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The global palm oil market is undergoing significant changes. In Pakistan, palm oil import prices rose sharply to nearly USD 1,000 per metric ton (mt) in Nov-24 from under USD 900/mt in early 2024, yet import quantities remain steady. While Pakistan's market remains stable, policymakers must remain cautious of climate risks and global price fluctuations. Decisions on export quotas and policies from key producers will influence price trends into 2025.
In Nov-24, Malaysia's palm oil stocks fell 2.6% year-on-year (YoY), and crude palm oil (CPO) production dropped 9.8% YoY due to adverse weather conditions, leading to a 14.7% YoY decline in exports. This tightening supply and production shortfalls in major exporting countries have pushed benchmark futures to their highest levels in 2.5 years. Indonesia's export levy increase and global uncertainties contribute to price volatility.
India's palm oil imports dropped 40% month-on-month (MoM) in Dec-24 to 503,000 mt, the lowest in nine months, as rising prices led refiners to favor discounted soybean oil. On the other hand, soybean oil imports rose 3% MoM to 420,000 mt, the highest in four months, while sunflower oil imports declined 22% MoM to 265,000 mt.
The shift reduced India's total edible oil imports by 25% to 1.19 million metric tons (mmt), the lowest in three months. Driven by declining stockpiles, palm oil's premium of over USD 100/mt compared to soybean oil is expected to curb imports in Jan-25 further. This trend could pressure Malaysian palm oil prices while supporting United States (US) soybean oil futures.
India consumes from 23 to 25 mmt of edible oil annually, with palm oil accounting for 8 to 10 mmt, 90% of which is used as food. Palm oil constitutes 60% of India’s imported vegetable oils and 37% of its edible oil consumption. Most imports originate from Indonesia, Malaysia, and Thailand.
Palm oil is used extensively in cooking, processed foods, and Indian fried snacks. Beyond food, it is a key ingredient in personal care products, detergents, and household cleaners, with derivatives found in nearly 50% of packaged supermarket goods. India’s demand for palm oil has grown due to its cost-effectiveness and longer shelf life. While annual demand has remained stable between 8.5 to 9.5 mmt over the past decade, prices rose 22% YoY in 2024. Industry experts anticipate price stabilization in 2025 alongside improved demand.
The Indonesian palm oil industry faces significant challenges in 2025, including declining production of Crude Palm Oil (CPO) and Fresh Fruit Bunches (FFB), the raw material for palm oil mills. The Indonesian Palm Oil Entrepreneurs Association (GAPKI) remains pessimistic about production increases, citing the low target for the Community Oil Palm Replanting (PSR) program, which has seen a reduction from 180,000 hectares (ha) to 120,000 ha per year. As of Oct-24, 351,267 ha were rejuvenated from a potential 2.8 million ha.
CPO production in 2024 is expected to drop by approximately 5% compared to 2023, mainly due to the effects of El Niño. In addition, the palm oil industry faces ongoing issues with land cultivation permits and unresolved forest area disputes. International competition from cheaper vegetable oils, such as canola, sunflower, and soybean oil, and Indonesia’s implementation of the B40 biodiesel mandate, which will reduce export capacity by 2 mmt, further complicates the market outlook. These factors are expected to decrease palm oil supplies and potentially drive up global vegetable oil prices in 2025.
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In W1, Indonesia's palm oil prices decreased to USD 1.15 per kilogram (kg), reflecting a 6.50% week-on-week (WoW) decline. This price dip comes amid ongoing uncertainty regarding the implementation of Indonesia's B40 biodiesel mandate, which is set to increase the palm oil-based biodiesel blend from 35% to 40%. The delay in the regulation's rollout has confused the market as traders await official technical details and decrees.
