EU palm oil use for biodiesel to fall in 2021 on cost concerns: USDA

EU use of palm oil to make biodiesel is forecast to decline in the 2021 marketing year (July-June), as high feedstock prices will hamper production from Spain, the US Department of Agriculture said in its annual EU biofuels report.

Palm oil use for making biodiesel is expected to fall to 2.63 million mt in 2021 from 2.65 million mt in 2020 due to expected lower production of Hydrogenation-Derived Renewable Diesel, popularly known as HDRD, from Spain, in response to exceptionally high palm oil prices, the USDA report released June 22 said.

The EU is the world's largest biodiesel producer, and in 2020 palm oil accounted for 18% of the total feedstock used to make the fuel after rapeseed oil (38%) and used cooking oil (23%) in the bloc.

Palm oil prices have risen sharply over the last year as pandemic-led supply tightness and revised biodiesel mandates across the world have pushed the tropical oil's cost to its highest in more than a decade.

The use of palm oil use in biodiesel will also be affected by planned phase-outs by several member states which are set to kick in from July, the USDA said.

Regulatory hurdles ahead for palm oil

The use of palm oil in making biodiesel is set to face setbacks in the coming weeks as EU member states are required to turn the bloc's updated green energy targets under the Renewable Energy Directive II (RED II) into national legislation by June 30.

Under the RED II directives, which will be in effect from 2021-2030, biodiesel made from palm oil and soybean oil have been categorized as at a high-risk of causing deforestation and emitting more greenhouse gasses than the use of fossil fuels.

Due to this mandate EU member states can no longer count palm oil-based biofuels towards their renewable energy and climate targets.

While the study behind the RED II directives has been strongly criticized by EU's largest palm oil suppliers -- Indonesia and Malaysia -- several member states have already announced early phase-outs. France excluded palm oil-based biofuels effectively since January 2020 while Austria and Belgium will follow suit in July 2021 and January 2022.

Germany, the largest producer of biofuels in the bloc, has said it will phase out palm oil-based biodiesel by January 2023.

The EU is the third-largest buyer of palm oil after India and China and imports about 5 million mt to 6 million mt in a year.

Indonesia and Malaysia -- which account for about 85% of the world's palm oil supply -- are currently challenging the EU RED II directives at the World Trade Organization, arguing that the policy unfairly targets palm oil while favoring European feedstocks like rapeseed oil.