Indonesia palm oil consumption, El Nino worries, weigh on market

The global palm oil outlook is expected to be weak during at least the first half of this year owing to structural issues as well as top producer Indonesia increasing domestic use of the vegetable oil for biodiesel, industry figures said on Wednesday, with potential climate impacts adding to uncertainty.

“Palm oil has lost its growth momentum. Area expansion has slowed down considerably,” Thomas Mielke, executive director of Oil World and a leading expert in the commodity, told the annual Palm and Lauric Oils Price Outlook Conference and Exhibition organized by stock exchange Bursa Malaysia.

He said insufficient replanting and management constraints are keeping yields below potential. Meanwhile, soaring input costs and strict sustainability criteria are discouraging investments in the sector.

“Fulfillment of the current biofuel targets (in Indonesia) would contribute to a bullish scenario shaping up for the second half of 2023 as well as for 2024,” Mielke said, referring to a likely rise in prices due to tighter supply as Indonesia exports less.

Indonesia has raised its mandatory biodiesel target from 30% palm oil content to 35%. It uses the world’s highest blend of palm oil in mandatory biodiesel, aimed at reducing reliance on imported diesel and propping up demand for the versatile commodity.

The country is the world’s biggest palm oil producer, followed by Malaysia and Thailand. Palm oil, the world’s most consumed edible oil, is widely used as a vegetable oil and is an ingredient in processed foods and many other products, including cosmetics.

The Indonesian government last year imposed various measures to control high prices of local cooking oil, including a brief ban on palm oil exports in a shock to the global market.

Fadhil Hasan, an Indonesian Palm Oil Association official and also director of corporate affairs at Asian Agri, a leading palm oil producer, said the industry was in decline.

He told the conference that during the three years through 2022, production in Indonesia was negative, indicative of structural problems.

“Both areas of expansion and productivity are stagnant,” he said, adding prices would be declining over this year after falling nearly 24% last year, citing the CIF Rotterdam benchmark.

The demand side, meanwhile, has seen a “shift in the consumption from exports to domestic consumption,” he added. “We predict that both production and consumption will slightly decline next year.”

He estimated that total consumption of Indonesian palm oil this year will be 50.762 million tonnes with domestic demand accounting for about 24.342 million tonnes of that and exports for about 26.420 million tonnes. The overall figure is below last year’s nearly 52 million tonnes.

Another factor hanging over the commodity is climate, with the possibility of the El Nino weather phenomenon kicking in, could potentially affect palm oil production in 2023, said experts.

El Nino is typically associated with droughts and water scarcity in Asia — as opposed to La Nina, which brings increased rainfall to the region. The World Meteorological Organization last week said there is a “much higher chance” of El Nino developing from June to August.

“With aggravated climate change, we cannot project normal crops anymore,” said Dorab Mistry, a veteran trader and director at Godrej International. “God knows which crop will be affected by aberrations in climate in 2023.”

Dorab said the onset of a new El Nino could drive prices higher in a potential hit to demand. “If no El Nino, we can see lower prices after August,” he said.

Oil World’s Mielke said an El Nino would add to pressure on palm oil production.

“When it (El Nino) comes, it is not going to affect this year’s production, but it will affect (market) sentiments,” Mielke said. “It is going to affect production only in the second half of 2024 and 2025. This is something we need to watch (for) and it will be a price determining factor before it really hits production.”

Tags: Indonesia, Vegetable Oil, Production, Thailand, Malaysia, yields, biodiesel, palm oil, Эль-Ниньо