Palm oil could become an 84m tonne market

Palm oil is predominantly consumed for food applications, however in the last decade palm oil consumption for biofuels has increased considerably.

According to Frost & Sullivan, global palm oil production is expected to grow at a CAGR (compound annual growth rate) of 5.9% in the period 2011 to 2020 to reach 84 million tonnes. The majority of this growth is expected to come from Indonesia with a CAGR of 7.8%, while production in Malaysia is expected to expand only by 2.7%.

Chris de Lavigne, global VP of consulting at Frost & Sullivan, predicts that by 2020 palm oil could become an 84 million tonne market, representing 45% of the global vegetable oil market. He also said that palm oil pricing is a complex matter that is influenced at any given time by one or a multitude of factors can than cause significant volatility at times.

de Lavigne also explains that Malaysia and Indonesia are at slightly different developmental phases and have some different policy agendas and objectives: 'Indonesia is on a fast track to catch up in the refining and downstream sector and their policies reflect this objective.'

The Indonesian palm oil industry, however, faces many challenges such as infrastructure, rising labour and diesel costs, additional downstream capacity, as well as trade spats and environmental concerns amongst others.

The fatty oleochemical industry has undergone numerous fundamental changes over the last 30 years. These have been exacerbated over the last five years, making it a volatile market. The industry is faced with numerous opportunities, challenges and question marks that will define it over the next 10 years.

de Lavigne highlights that most active players in the market today are currently expanding production with at least two to three new players expected to enter the market shortly. This has been spurred on by crude palm oil (CPO) tax incentives that were introduced a few years back.

He also said that the raw material prices are high at the moment due to ample supplies of vegetable oils, slowing growth, and a lack of biodiesel support: 'Raw material availability is not the issue and there will be plenty of supply of crude palm oil and palm oil kernel moving forward. But there is likely to be more competition to control it.'

CAGR for crude palm oil and palm oil kernel stands at around 8-10% per annum. This is likely to continue at a similar rate through to 2020.

In 2012, global biodiesel production was estimated at 22.9 million tonnes. This grew to 26.3 million tonnes in 2013 and almost 30 million in 2014. 'Asia thus needs to open up and develop its own domestic market,' says de Lavigne. 'A strong domestic market always supports potential exports too.'

According to de Lavigne, the advent of biodiesel has pushed the palm oil market into a different trading range: 'For the majority of the past seven years we have seen palm oil trade at a premium to Brent crude oil, making biodiesel difficult without some form of support.'

Frost & Sullivan concludes that, unless there are price catalysts such as biodiesel, the industry will likely remain in a fairly bearish mode and this could last some time. With that, de Lavigne notes that 'the industry needs to reduce costs as well as look at how it can better utilise its assets and selectively develop more downstream revenues'.