Lang
Dorab Mistry, director at Indian consumer goods company Godrej International, said the days of $400-per-tonne discounts are over and palm oil will not be that cheap again as long as Indonesia continues to prioritize biodiesel.
Indonesia raised the mandatory palm oil blend in biodiesel to 40% this year and is considering raising it to 50% in 2026, along with a 3% jet fuel blend next year, as part of efforts to reduce fuel imports.
Eddy Martono, head of Southeast Asia’s largest palm oil association, expects this policy direction to reduce Indonesian exports to only 20 million metric tonnes by 2030, down from 29.5 million tonnes in 2024.
Jakarta’s policy shift, together with lower output caused by flooding in neighboring Malaysia, has pushed palm oil prices above rival soybean oil, leading buyers to reduce purchases.
In India, the world’s largest vegetable oil buyer, crude palm oil has been more expensive than crude soybean oil for the past six months, with the difference at times exceeding $100 per tonne. In late 2022, palm oil traded at discounts of more than $400.
Indian buyers paid $1,185 per tonne for crude palm oil last week, up from less than $500 in 2019.
High vegetable oil prices may complicate government efforts to contain inflation, both in countries that rely on palm oil and those that rely on other oils such as soybean, sunflower, and canola.
Palm oil production, dominated by Indonesia and Malaysia, doubled every decade from 1980 to 2020, drawing criticism because of deforestation linked to plantation expansion.
During that period, annual production growth averaged more than 7%, broadly matching demand growth. However, Malaysia’s palm oil production has stopped growing for more than a decade because of limited suitable land and slow replanting, while environmental concerns have slowed expansion in Indonesia.
Even in Indonesia, smallholders, who account for 40% of production, remain slow to replant. As a result, global production growth has slowed to only 1% annually over the past four years.
Thomas Mielke, executive director of German analyst firm Oil World, expects production growth this decade to average about 1.3 million tonnes per year, less than half the previous decade’s average of 2.9 million tonnes.
Production could slow further because of labor shortages, ageing plantations, and the spread of Ganoderma disease, which damages productivity.
Oil palm trees begin to lose productivity after 20 years and should be replaced after 25 years. However, new trees need three to four years before producing, leaving land unproductive during that period and discouraging farmers from replanting.
Malaysia replanted only 114,000 hectares in 2024, equivalent to 2% of planted area, compared with a target of 4% to 5%, according to Plantation Minister Johari Abdul Ghani.
In Indonesia, slow replanting has reduced productivity as plantations age, with crude palm oil yield falling by 11.4% to 3.42 tonnes per hectare over a decade, according to Fadhil Hasan of GAPKI.
Although countries such as Colombia, Ecuador, Côte d’Ivoire, and Nigeria have increased palm oil production, industry officials say output growth there is not keeping pace with rising demand, especially for biofuels.
Mistry and Mielke have called for Indonesia to resume issuing new permits for oil palm cultivation, a practice suspended since 2018.
Mistry warned that if Indonesia continues to halt oil palm permits, periodic supply shortages and sharp price increases are likely.
Demand has already started to weaken in key markets because of high prices, while industrial buyers are looking for alternatives. However, industry officials say consumption will continue to rise, driven by demand for chemicals and biofuels.
Harish Harlani, Vice President of P&G Chemicals, said the company is seeing a sharp increase in palm oil demand and expects a supply-demand imbalance because of limited land availability.
Sanjeev Asthana, CEO of Patanjali Foods Ltd., said higher palm oil prices will push buyers toward alternative oils, which will also raise their prices. He added that available volumes of these oils are limited and cannot fully replace palm oil.
Source: Reuters