La Nina, biodiesel to define palm oil price direction

Palm oil analysts forecast prices hinging on biodiesel demand and the severity of the La Nina weather trend towards the end of the year and into 2021.

Speaking at the Solvent Extractors Association of India webinar, forecasters agreed that previous projections of 25pc cuts in palm oil yields this year have proved fatalistic. While there is some downside because of labour shortages, reduced fertilizer application and La Nina's increased rainfall, it will not nearly be as severe as feared.

January-August Malaysian palm oil supplies were 600,000t lower than in the same period last year at 12.7mn t, according to the Malaysian palm oil board. But a seasonal increase in production expected in the fourth quarter may be lower than in previous years, although overall 2020 output is unlikely to be much lower than last year's 19.9mn t total.

The lack of foreign workers because of Covid-19 movement restrictions has caused alarm in the market this year and has been a drag on Malaysian palm oil output.

But UK-based LMC International chairman James Fry expects La Nina to pose a bigger threat to supplies than the much-discussed labour shortage, which he said has been a regular problem for years. He added that the usual fourth-quarter peak may be delayed by a couple of months because of the expected La Nina rainfall but that the production outlook is favourable for next year.

Fry expects lower transport fuel demand than before the Covid-19 pandemic will result in a weakening of biodiesel use as governments reduce support for rising mandates.

Lower crude and relatively higher palm oil prices have strained. Indonesian biodiesel funds under its high B30 mandate, as it uses export levies to subsidise the gap between biodiesel and fossil fuel diesel prices.

But the political will to persevere with the scheme by Indonesian President Joko Widodo to support the domestic palm oil industry is likely to ensure its continuation, although alternative methods may be needed.

Indian conglomerate Godrej International's director Dorab Mistry suggested a more dynamic mandate to help ease the financial burden, with B30 implemented up until the crude palm oil (CPO) price hits $600/t before falling to B25 and then B20 should prices hit $700/t or above. Most agreed, although Indonesia will likely continue to stick to the rigid B30 target.

Malaysia may similarly rein back its rollout of a nationwide B20 mandate should the palm oil-gasoil spread, which hit a nine-year high of $400/t last month, remain wide.

CPO prices on the benchmark fob Bursa Malaysia exchange fell to $460/t in May on the back of depleted demand in the wake of the first Covid-19 wave but recovered to $745/t in September. Palm oil demand is expected to suffer further as a result, particularly from export biodiesel markets such as the EU, which are trying to pivot towards waste feedstocks such as used cooking oil anyway.

Germany-based Oil World executive director Thomas Mielke forecast global biodiesel production to fall by 2.52pc from 2019 to 43.4mn t this year. Of the total 7.2mn t will be produced in Indonesia from 7.48mn t last year and just 900,000t in Malaysia from 1.42mn t a year earlier. The EU is forecast to have a 780,000t cut in output to 14.3mn t, the US to 7.5mn t from 7.35mn t, while Brazil bucks the trend at 5.5mn t from 5.16mn t the previous year.

By Amandeep Parmar