Palm Oil Indonesia Update: Futures May Touch 6 Year Low in 2015

Palm oil output in Indonesia, which hits a seasonal peak in August or September, has risen for a second month in March 2015. This means that it is highly likely that palm oil reserves have risen accordingly and therefore CPO prices remain under pressure. Based on a Bloomberg median of six palm oil planters, refiners and analysts, Indonesian CPO reserves rose about 2 percent (month-to-month) to 2.55 million tons in March. The median also indicated that CPO production in Indonesia may have grown 12 percent to 2.4 million tons, while exports remained flat at 1.8 million tons.

Ample rainfall in the main palm oil growing regions of Sumatra and Kalimantan in March is expected to continue into April.

Meanwhile, CPO production in Malaysia, the world’s second-largest palm oil producer, was reported to have risen the most in 18 years in March 2015, adding downward pressure on prices. Over the past year, palm oil futures have fallen 19 percent to 2,173 ringgit (USD $595) per ton in Kuala Lumpur on Thursday (16/04). Dorab Mistry expects that CPO prices may fall to 1,900 ringgit with futures trading between 2,100 and 2,300 ringgit until May 2015. This forecast is significantly lower than his previous estimate of 2,500 ringgit (for May). However, he added that Indonesia’s biodiesel program may help to cause a rebound in prices provided that Indonesia’s state-owned energy company Pertamina announces a tender to purchase CPO.

Indonesia’s Biodiesel Program

In late 2013, the Indonesian government raised the mandatory amount of palm oil (fatty acid methyl ester) blended in biodiesel from 7.5 percent to 10 percent. This policy was designed to limit costly oil imports (for domestic fuel use) which place pressure on the country’s ailing trade and current account balances. The mandatory content in biodiesel is expected to be raised to 15 percent (B15) in September 2015, and to 20 percent (B20) in January 2016. However, this ambitious program has been plagued by several problems including logistical and infrastructure hurdles, as well as sharply falling petroleum prices (43 percent over the past year) which make biofuels less attractive.

The Indonesian Biofuel Producers Association said that Indonesia’s biodiesel use is estimated to reach 3 million kiloliters provided that the mandatory 15 percent blending starts in April 2015. Domestic biodiesel consumption totalled 1.7 million kiloliters in 2014, far below the institution’s target of 3.3 million kiloliters.

Recently, Indonesian authorities have introduced several new policies that affect the domestic palm oil industry (and thus also the global palm oil industry being the world’s largest palm oil grower). In February 2015 the Indonesian government announced to raise biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in an effort to protect the domestic biofuel industry (compensating biofuel producers for the price differences between regular diesel and biodiesel, caused by low petroleum prices since mid-2014).

Secondly, Indonesia plans to impose a USD $50 export levy (per metric ton) on CPO shipments, and a USD $30 (per metric ton) export levy on processed palm oil products starting from April 2015. These levies will be used to fund biodiesel subsidies (compensating price differences between regular diesel and biodiesel), replanting, as well as research and human resources development in the palm oil industry.

Indonesian Palm Oil Production and Export:

	2008	2009	2010	2011	2012	2013	2014	2015¹
Production (million metric tons)	19.2	19.4	21.8	23.5	26.5	27.0	31.0	31.5
Export (million metric tons)	15.1	17.1	17.1	17.6	18.2	21.2	20.0	19.5
Export (in USD billion)	15.6	10.0	16.4	20.2	21.6	19.0

^{¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture}

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