Palm oil prices may rise next year as output normalizes

28.11.2016

Crude palm oil (CPO) prices are forecast to increase in the first half of next year before an abundant harvest in the middle of next year normalizes production.

The average price of CPO, which is used in a broad range of products, from cooking oil to bath soap, is forecast to reach US$680 to $690 per ton (CIF Rotterdam) in 2017 from an average of $670 this year, according to the Indonesian Palm Oil Producers Association (Gapki).

Palm oil production is expected to normalize next year to between 32 million and 33 million tons, up from 30 million tons forecast this year, showing a 10 to 15 percent decrease from last year, the steepest drop in 20 years on account of a prolonged dry season last year.

“In 2016, Indonesia has experienced wet dry seasons, which is favorable for oil production, so we expect production to normalize next year,” said Gapki executive director Fadhil Hasan at the 12th Indonesia Palm Oil Conference and 2017 Price Outlook (IPOC) event in Nusa Dua, Bali, on Friday.

The small stock may only persist until March next year, when prices can peak to well over $800 per ton before going down and possibly reaching the lowest levels in the last quarter, said Siegfried Falk, market analyst from Germany-based information provider Oil World.

“The major reason behind this forecast is that for one thing, the production is recovering and the other major factor is that stocks of palm oil and of other vegetable oil have been reduced massively in the past 12 months,” Siegfried said.

“The stocks have declined by roughly 4 million tons for palm oil, more than 1 million ton for rapeseed oil and by at least 5 million tons of all vegetable combined,” he added.

“The increase in soya oil and sunflower oil is insufficient so the net effect is decline in total production and at the same time, consumption kept growing.”

Demand of palm oil for various usages, from food to industrial use, is estimated to keep growing by 2 to 3 million tons next year during the recovering production phase, but may not be sufficient to balance the over-production.

UK-based agribusiness consultant LMC International chairman James Fry shares a similar view, saying prices will soar but that will stop by August or September before they decrease to as low as $500.

Fry said the over-production should be balanced with increasing demand, including from the mandatory biodiesel program, subsidized by the Indonesian Oil Palm Estate Fund (BPDP).

“The [biodiesel] mandate in this country should be much bigger at this point and that will help stabilize prices,” he said.

The government has ordered the blending of diesel fuel with a portion of biofuel in a move to reduce the country’s growing dependency on petroleum-based fuel and carbon footprint. The mandatory biofuel blend into diesel fuel has increased from around 10 percent in 2013 to 15 percent in 2015 and 20 percent this year.

However, Fry said in practice, the mix is not always 20 percent, hence needing the government’s push for enforcement.

Non-subsidized diesel fuel is also expected to contain a biofuel mix of 20 percent starting next year, otherwise a penalty of Rp 6,000 per liter will be imposed on those who violate the regulation, according to Gapki.


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