In 2016 Indonesia is expected to implement its B20 biodiesel program - up from this year's B15 program - which implies that biodiesel has to consist of a blend: diesel (80 percent) and fatty acid methyl ester (20 percent). Fatty acid methyl ester (FAME) is produced from palm oil. The higher mandatory FAME level should boost domestic palm oil demand in Indonesia (hence supporting global prices). In case global petroleum prices rise in 2016 (several analysts see crude oil prices rise to USD $60 per barrel), then demand for biodiesel will increase as it becomes a cheaper option. The Indonesian government subsidizes the price of biodiesel through its CPO fund program (financed by collecting levies from Indonesian palm oil exports). In 2016, domestic demand for biodiesel in Indonesia is estimated rise to 7.1 million kiloliters from an estimated 1.3 million kiloliters this year. Higher domestic palm oil demand will also offset the negative impact of weaker palm oil shipments to India and China.

Dorab Mistry, Director of Godrej International Ltd, expects that global demand for palm oil will outpace palm oil production in 2016 and therefore palm oil futures will continue to rise in the near future. Since August 2015 - when palm oil prices were at a six-year low - futures have already surged 26 percent. Currently, the world's palm oil reserves are still high. Indonesia's palm oil stocks stood at 3 million tons in October, up 27 percent (y/y), while Malaysian stocks climbed to a near 15-year high in the same month. 

Due to the El Nino weather phenomenon, which brings drought to Southeast Asia, the world's two largest palm oil producers - Indonesia and Malaysia - have seen lower-than-usual rainfall in 2015, implying that CPO output will be curbed next year. The same scenario unfolded in 2009 when El Nino was partly responsible for the 57 percent surge in palm oil futures.

Fadhil Hasan, Executive Director of the Indonesian Palm Oil Producers Association (Gapki), said Indonesia's palm oil exports will improve in 2015 supported by new export markets and continued growing demand from Bangladesh and Pakistan. In the first ten months of 2015, Indonesia exported a total of 21.5 million ton. This figure is almost the same as total palm oil exports last year. Regarding CPO exports in 2016, Hasan expects to see stagnation due to higher domestic consumption (B20 program) and curbed output due to El Nino.

Hasan expects global palm oil demand to rise by 3.2 million tons to 62.5 million tons in 2016 due to higher demand from the biodiesel sector and due to the expanding world population (palm oil is used in the production of a wide variety of products ranging from food to cosmetics).

Whether the palm oil industry will also be affected by the new Council of Palm Oil Producer Countries (CPOPC), set up last week by Indonesia and Malaysia, remains unclear. This council is an intergovernmental palm oil council that aims to control the global CPO supply, stabilize prices, promote sustainable practices in the palm oil industry, and enhance the welfare of oil palm smallholders. It is envisaged to play a role similar to that of the OPEC in the global oil sector. Earlier efforts of Indonesia and Malaysia to create such an institution have failed while similar attempts in the rubber industry have also shown a failure. Moreover, both countries' export policy are different and are unlikely to be harmonized as each country has different production costs.

Indonesian Palm Oil Production and Export Statistics:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    30.0    31.5    33.1
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    22.4    21.7    25.0
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    20.6    21.0    15.6

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