Indonesia's Biodiesel Policy and Dry Weather Forecast to Maintain High Palm Oil Prices
Indonesia's Biodiesel Policy and Dry Weather Forecast to Maintain High Palm Oil Prices

Indonesia's Biodiesel Policy and Dry Weather Forecast to Maintain High Palm Oil Prices

  • 09-Mar-2023 3:19 PM
  • Journalist: Harold Finch

KUALA LUMPUR: The looming El Nino weather pattern could increase strain on global inventories of the most utilized cooking oil, according to industry officials at a recent conference. This, combined with Indonesia's biodiesel policy, is expected to result in a market for vegetable oils that is set to become tighter by mid-2023 due to an estimated 4.5 million tonnes rise in production of biodiesel. Prices are likely to go up later this year as a result.

Starting in February, Indonesia, the world's largest producer of Palm oil, has increased the mandatory blend of Palm oil in biodiesel from 30% to 35%, to reduce dependence on diesel fuel imports which are facing high global energy prices. This move is also expected to help reduce emissions.

"Rising demand and limited growth in (vegetable oil) supplies would bring us into a global production deficit in July to December this year and January to June 2024".

It appears that Malaysian production is expected to increase by 600,000 tonnes to 19 million tonnes in 2023. Additionally, Indonesia's production is forecasted to go up by 1.2 million tonnes to 47.7 million tonnes during the same period. Dorab Mistry, the director of Godrej International, an Indian consumer goods company, predicts that Malaysian Palm oil will trade between 4,000 and 5,000 ringgit ($1,106) per tonne between now and August.

Malaysian Palm oil has seen a sharp drop in price on Wednesday, with the benchmark contract falling 24 ringgits to 4,181 ringgit a tonne on the Bursa Malaysia Derivatives Exchange. This plunge comes amid speculation of a potential El Nino weather pattern this year, with leading producers such as FGV Holdings and United Plantations predicting a decrease in production by 2024.

The recent La Nina weather event has brought flooding and other wet conditions to Malaysia and Indonesia, two of the world's top Palm oil producers. These conditions have had a significant impact on yields, resulting in lower production levels. Unfortunately, this is made worse by an El Nino episode that is also predicted to bring below-average rainfall to these countries. This could lead to further reductions in yield and an increase in global prices for Palm oil.

"This is climate change, Mother Nature has put a booster rocket under agricultural prices," Mistry said.

Indonesia is expected to export less Palm oil in 2023 than was exported in 2021, surprising the market. This decrease is mainly attributed to a biodiesel mandate issued by the nation. Fadhil Hasan, head of the trade and promotion division at GAPKI (Indonesian Palm Oil Association), explained the reason for this reduction.

"It used to be Palm oil is export-oriented for Indonesia, but sales are declining, and domestic consumption is increasing," Fadhil said.

Palm oil futures are expected to dip in 2023, with projections indicating an average of 3,760 ringgit ($831.86) per tonne. This is a decrease from 4,920 ringgit in 2022 due to the impact of decreasing gasoil prices.


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