Commodities 2024: Palm oil sees global recovery on biodiesel demand, stagnant supplies

Palm oil prices are expected to average higher globally in 2024 as a stagnating production in main producers, Indonesia and Malaysia, along with growing demand for its use in making biodiesel will squeeze supplies in the coming year, industry experts said.

In 2024, third-month crude palm oil futures on Malaysia's commodity exchange are expected to average at MR4,000/mt ($856.44/mt), according to the median estimate of 11markets and government agencies polled by S&P Global Commodity Insights.

The benchmark palm oil contract which influences international vegetable oil prices, averaged MR3,798/mt in 2023, down 23% from 2022, and largely in line with S&P Global's price forecast of MR3,800/mt on Jan. 3.

In the physical markets at origins, Platts assessed the average price of Crude Palm Oil FOB Indonesia at $892.2/mt, according to S&P Global data.

Key factors influencing palm oil prices in 2024 include a "wildcard" El Nino, rising biodiesel demand, robust food demand and low production growth, industry experts said at an industry conference in November.

Biodiesel forecast bullish

Growing biofuel demand in Indonesia -- the world's largest producer and exporter of palm oil -- will be one of the main demand drivers in 2024, the Malaysian Palm Oil Council predicted in December.

Indonesia's use of CPO as a feedstock to make biodiesel is expected to rise to 11 million-12 million mt, exceeding its domestic food use of around 10 million mt for the first time in 2024, trade expectations showed.

The narrowed spread between palm oil and gasoil prices -- known as the POGO spread -- during 2023 will further incentivize Jakarta's growing biodiesel blending mandate.

In 2023, the average POGO spread was $39.8 compared with the 2020-2022 average of $279.4, according to S&P Global data.

A negative POGO spread, as seen between August-November 2023, means discretionary blending is profitable. The metric is used by the biodiesel industry to gauge costs and margins while adhering to government mandates.

Julian McGill, agricultural economist and managing director of Kuala-Lumpur-based Glenauk Economics, said in November that growing biodiesel mandates across the world are "throwing vegetable oil fundamentals off kilter."

Production forecast unchanged

Palm oil production from Malaysia and Indonesia, which accounts for about 85% of the world's supply of tropical oil, may register negligible gains in 2024 as dry weather and a lack of new plantations cap chances of supply growth, according to a wide section of the industry.

Indonesia's palm oil output will likely remain stable on the year at 48.5 million mt in 2024 while Malaysian production is seen at around 18.5 million mt next year, also steady from 2023, according to projections from respective industry regulators in November.

Weather agencies forecasts have also confirmed a mild El Nino weather pattern in 2023 and 2024, which brings in drier weather and lower precipitation in Southeast Asia.

El Nino remains to be a key wild card for CPO price in 2024 and its impact on palm oil yield will only come through in 10-12 months, said Ivy Ng, CIMB Investment Bank Bhd plantation analyst.

During the more severe El Nino of 2015-16, oil palm yields fell by 17% in Indonesia and 9% in Malaysia.

Looking ahead to 2024, both Malaysia and Indonesia do not foresee any growth in palm oil production. Key planting regions in Sumatra and Kalimantan experienced below-average rainfall from August to October, impacting production due to the El Nino phenomenon, MPOC said in December.

Global production of palm oil, which makes up 40% of the world's total vegetable oil supplies, is expected to grow at the lowest rate in four years in 2023-24, said Thomas Mielke, head of Hamburg-based analyst firm Oil World at PIPOC 2023 in November.

Export forecast clouded

Demand for palm oil from India and China -- the two largest buyers -- is expected to be slightly lower on the year. The potential for recession and high interest rates in 2024 is expected to temper demand, Nagaraj Meda, head of commodities risk firm TransGraph consulting said.

India's palm oil imports hit a record high of 10.5 million mt in marketing year 2022-23 (November-October) due to lower prices compared with soybean and sunflower oils.

For MY 2023-24, India's imports could range between 9.08 million-9.3 million mt, according to various industry sources.

China's palm oil imports rose to 6.19 million mt in MY 2022-23 (July-June), up 48% on the year and were at 6.4 million mt in MY 2023-24, the US Foreign Agricultural Service said Dec. 8.

On the destination side, Platts assessments of Crude Palm Oil CFR West Coast India averaged at $937.1/mt in 2023, S&P Global data showed, meanwhile Crude Palm Oil CIF Rotterdam averaged at $957.2/mt in 2023.