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Trade4go
Dec 20th, 2024
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At its annual conference in Bangkok, Thailand, the Roundtable on Sustainable Palm Oil (RSPO) has adopted updated rules for sustainable-certified palm oil production. Key changes include strengthened certification standards for smallholders, new requirements for identifying and addressing human rights impacts, and expanded restrictions on harmful pesticides. Palm oil mills must also report water usage to address concerns about climate-related water scarcity.
However, the revised rules have drawn criticism from Greenpeace and the Rainforest Action Network (RAN) for weakening protections against deforestation. The RSPO removed references to the High Carbon Stock Approach (HCSA) Toolkit, a methodology used to identify and protect high carbon stock (HCS) forests, in its updated definition of High Carbon Stock forests, potentially allowing natural forests to be cleared for plantations. Critics argue that this change undermines commitments to no-deforestation practices and creates loopholes.
The RSPO maintains that the updates aim to improve implementation and compliance, particularly in emerging palm oil markets. The revisions also include a new digital traceability system, Prisma, to support compliance with the European Union Deforestation Regulation (EUDR).
The Palm Oil Producing Countries Council (CPOPC) predicts global palm oil prices could range between USD 904 and 1,130 per metric ton (mt) in 2025 due to stagnant production in key markets, particularly Indonesia and Malaysia. Aging plantations, unpredictable weather, and limited expansion of new plantings are forecasted to constrain supply while global demand increases.
According to the CPOPC deputy secretary-general, the Malaysian floods bolstered the market by nearly USD 1,122.98/mt as of W50, creating temporary optimism. The CPOPC, comprising major producers like Malaysia and Indonesia, is working to include Thailand, potentially extending its control from 93 to 95% of global palm oil output, further consolidating its market influence.
According to the Malaysian Palm Oil Board (MPOB), Malaysia's palm oil production is expected to decline for the fourth consecutive month in Dec-24, driven by heavy rainfall and flooding. Crude palm oil (CPO) output could drop by 5% to 8% under normal circumstances or up to 10% to 20% if severe flooding persists. Nov-24 production fell 9.8% month-on-month (MoM) to 1.62 million metric tons (mmt), marking the lowest November output since 2020.
Flooding, particularly in Peninsular Malaysia, has disrupted harvests and infrastructure, further constraining production and transport. These supply issues are expected to tighten inventories and support higher benchmark CPO futures, already near a 2.5-year high. As of W50, palm oil is trading at a premium to soybean and sunflower oils due to limited global supplies.
According to the Plantation and Commodities Ministry of Malaysia, India's recent hike in palm oil import duties poses a temporary challenge to Malaysia's palm oil exports. India raised import duties for CPO from 5.5% to 27.5% and processed palm oil from 13.75% to 35.75%, aiming to protect domestic oil prices and support its agriculture sector. Meanwhile, Indonesia's reduction in export levies further intensifies competition.
Malaysia is countering these impacts through trade agreements like the Association of Southeast Asian Nations (ASEAN) India Free Trade Agreement (AIFTA) and the Malaysia-India Comprehensive Economic Cooperation Agreement (MICECA), which cap India's import duties at 37.5% for CPO and 45% for processed palm oil. Additional measures include promoting Malaysian Sustainable Palm Oil (MSPO) certification and exploring high-value products such as bioplastics and biofuels. Despite these challenges, Malaysia's palm oil exports to India grew 16.4% year-on-year (YoY) to 2.67 mmt from Jan-24 to Oct-24, reflecting strong demand and the industry's resilience.
Sri Lanka's palm oil industry is optimistic about the potential reversal of the 2021 ban on oil palm cultivation, driven by the new government's focus on agriculture and poverty alleviation. The Palm Oil Industry Association (POIA) highlights the policy's inconsistency, as Sri Lanka is the only country that bans oil palm cultivation while allowing its consumption. The ban has led to a reliance on costly palm oil imports totaling USD 57 million annually.
If lifted, the industry could meet up to 50% of Sri Lanka's edible oil demand by 2025. However, the POIA points out that the ban was based on unfounded concerns about oil palm's water footprint, which they argue is unsupported by scientific evidence. The association hopes the new government will reconsider the ban to support agricultural development, improve productivity, and create jobs.
