November 24, 2024 | 05:41 GMT +7

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Wednesday- 08:31, 09/11/2022

Palm oil faces headwinds amid China lockdowns, EU phaseout

(VAN) Indonesia sees 'stable' prices in coming months, but future outlook dim.
Trucks with fresh palm oil fruit at a factory in West Aceh, Indonesia on May 17. Photo: Reuters

Trucks with fresh palm oil fruit at a factory in West Aceh, Indonesia on May 17. Photo: Reuters

Market uncertainties and slowing economies are clouding the outlook for global palm oil demand, with prices expected to decline next year after having hit record highs in the wake of Russia's invasion of Ukraine.

Some industry players and analysts who gathered at the Indonesia Palm Oil Conference on the resort island of Bali last week forecast that Malaysian palm oil futures for delivery in three months -- a global benchmark of the commodity -- to hover between 3,500 ringgit ($738) and 5,000 ringgit per tonne through the first quarter of 2023.

The price stood at around 4,400 ringgit per tonne in the past week after hitting 7,000 ringgit between March and May. The record prices occurred as the Russia-Ukraine fighting disrupted delivery of sunflower oil, of which Ukraine is a top producer, sending prices of global vegetable oils soaring.

It also prompted Indonesia, the world's largest palm oil producer, to impose a three-week ban on exports of the commodity between April and May amid a domestic cooking oil crisis.

"Historically, the current prices are still high and will remain stable until the end of the year," Fadhil Hasan, head of foreign affairs at the Indonesian Palm Oil Association (Gapki), told conference participants on Friday. However, citing a correlation between the global economic situation and palm oil prices, he added that they are expected to fall in 2023 "due to weak demand from ... declining economic growth."

Demand from China, the largest importer of Indonesian palm oil, is expected to remain under pressure over the next year as long as Beijing maintains its zero-COVID policy. Data from Gapki shows China's imports of Indonesian palm oil fell 30% this year as of the end of August to around 3 million tonnes versus the same period in 2022.

The China decline is partially offset by demand from India and Pakistan -- the second- and third-largest importers of Indonesian palm oil -- which is expected to remain strong over the next few years.

Still, palm oil prices are facing further downward pressure over the medium and long term as European Union opposition to the commodity due to environmental concerns continues to gain steam, especially for use in biofuel.

The EU under its Green Deal policy has adopted proposals to cut its net greenhouse gas emissions at least 55% by 2030 compared with 1990 levels -- including through a gradual phaseout of biofuel feedstocks with high deforestation risks such as palm oil. EU governments and the bloc's parliament are reportedly planning the next round of negotiations on a new EU anti-deforestation law this week, which could accelerate the phaseout.

Gapki expressed concerns over repercussions in Indonesia's palm oil industry. "Either [the] EU doesn't understand the existential threat that the law will cause to millions of Indonesian small farmers, or it simply doesn't care," the association said in a written statement on Friday, adding that palm oil farmers "will be blocked from the EU market, damaging Indonesia's economic growth and killing jobs."

Officials in Indonesia and neighboring Malaysia, another major palm oil producer, have repeatedly called the EU's anti-palm oil move "discriminatory" and "protectionist," slamming the use of "palm oil free" labels in food products and other items sold in European supermarkets.

James Fry, founder and chairman of British consultancy LMC International, told the Bali conference that EU imports of palm oil for food this year have stabilized, as users seemingly turned to it after Russia blocked the Ukrainian sunflower oil trade. However, nonfood demand, mainly for biofuel, is falling sharply due to the bloc's palm oil policies.

"So if China is disappointing, the EU as a market for palm oil is a disaster," Fry said.

Meanwhile, Thomas Mielke, executive director of German agricultural research company Ista Mielke, said production of other vegetable oils including soybean, rapeseed and canola oils in Latin America, Canada and elsewhere is expected to grow. He added ample supplies of these oils are expected to lead to a "downward trend" in prices during the first half of 2023. This poses another downside risk for palm oil, traditionally the cheapest among edible oils. Mielke said palm oil currently accounts for half the world's exports of all vegetable and animal oils and fats.

Increasing production of the other oils also could erode the dominant share of palm oil in the global vegetable oil market, he added, while production is structurally declining in Indonesia and neighboring Malaysia due to the considerable slowdown in expansion of cultivation areas.

"We have acreage limitations, and it will be increasingly difficult to expand production into new areas," Mielke said. "The big challenge for the future is to raise yields per hectare ... in a sustainable way."

Over the longer term, Indonesia and Malaysia also may face a challenge in India, which is keen to cut edible oil imports. The Indian government has introduced a program to expand by 2026 oil palm plantations to 1 million hectares from 350,000 hectares and annual palm oil production to 1.12 million tonnes from 300,000 tonnes, said B.V. Mehta, executive director of the Solvent Extractors Association of India, at the conference.

Indonesian palm oil producers have expressed hope for their government's biodiesel program to buoy palm oil demand. The program had supported the industry in recent years amid the EU's palm oil policies, prior to coronavirus-related supply disruptions and price hikes that discouraged Jakarta from expanding the biodiesel policy. With palm oil prices now on the decline, the government is reportedly planning to increase palm oil content in the biodiesel mix sold in Southeast Asia's largest economy to 40% from 30%.

Reuters reported that 14 major global food trading companies on Monday detailed a plan at the COP27 U.N. climate summit in Egypt to end deforestation in their supply chains by 2025 for soy, beef and palm oil. Among the companies participating in the move aimed at helping avoid damaging climate change are Cargill, Bunge, Archer Daniels Midland, Louis Dreyfus, JBS of Brazil and China's Cofco International, the news egency said.

Tr.D

(Nikkei)

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