Asian palm oil to get a boost in 2020 on lower output, biofuel mandates

Singapore — Asian crude palm oil prices are expected to find support in weaker production to be brought about by dry weather in 2020, along with higher biofuel mandates in Indonesia and Malaysia, as the slump to a four-year low in July 2019 fades from market memory.

On September 2, 2019, when S&P Global Platts first started assessing FOB Indonesia CPO, it stood at $520.50/mt, but by December 31, 2019, the CPO assessment had jumped some 50% from September to close the year at $779.50/mt. The upward momentum was largely catalyzed by the increase in Indonesia's biofuel mandate.

However, this upside in CPO prices may be capped in 2020, by keen competition from soybean oil and sunflower oil prices, as well as slower demand in response to the climb in prices.

"Compared to an average of RM2,600/mt ($633.37/mt) in 2019, 2020 prices are likely to average RM2,650-2,700/mt ($645.55/mt-$657.73/mt) on low production, higher food and biodiesel mandate based demand," Mumbai-based consultancy Sunvin Group's head of research Anilkumar Bagani said.

BIOFUEL MANDATE

Indonesia from January 2020 has rolled out a B30 biodiesel mandate, which requires diesel to contain 30% palm-based biofuel, up from 20%.

Indonesia is forecast to use close to around 15.7 million mt of domestic palm oil in 2020, compared with an estimate of 14.5 million mt in 2019, according to analysts at ISTA Mielke, published in the Oil World Weekly of December 20, 2019. Indonesian biodiesel production is projected at around 8.5 million mt in 2020 against 7.5 million mt in 2019.

Malaysia's biofuel mandate was also increased to 20%, from 10% previously. The implementation of the B30 in Indonesia and the B20 in Malaysia will translate to a 25% and 15% increase in biofuel demand, respectively, analysts said.

However, with palm oil prices set to trend higher, overall demand may not get the desired boost from these mandates.

THE WEATHER

In Malaysia, an industry source said recent floods in Johor, Pahang and Negri Sembilan had hampered the harvesting of fresh fruit bunches, or FFB, from the palm oil trees, which would lower the oil extraction rate of CPO.

"We expect the oil extraction rate to be lower. End-December [2019] stocks are likely to stand between 2 million and 2.1 million mt," the source said.

The Malaysian Palm Oil Board has yet to release Malaysia's end-December 2019 stocks data, but market participants surveyed by S&P Global Platts estimated Malaysia's palm oil stocks to have ranged between 1.89 million mt and 2.20 million mt last month.

This compares with 2.26 million mt at end-November 2019 and 3.22 million mt at end-December 2018, MPOB data showed.

There are also concerns that the El-Nino effect, typically characterized by a decline in rainfall and dry weather, may emerge later this year and have an adverse effect on CPO output.

DEMAND FROM INDIA AND CHINA

Higher palm oil prices, however, may dampen palm oil demand from major regional buyer India, as end-users look to cheaper alternatives.

"India will need an additional 1 million mt of vegetable oil every year over the next five years to feed its growing population and also because of rising per capita growth," according to BV Mehta of the Solvent Extractor's Association of India.

"The [price] spread between palm oil and soft oils has narrowed, prompting customers to shift to bean oil and sunflower oil," Pranav Bajoria of Comglobal, a Singapore-based brokerage, said.

Palm oil accounts for around 64% of India's edible oil imports and according to a broker in India, palm oil imports could drop to as low as 9.3 million-9.5 million mt inthe marketing year commencing November 1, 2019, from an estimate of 9.7 million-9.8 million mt three months earlier.

Indian demand has started to shift to soybean oil, from palm oil, but the limited production of soybean oil is insufficient to meet this demand, market sources said.

In China, palm oil imports have increased as domestic soybean crushing was impacted by the African Swine Flu.

While some market participants expect Chinese palm oil demand to wane if phase one of the US-China trade deal is signed mid-January, others opine this will have little effect on the market.

"China will probably import more US soybeans to fulfill their end of the deal, but at the crux of the matter is the fact that soybean meal demand is under pressure as the ASF does not show any sign of disappearing soon," a Singapore-based trader said.

TAXES AND LEVIES

New taxes and levies on palm oil products will also raise the price of palm oil exports from Malaysia and Indonesia in 2020.

As of January, the Malaysian tax on crude palm oil exports stands at 5%, while Indonesia palm oil exporters are subject to a $50/mt levy on crude palm oil exports and $30/mt on refined, bleached and deodorized palm olein exports.

Under the ASEAN-India Free Trade Agreement, the Indian base import duty on CPO was reduced to 37.5%, from 40%, and on RBD Olein to 45%, from 50%.

The narrower 7.5% tax margin between imported CPO and refined olein, which was implemented in January 2020, will prove challenging to Indian refiners who will not be able to run their refineries at optimum capacities.

-- Anu Das, anu.das@spglobal.com

-- Edited by Norazlina Jumaat, norazlina.jumaat@spglobal.com