The El Nino-inflicted dry weather in Indonesia and Malaysia, possibly the worst in nearly two decades, is expected to curtail crude palm oil (CPO) output in both countries, implying that palm oil prices can extend their rally into next year. Moreover, Indonesia will consume more CPO as the government will raise the mandatory amount of palm oil blended with diesel from 15 to 20 percent (part of its B20 biofuel program) in early 2016. Since August - when prices were at a six-year low - palm oil futures have surged 26 percent.
Palm oil expert Dorab Mistry, Director of Godrej International Ltd, expects palm oil prices to extend their rally into 2016 on curtailed production on the back of El Nino-inflicted drought in Southeast Asia and the recent haze situation in the region (caused by forest fires on parts of Sumatra and Kalimantan), while palm oil consumption is to get a boost from the Indonesian biodiesel mandate. Next year, Indonesian demand for biodiesel may rise to 7.1 million kiloliters from an estimated 1.3 million kiloliters in 2015.
A looming problem is that biodiesel use expansion may cause a widening premium of palm oil over gas oil, hence increasing the subsidy needed for each ton of biofuel and may evoke resistance from local car manufacturers.
On the other hand, palm oil production in Indonesia will not fall too drastically as new palm oil plantations are coming into the production stage. This year Indonesian CPO production is estimated at 31.5 million metric tons. Next year production could decline to 30.5 million metric tons, although other analysts say a slight increase to 32.0 million metric tons is also a possibility as new plantations start delivering.
Indonesian Palm Oil Production and Export:
(million metric tons)
(million metric tons)
(in USD billion)
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture
Indonesia is the world's largest producer and exporter of palm oil, an edible vegetable oil used in a wide variety of products ranging from food items to cosmetics and biofuel. Together with Malaysia, Indonesia accounts for about 85 percent of the world's palm oil supply. Although being an important foreign exchange earner for Indonesia, the palm oil industry has a severe negative impact on the environment as more and more carbon-rich peat-lands and forests are being replaced with palm oil plantations. Many farmers use slash-and-burn practices that can lead to severe forest fires (and toxic haze).