SINGAPORE/JAKARTA (Reuters) – A move by Indonesia, Indonesia’s largest palm oil exporter to restrict shipments and increase domestic biodiesel consumption is set to slash global vegetable oil supplies already shrinking due to lower production in Southeast Asia and Latin America.
Edible oil buyers, including price-sensitive consumers in South Asia and Africa, will bear the brunt of the supply-side constraints that come as demand is expected to pick up, with China easing its COVID-19 control and India boosting purchases.
Indonesia’s export restrictions and growing use of crops to make biofuels pose another challenge for food-importing countries hit by last year’s sharp inflation, which pushed commodity prices like wheat, corn and soybeans to all-time or multi-year highs. .
“The implementation of the (B35) mandate in Indonesia in 2023 definitely changes (the) global SND (supply and demand) palm oil (situation) in 2023,” said Oscar Tjakra, Senior Analyst, Food and Agribusiness Research at Rabobank.
“I now expect the global palm oil SND to be in a slight deficit.”
Indonesia’s B35 mandate, the highest in the world, states that diesel sold in the country from February 1 must contain 35% palm-based fatty acid methyl ester. In comparison, Malaysia has only partially implemented a 20% biodiesel blending mandate and other countries have procedures calling for single and double biodiesel or gasoline proportions.
The Indonesia Biofuel Producers Association says the B35 mandate will consume 11.44 million tonnes of palm oil this year, up from 9.6 million in 2022 under the country’s B30 metric.
Indonesia, which produces more than half of the world’s palm oil supply, also tightened trade rules this year, allowing exporters to ship six times the volume of domestic palm oil sales, down from eight times the fourth quarter of 2022’s share.
“Indonesian palm oil exports will certainly decrease with the decline in production and the increase in domestic consumption,” Fadel Hassan, an official with the Indonesian Palm Oil Association (Japki), told Reuters.
Indonesia produced 51.3 million tons of palm oil in 2022 and exported 33.7 million tons, Gabke estimated. She added that in 2023, palm oil production is expected to reach 50.82 million tons and exports to be 26.42 million tons.
Benchmark futures contracts for palm oil are expected to range between 4,000 and 4,200 ringgit (920 to 970 US dollars) per tonne this year, according to the director general of the Malaysian Palm Oil Board of Directors, Ahmad Parviz Ghulam Qadir.
This is below a record average for Malaysian palm futures at 4,910 ringgit per tonne in 2022, with prices skewed upward due to disruptions to edible oil supplies and distribution caused by Russia’s invasion of Ukraine. But it is still high compared to previous years. Malaysian crude palm oil prices averaged RM3,260 per tonne between 2018 and 2022.
On Friday, Malaysian palm futures traded around 3,860 ringgit, near a three-week low.
Other threats to edible oil supplies include Argentina’s worst drought in 60 years, which is expected to reduce its soybean production to 41 million tonnes, down from a previously estimated 48 million tonnes.
Strong request
India’s palm oil imports in December jumped 94 percent from a year earlier to a record high, as higher palm oil discounts on competing vegetable oils increased refinery purchases.
“Discount for palm oil over competitor oils is around $300 per tonne, and we expect that discount to narrow to around $200 by March,” said Sandeep Pajoria, CEO of the Sunvin Group, a vegetable oil brokerage.
“But India’s strong demand for palm oil will continue because it is still the cheapest edible oil.”
Palm oil purchases by China, the world’s second-biggest importer, are also expected to rise this year, after falling sharply in 2022 due to Beijing’s then-tight coronavirus controls.
($1 = 4.3350 ringgit)
(Reporting by Naveen Thukral and Bernadette Christina); Additional reporting by Francisca Nangui in Jakarta and Mai Mi Chu in Kuala Lumpur; Edited by Tom Hogg
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