Mumbai (Commodities Control) – Palm oil prices have been on fire from the beginning of the year, for more reasons than one.
March benchmark crude palm oil contract on the Bursa Malaysia Derivatives Exchange (BMD) touched a level of Ringgit 2,926/tonne, before settling for Christmas-thinned volume.
The elevated crude palm oil stockpile at the beginning of 2019 slid sharply by the year-end, across Malaysia and Indonesia while prices have rallied by nearly MR 900-1000/mt. CPO prices were close to MR 2,065/mt at the beginning of the year.
Palm oil prices were trading near 1-year lows in July, but managed to reverse its fate in October with a rally that took the prices to its highest since February 2017, on December 11.
Meanwhile, the PO-GO spread between gasoil and CPO futures changed dramatically too. The spread between the two oils pushed itself from negative in the beginning of 2019 into positive territories in the last quarter.
The palm price hike shifted the spread between palm oil futures and gasoil futures from $-140/ton in July 2019 to $120/ton in December 2019.
Indonesia and Malaysia are facing declining inventories. Malaysian palm oil inventories fell below 3 million mt in March and touched 2.256 million mt in November, data from the Malaysian Palm Oil Board showed, while Indonesian inventories stood at 3.8 milllion mt in August 2019, according to data from the Indonesian Palm Oil Association, or GAPKI. That was down from 4.592 million mt in August 2018. This will continue in 2020, as well.
A climb in domestic consumption helped pushed Indonesia CPO inventories lower. Domestic consumption climbed to 1.512 million mt in August 2019 versus 1.072 million mt in August 2018, driven primarily by the B20 blending mandate that kicked off in the latter part of 2018.
Meanwhile Industry experts see limited growth on the supply side in 2020, affected by this year's dry weather and less fertilizer.
Singapore-based Palm Oil Analytics forecast that Indonesia will produce 45 million mt of CPO for 2019 and 46 million mt of CPO in 2020.
Meanwhile, Malaysian exports had been climbing because of demand from China as well as India.
Malaysian CPO production was expected to fall to 19.5 million-19.8 million mt because of lower rainfall and fertilizer usage. 2019 production is expected to come in around 20.3 million mt, as per Palm Oil Analytics.
While, production of Malaysian palm oil products for December 1-20 is estimated down by 23.05 percent as compared to the same period a month ago, according to Southern Peninsular Palm Oil Millers Association (SPPOMA).
Going forward, palm exports, if prices stay at close to the soybean oil level, would see stiff competition from soybean oil. Although stalling CPO production plus blending needs for palm oil methyl ester will ensure the CPO supply remains tight.
Malaysia placed a 5% export tax in January 2020 for CPO and Indonesia imposed a $50/mt export levy on CPO, also starting in January 2020, which could affect overseas sales. Nonetheless, with palm oil still priced cheaper than sunflower oil and an insufficient supply of soybean oil, demand for palm oil should stay steady.
Meanwhile, Indonesian President Joko "Jokowi" Widodo launched B-30 on 23rd December 2019, an upgrade to a government program to increase the mandatory biodiesel mix in diesel fuel to 30 percent, one that the president said would significantly reduce Indonesia's reliance on fossil fuel and imported oil.
The B-30 was launched earlier than the original schedule of January next year since the government considered the previous B-20 program was a roaring success.
The Indonesian domestic biodiesel mandate will result in Indonesian capacity being fully utilized all year, as PME could be used in Indonesia year-round as the country does not have winter months.
Most producers are expecting their capacities to be utilized up to 70% to 90% for the domestic mandate. Some are expecting less than 100,000 mt of exports in 2020.
The European Commission had imposed anti-subsidy measures of 8%-18% on biodiesel imports from Indonesia, which would see much of Indonesian PME exports shut out of Europe. With current PME versus gasoil prices, China is not expected to purchase much PME for discretionary blending, either.
Although, the loss of external demand on PME is not expected to have much effect on CPO prices or PME production in Indonesia.
Analysts say, 9-10 million tons of CPO is expected to be utilized to produce 10.6 million kilo liters of biodiesel so that the targeted consumption of 9.60 million kilo liters can be achieved in 2020.
A total of 9.6 million kiloliters quotas of the biodiesel mandate were awarded to 18 companies, including state-oil company PT Pertamina, Wilmar International, Musim Mas and PT Shell Indonesia.
In Malaysia, B20 blending mandate is expected to consume 1.7 million-2 million mt of CPO to produce 2.2 million kiloliters of PME. Malaysia would gain from Indonesia's loss, with PME from the country entering Europe once the winter ends.
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