Commodities 2023: Palm markets to moderate as blending mandates support CPO, China's UCO exports rise

Asian palm prices are expected to be rangebound in 2023 after a volatile 2022 despite Malaysia entering the year with low stocks and China's used cooking oil exports set to increase to Europe and even extend to the US.

The biodiesel market was marked by a rapid change in fortune in 2022 as palm prices plunged from May after being pressured to historic highs in the wake of Russia's invasion of Ukraine in February.

Indonesia's move to ban palm exports in May in a bid to rein in domestic cooking oil prices caught the market by surprise and was followed by an equally abrupt reversal weeks later and a push by the government to hike exports as overflowing storage tanks sent palm prices plunging.

Platts assessed crude palm oil at an historic high $1,930/mt FOB Indonesia March 10 before prices plunged to a year-to-date low of $783/mt Sept. 29, S&P Global Commodity Insights data showed.

The outlook for Malaysian prices in 2023 is also more moderate after volatility in 2022.

"Unless the war in Ukraine ends, palm oil is expected to trade between Malaysian ringgit 3,500 and 5,000/mt ($789-$1,120/mt) between now and the end of May," Godrej International director Dorab Mistry told an industry conference in Goa in December.

"The war has cast a huge, unexpected shadow on the world economy," he added.

Malaysian CPO third month futures traded in a range of MR 3,226-7,104/mt over Jan. 1-Dec. 27, 2022.

Output, demand to rise

Palm production is expected to increase in 2023 but will be met by robust demand, brokerage UOB KayHian said in a December note.

"Our estimation of 2023 CPO production is very close to Oil World's forecast," UOB KayHian said. Leading benchmark Oil World is expecting palm oil production to rise 2.9 million mt/year in 2022-2023.

"We expect global palm oil production to increase by 3 million mt, or 4% year on year. CPO production is expected to come in at 19.1 million mt for Malaysia and 47.7 million mt for Indonesia. The rise in production will be supported mainly by yield recovery in 2023 after three consecutive years of disruption from La Nina," UOB KayHian added.

The brokerage also forecast demand to rise in 2023, due mainly to an increase in Indonesia's biodiesel blending mandate and a wider soy oil-palm oil spread.

"We expect global palm oil demand to grow by 3.5 million mt, or 5% year on year, in 2023 after three years of weak growth," it said.

Indonesia's Energy and Mineral Resources Ministry on Dec. 29 delayed an increase in the domestic biodiesel blending mandate to B35 by a month to February 2023, from B30 currently.

"The higher blending rate of 35% is expected see some 12.5 million kiloliters of palm consumption locally," a source said.

The higher mandate boosting domestic demand could reduce Indonesia's exports in 2023, market sources said.

"Indonesia's PME exports are expected to shrink to negligible amounts in 2023," a second source said.

However, a third source said: "There is enough domestic capacity for B35. I don't think there is an issue to produce B35 and an additional 500,000 kiloliters for export."

Indonesia exported 315,531 kiloliters of biodiesel over January-October, data from Indonesian biofuel producer association APROBI showed.

The government had allocated 10.151 million kiloliters of biodiesel consumption across 18 producers for 2022, and the B35 blending mandate will see the allocation rising to up to 13.15 million kiloliters.

China's UCO exports to rise

China's used UCO exports over January-October at 1.383 million mt had already outpaced the 1.035 million mt exported over full year 2021, latest customs data showed, despite a steep decline in demand from the EU in the second half of the year.

The country's used cooking oil methyl ester or UCOME biodiesel exports at 1.468 million mt over January-October also outpaced full year 2021 exports of 1.293 million mt.

Demand for UCO as a feedstock was expected to increase further in 2023 as sustainable aviation fuel mandates take off globally and oil majors position themselves for a post-carbon world.

China's increasing exports of UCO and UCOME to Europe are set to continue in 2023 with the EU Renewable Energy Directive or RED II driving higher usage mandates. This, coupled with SAF demand increasing over the next 2-3 years, could see UCO taking an increasing share of the biodiesel market.

Chinese UCO could also make its way into the US market, if the arbitrage is open and export hurdles were overcome, as US demand for UCO as feedstock for hydrogenated vegetable oil or HVO plants increases.

Major SAF producer Neste is also adding capacity to its Singapore plant in 2023. The company will "add capacity produce up to 1 million mt of sustainable aviation fuel and renewable raw materials for polymers and chemicals by the end of Q1 2023," according to a statement on its website.

Total palm oil methyl ester or PME exports by Malaysia and Indonesia also edged higher in 2022.

While Malayia's exports dipped to 294,373 mt over January-November from 349,104 mt in the same period a year earlier in latest Malaysian Palm Oil Board data, the decline was more than offset by Indonesia's PME exports surging to 325,000 mt over January-October from 139,000 mt a year earlier, Indonesian Palm Oil Association data showed.