Indonesia, Malaysia push biofuel to offset palm oil price downturn
04/09/2023 (Asia Nikkei), Jakarta / Kuala Lumpur - Weak prices for palm oil, a worsening outlook and a backlash against the commodity over deforestation concerns are pushing Indonesia and Malaysia -- the world's biggest producers -- to boost domestic use through developing jet fuels and expanding biodiesel programs.
Widely used in Indonesia for cooking oil and applications such as personal care and cleaning products, palm oil is an important sector in Southeast Asia's largest economy with the industry employing millions of workers. Indonesia is the world's largest exporter and it is the country's top export commodity, apart from coal. Palm oil is similarly important in neighboring Malaysia, the world's second-largest producer and exporter.
The benchmark crude palm oil (CPO) price in Malaysia ranged from 3,500 ringgit ($755) to 4,200 ringgit per tonne between January and June. That is compared to the all-time high in April 2022 of almost 7,000 ringgit per tonne, following the launch of Russia's invasion of Ukraine, which sent prices of all edible oils skyrocketing. That run-up in prices for palm oil, traditionally the cheapest among vegetable oils, was a continuation of one caused by pandemic-related disruptions since late 2020.
"Elevated inventories in India and mainland China, an expected increase in global soybean production through the 2023/24 season, and the upcoming September-October period of peak palm fruit yields ... all point to downward pressure on prices through the remainder of" 2023, BMI, a research unit of Fitch Group, said in an Aug. 15 note. "Through the medium term, it remains our view that average annual palm oil prices will continue to ease."
BMI forecast an average price of 3,800 ringgit per tonne for Bursa Malaysia-listed third-month palm oil futures contracts in 2023, down from the average of 4,910 per tonne last year. It also forecast prices will continue to fall, reaching 2,400 ringgit a tonne in 2027 -- on par with a five-year pre-COVID pandemic average of close to 2,420 ringgit per tonne.
The declines have hurt incomes of major palm oil producers after many enjoyed record profits in 2021 and 2022.
In Malaysia, state-owned conglomerate Sime Darby Plantation reported that second-quarter net profit fell by 54% to 380 million ringgit from the same period in 2022. FGV Holdings, also government linked, saw its plantation sector plunge 97% to 13.76 million ringgit, mainly due to the lower average CPO price compared to the previous year and on top of lower CPO sales and 37% higher CPO production costs.
In Indonesia, net income at top producers Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Salim Ivomas Pratama declined 85%, 54% and 71%, respectively, in the first half of 2023, to 284.3 billion rupiah ($18.7 million), 367.6 billion rupiah and 128.4 billion rupiah.
Political issues also weigh on producers. A European Union regulation on deforestation-free supply chains entered force on June 29. S&P Global said in August that combined with the EU's renewable energy directive, which limits the use of palm oil for biofuel in EU markets starting in 2030, the new law is "seen as another layer of restrictions by palm oil producing countries."
Indonesia and Malaysia account for about 85% of global palm oil trade while the EU is typically the third largest importer after China and India. Indonesia, Malaysia and the EU have reportedly agreed to form an ad hoc task force to hash out issues related to the implementation of the deforestation regulation.
To deal with the market and political pressures, Jakarta and Kuala Lumpur are seeking new ways to utilize the commodity.
State-owned airline Garuda Indonesia in August announced the start of a static test on a "sustainable aviation fuel," or "bioavtur," on an engine used in its Boeing B737-800 NG fleet, with ground and flight tests to follow. Garuda's bio jet fuel is jointly developed by Indonesian state oil company Pertamina and the Bandung Institute of Technology.
Also last month, Indonesia expanded its mandatory B35 biodiesel program -- produced by Pertamina -- nationwide, after a partial introduction in February. B35 has a higher palm oil content in the diesel mix than the B30 launched in early 2020. Indonesia is next targeting B40 for 2030.
Indonesia is pushing the biodiesel program expansion as palm oil prices have fallen from the record highs. Malaysia is also exploring its own biofuel efforts.
The Malaysian Palm Oil Board and state energy giant Petronas signed an agreement in August to study using cooking oil and palm oil waste as sustainable aviation fuel. In the second phase of the National Energy Transition Roadmap launched late last month, the government included a B30 biodiesel mandate on heavy vehicles by 2030 after rollout by 2025.
Yusuf Rendy Manilet, economist at Indonesian think tank Center of Reform on Economics, sees Indonesia's biofuel policy as ultimately viable.
"The government's goal is to reduce dependency on imports of oil by leveraging biofuels in order to improve the trade balance," Manilet told Nikkei Asia. "In the long run, with more biofuels becoming available and oil imports reduced ... fuels will become more affordable and lead to improving purchasing power."
BMI said increasing biofuels uptake could pose a "major upside risk" to its price outlook for edible oils overall. "An increase in the rate of diversion of palm oil to the manufacture of blended biofuels -- or, the greater diversion of alternative edible oils, such as soy oil, to biofuels -- would tighten the supplies of edible oils for food consumption."
It added that the developing El Nino weather phenomenon, marked by drier and hotter weather in Southeast Asia, poses another major upside risk to its palm oil price outlook over the next 12 to 18 months -- although "much depends on the eventual strength of the El Nino event itself."
BMI said the 2014-16 El Nino, one of the most severe of modern times, led to double-digit annual declines in percentage terms for crop yields in both Malaysia and Indonesia over the 2015-16 season -- which resulted in palm oil prices rising by 1,000 ringgit per tonne during the period.