COMMODITIES 2025: Rising biodiesel demand, tighter supplies to fuel palm oil market in 2025

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

The palm oil market is expected to remain strong in 2025, following its outperformance against rival vegetable oils in 2024, fueled by the continuous rise in biodiesel blending, higher tariffs, and sustained high demand, while production remains stagnant.

Benchmark crude palm oil futures on Malaysia's commodity exchange are expected to average at MR4,222.7/mt ($942.77)in 2025, up 4.5% from the year before, according to forecasts by 12 industry and government agencies polled by S&P Global Commodity Insights.

The palm oil contract, which influences international vegetable oil prices, averaged MR4,041.9/mt in 2024, largely in line with Commodity Insights' annual palm oil price survey of MR4,000/mt on Dec. 22, 2023.

All prices are in Malaysian Ringgit per mt

Source: S&P Global Commodity Insights

Biodiesel mandates, rising edible oil consumption, and geopolitical factors impacting substitute oils are likely to support palm oil prices, Malaysia-based MARC ratings said in a note Dec. 20. However, weaker-than-expected demand from China and India, weather conditions, and increased production of other substitute edible oils, pose some downside risks to prices.

In the physical markets, the price of crude palm oil FOB Indonesia averaged $995/mt in 2024, higher compared to soybean oil FOB Argentina's average price of $929/mt and sunflower oil FOB Black Sea at $931/mt in the year, according to Commodity Insights data.

Malaysia and Indonesia account for 85% of the world's palm oil supplies.

Lower stock levels in both the major producers along with Indonesia's increasing export levies and higher domestic consumption for its biodiesel mandate, will likely support palm oil prices in 2025, analysts say.

Production outlook

Palm oil production will likely see a small uptick in 2025, with most analysts pointing to small improvements in yield due to favorable weather conditions.

According to the US Foreign Agricultural Service's December oilseeds report, global palm oil production is seen at 80.34 million mt in 2024-25, up marginally from 79.83 million mt in 2023-24.

Indonesia's production is expected to rise slightly in 2024-25 to 47 million mt from 46.5 million mt, while Malaysia's production may also see a small uptick to 19.8 million mt, FAS said.

Global palm oil output is seen rising by 2.3 million mt in the 2024-25 season (October–September), rebounding after a drop of 1.2 million mt in the 2023-24 season, industry analyst Thomas Mielke, chief of Hamburg-based research firm Oil World, said at an industry conference in Indonesia, Nov. 8.

Demand uptick possible

In the near term, the combination of Chinese New Year and Ramadan along with higher summer demand from India will keep palm oil demand buoyant in the first half of 2025, industry analysts said.

The US FAS expects the largest buyers India and China to step up purchases in 2025, as better macroeconomic conditions boost trade pace.

India's palm oil imports are forecast at 9.4 million mt in the 2024-25 marketing year, up from 8.8 million mt in 2023-24, while China's imports are expected to be up to 5.15 million mt, from 4.37 million mt in 2023-24, US FAS said.

However, the biggest demand growth in the coming year may be Indonesia itself as the country moves to a 40% palm oil-based biodiesel or 'B40' mandate from the current 35% blend.

According to CIMB research, Indonesia's planned adoption of a biodiesel mandate in January is expected to boost demand for palm oil by 2 million mt in 2025.

The FAS expects Indonesia's overall palm oil consumption to rise to 22.32 million mt in 2024-25 from 21.07 million mt in 2023-24.

Costlier feedstocks ahead

Using palm oil for biodiesel will be a lot costlier for Indonesia and Malaysia's governments in 2025 as the industry tries to balance the availability of raw materials and the growing price gap between conventional gas oil and palm oil.

The increased spread between palm oil and gasoil prices -- known as the POGO spread -- during 2024 has meant that Jakarta is looking to increase taxes on crude palm oil exports to find extra funds to subsidize biodiesel makers in 2025.

In 2024, the average POGO spread between Malaysian palm oil futures and ICE Gas oil Singapore surged to $164.8/mt compared with $39.8/mt in 2024, exchange data showed.

A negative POGO spread, as seen in January 2024 means discretionary blending is profitable. The metric is used by the biodiesel industry to gauge costs and margins while adhering to government mandates.

Indonesia has said Dec. 19 that it will increase the export levy on crude palm oil to 10% from the current 7.5% to help finance a larger biodiesel program set to start on Jan. 1, 2025.

However, the industry expects Indonesia's B40 rollout to be staggered through 2025.

Some analysts have also expressed doubts about the feasibility of scaling up the biodiesel mandate at time when palm oil prices are going up while crude oil prices stagnate, as the program is primarily funded by levies collected on palm oil exports, which cover the price difference between biodiesel and traditional diesel.

Jakarta's B40 biodiesel mandate is expected to divert 1.2 million mt of palm oil from Indonesia's exports to its domestic biodiesel industry in 2025, Julian McGill, managing director of Malaysia-based Glenauk Economics said at the Globoil 2024 conference in Mumbai Sept. 19

Globally, 20% of the total world consumption of 17 oils and fats are absorbed by the energy sector for making transport and heating fuels in 2024, Oil World data showed.