Commodities 2021: Asian PME exports to enter new year locked out of Europe by firm feedstock prices

Singapore — Palm methyl ester exports by main suppliers Malaysia and Indonesia are set to remain bleak in the first half of 2021 as the prevailing POGO spread between palm oil and gasoil futures at a lofty $400-$500/mt, well above the typical range of $50-$200/mt, locks PME exports from both countries out of Europe.

The wider the POGO spread, the more expensive it is to blend biodiesel, hiking prices and reducing demand. For much of 2020, increases in crude palm oil or CPO futures have outpaced those of ICE Gasoil futures, widening the POGO spread into unchartered terrain.

Both countries have reported weak PME exports for 2020, and their export prospects for 2021 remain dismal with the POGO spread so high.

Producers in both Malaysia and Indonesia are instead expected to rely on domestic consumption to drive demand as high feedstock crude palm oil prices keep PME out of Europe, at least in the near term.

In Malaysia, CPO third month futures on the Bursa Malaysia rebounded to MR3,556/mt Dec. 24 on tight supply, almost 80% higher than the year-to-date low of MR1,982/mt touched on May 5.

Malaysia's palm oil shipments over Dec. 1-25 were up 17.27% from Nov.1-25 at 1.333 million mt, data from Intertek Testing Services showed, while data from fellow cargo surveyor AmSpec put the rise at 17.27% to 1.145 million mt over the same period.

However, the country's CPO production over Dec. 1-25 was down 15.09% from Nov. 1-25, while the yield was down 13.51% over the same period, according to Southern Peninsular Palm Oil Millers' Association data, and market watchers expect Malaysia's CPO production to continue declining until at least March-April 2021.

As a result, Malaysia will enter 2021 with significantly lower palm inventories, driven by slowing production and robust exports. The country's CPO inventories hit a 40-month low of 1.564 million mt in November, Malaysian Palm Oil Board data showed, the lowest since July 2017.

With CPO futures for forward months in backwardation for the first quarter of 2021, traders are expecting palm prices to remain tight at the prompt.

Prevailing high prices of vegetable oils, including palm oil, will persist into Q2 because of lower-than-expected production and firm demand, LMC International chairman James Fry told the Indonesian Palm Oil Conference in December. "Malaysian palm stockpiles will stay low till Q2, when output picks up," he said.

High CPO prices will ensure the POGO spread remains positive and PME offers in turn remain high, after hitting $1,100/mt FOB Malaysia at end December -- and finding little buying interest.

On a more positive note, Malaysia's B20 blending mandate is expected to roll out in the first half of 2021, which is expected to boost domestic PME consumption by around 100,000 kiloliters year on year from the present B10 mandate to 950,000 kiloliters.

B30 MANDATE SUPPORT

In Indonesia, PME producers and market participants spent much of 2020 pondering the continued viability of the country's B30 blending mandate, and with the POGO spread in the $400-$500/mt range, concern was heightened.

However, doubts were laid to rest on Dec. 18 when the Indonesian government hiked its quotas for the B30 blending mandate to 9.2 million kilolitres for 2021 from earlier projections of 8.5 million kiloliters.

Jakarta in May had moved to support the B30 blending program by raising its palm oil export levy by $5/mt to $55/mt from July and injecting Rupiah $2.78 trillion ($186 million) into the Indonesian Oil Palm Estate Fund (BPDP-KS), which is funded by the levy and subsidizes biodiesel blending when palm-based biodiesel prices outpace the cost of diesel.

The export levy had since been hiked to $225/mt with effect January 2021, while plans to launch a B40 blending mandate in the year have been delayed indefinitely.

Indonesian biofuel producers association Aprobi estimated the country's biodiesel consumption at 7.076 million kiloliters over January-October, well below the 9.6 million kiloliter quota issued for full year 2020 on October 2019. This was attributed to lower biodiesel consumption during lockdowns to contain the spread of COVID-19.

Indonesia's PME exports were negligible in 2020 due to the domestic blending mandate and unusually positive POGO spread, with Aprobi recording just 16,331 kiloliters over January-October, plunging from 1.3 million kiloliters in 2019.

High palm oil prices also reduced Malaysia's PME exports to 335,669 mt over January-November from 577,776 mt in 2019, Malaysian Palm Oil Board data showed.

Both country's PME export prospects remain dismal for 2021 with the POGO spread so high, as it inevitably results in European buyers purchasing RED PME only to meet European mandates when an arbitrage window between Asia and Europe is open, rather than for discretionary blending.

As a result, producers in both Malaysia and Indonesia are expected to depend on domestic consumption mandates to drive demand in 2021.