The lack of clarity has impacted palm oil futures, with the Bursa Malaysia Derivatives Exchange (BMD) benchmark contract closing 2.5% lower amid fears of reduced Indonesian exports due to the biodiesel shift. While expectations were high for a decrease in Indonesian exports in 2024, the uncertainty surrounding B40's implementation has caused volatility in the market. Analysts remain cautious about the policy's success, especially with the subsidization plan covering only non-industrial demand, which is less than half the country's total. This ongoing ambiguity could keep pressure on palm oil prices in the short term as traders continue to evaluate the potential impact of B40 on export volumes and global supply.
Malaysia's palm oil prices decreased to USD 1.09/kg in W1, a slight decrease of 0.91% WoW but an increase of 37.97% YoY. This drop followed Indonesia's delay in implementing the B40 biodiesel mandate, which introduced market uncertainties and spurred a sell-off. Despite this, a weaker Malaysian ringgit, a decrease of 0.18% against the USD, and rising crude oil prices could bolster palm oil's competitiveness and biodiesel demand, potentially stabilizing or lifting prices in the medium term.
However, heavy rains disrupted Malaysian palm oil production in early Jan-25, particularly for CPO and palm kernel oil (PKO), which could tighten supply and exert upward pressure on prices. Delays in harvesting, logistical challenges, and quality degradation of raw materials may amplify production costs. Driven by its applications in food, cosmetics, and biodiesel, global PKO demand remains robust. Coupled with Indonesia's forthcoming B40 biodiesel policy diverting palm oil to domestic use, this supply shortfall is likely to intensify competition and reinforce elevated price trends into early 2025.
Analysts foresee higher procurement costs across industries reliant on PKO, including food manufacturing and cosmetics, which could potentially cause price hikes in consumer goods. Overall, Malaysia's production challenges and Indonesia's biodiesel mandate are set to drive price volatility in the palm oil market. While prices may ease if weather conditions improve or inventories recover, sustained demand and constrained supply suggest prices will remain elevated in the near term.
In W1, Thailand's oil prices fell to USD 1.13/kg, marking a 3.42% decrease WoW but a significant 37.80% increase YoY. Thailand's oil production outlook for 2025 appears positive, driven by the maturation of new oil palm plantations established following favorable price conditions in 2022. Despite this, domestic consumption is expected to remain stable at 1.49 mmt. However, the Ministry of Energy's decision to maintain a low biodiesel blending ratio of B5 is anticipated to reduce palm oil demand for biofuel. Additionally, palm oil exports are projected to decline slightly to 1 mmt in 2025. These factors and ongoing fluctuations in biofuel demand and production dynamics could create a mixed impact on price stability, potentially resulting in modest price adjustments in 2025.
Given the ongoing volatility in palm oil prices due to production declines in major exporters like Malaysia and Indonesia, businesses should diversify their sourcing strategies by exploring alternative suppliers across different regions. Engaging with emerging palm oil producers such as Thailand and smaller Southeast Asian countries can mitigate risks associated with supply disruptions, adverse weather, or regulatory changes. This approach will give companies greater flexibility in responding to price fluctuations and ensure a more stable palm oil supply, especially as key producers face declining production and biodiesel mandates. Long-term contracts with diverse suppliers could stabilize pricing and support sustainable practices.
Food manufacturers and other industries reliant on oils should consider substituting palm oil with other vegetable oils, such as soybean or sunflower oil, which are increasingly available at competitive prices to manage the rising cost of palm oil. This substitution can help maintain operational cost efficiency, especially in markets like India, where palm oil’s premium over other oils has driven a shift in consumption patterns. By diversifying oil portfolios, businesses can reduce their exposure to market volatility while catering to consumer preferences for alternative oil options.
With Indonesia’s B40 biodiesel mandate and the uncertainty surrounding its implementation, businesses should closely monitor regulatory developments in palm oil-producing countries. These policies could significantly affect export volumes and global supply chains. Companies should proactively engage with exporters and adapt to shifting market conditions to prepare for potential supply disruptions. Additionally, securing palm oil through long-term agreements or hedging strategies could buffer against the impacts of policy shifts and help stabilize procurement costs.
Sources: Noticias Agricolas, Chem Analyst, Ukragroconsult, Kontan
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