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Indonesia's palm oil prices climbed to USD 1.22 per kilogram (kg) in W50, reflecting a 4.27% week-on-week (WoW) increase and a 32.95% YoY surge. The rise coincides with the Indonesian government's plan to implement its 40% palm oil-based biodiesel (B40) blending program on January 1, 2025, to curb carbon dioxide (CO₂) emissions by up to 40 mmt annually.
The current B35 program has reduced emissions by approximately 32 mmt annually. To meet the growing demand driven by B40, the government has increased the national palm oil production quota. Initially delayed due to high vegetable oil prices in 2021/22, the B40 launch is expected to further boost domestic palm oil consumption and support prices.
Malaysia's palm oil prices declined to USD 1.17/kg in W50, a 1.68% WoW drop, despite maintaining a substantial 52.56% YoY gain. The decline follows a sharper-than-expected reaction to reports from the Malaysian Palm Oil Council (MPOC) and the United States Department of Agriculture's (USDA) Dec-24 Foreign Agricultural Service (FAS) Vegetable Oil Balance, which cut estimates for production, exports, and stocks. In addition, the USDA lowered Malaysia’s output to 19.3 mmt, a decrease of 0.5 mmt.
Furthermore, the price decline contrasts with disruptions caused by heavy rainfall and severe flooding, which the MPOB warns could reduce CPO production by 5 to 8% under normal conditions or up to 20% if flooding persists. Damaged infrastructure and logistical delays in key producing regions may further tighten supply and curb inventories. While Malaysia’s palm oil premium over competing oils like soybean and sunflower oil underscores supply constraints, ongoing adverse weather risks production and export recovery. Despite the current price dip, conditions fundamentals may lend support in the near term.
Thailand's palm oil prices decreased to USD 1.24/kg in W50, a slight decrease of 0.80% WoW and an increase of 54.32% YoY from USD 0.81/kg. This price fluctuation coincides with severe flooding in Southern Thailand, particularly in regions such as Nakhon Si Thammarat and Chumphon. Heavy rains have caused significant damage to infrastructure, homes, and oil palm plantations. The floods have disrupted transportation and harvesting, potentially affecting future palm oil production in the region.
Adverse weather challenges could strain local supply, especially as logistical difficulties persist. This may result in tighter palm oil inventories, which could support higher prices in the near term despite the current price dip. Additionally, Thailand's palm oil premium over competing oils may further intensify as regional production struggles to meet demand. Future prices will likely depend on the severity of weather conditions and the ability to restore affected infrastructure.
To address concerns over deforestation and improve the credibility of palm oil sustainability efforts, stakeholders should invest in enhanced sustainability certifications and traceability systems. Businesses should leverage the RSPO's adoption of the Prisma digital traceability system to ensure compliance with international regulations such as the EUDR. Companies should also consider expanding their commitments to independent auditing of smallholders and suppliers, ensuring that their operations adhere to no-deforestation practices. This will help mitigate criticisms from environmental groups and strengthen the global market's confidence in sustainable palm oil.
Given the flooding challenges, unpredictable weather, and declining production in key regions like Malaysia and Thailand, businesses should diversify their palm oil sourcing strategies. Companies can reduce dependence on any single region by sourcing from a wider range of countries and considering alternative suppliers within Southeast Asia, including emerging producers like Sri Lanka. This approach helps buffer against regional disruptions and ensures more consistent pricing in an increasingly volatile market. Additionally, partnerships with producers that adopt sustainable practices, such as MSPO certification, can further enhance supply chain resilience.
As global competition increases, particularly with India's import duty hikes, stakeholders should strategically navigate trade agreements and policy shifts to maintain market access. Malaysia's use of the ASEAN-AIFTA and MICECA demonstrates how leveraging trade agreements can mitigate import tariff challenges. Palm oil producers should explore similar agreements with key importing countries and adapt to evolving regulations. Promoting sustainable certifications, such as MSPO, within these agreements can also improve market positioning and foster long-term growth despite fluctuating tariffs.
Sources: Tridge, Hellenic Shipping New, Ukragroconsult, Reuters, Bangkok Post
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