In a recent development, market sources have revealed that Indonesia is contemplating a significant increase in its biofuel blending mandate to 40%. As the world's leading palm oil producer and exporter, Indonesia has implemented as of July 2023 a mandatory 35% palm oil mix in its biodiesel, known as B35. However, discussions within the Indonesian government suggest that a new mandate, B40, could be introduced in the near future.
If the B40 mandate were to come into effect, it would entail a 5% increase from the current requirement, meaning that approximately 120,000 metric tonnes per month, equivalent to 1.44 million metric tonnes annually, of palm oil supply would be consumed domestically to meet the higher blending standards, according to sources surveyed by Mintec. As Indonesia is the largest producer and exporter of palm oil and derivatives, this move could potentially lead to a decrease in palm oil available for export, impacting the global palm oil supply.
The potential reduction in palm oil supply from Indonesia has implications for the global market, as it could result in price increases. With Indonesia's substantial share of the palm oil market, any decrease in availability would likely affect the overall supply-demand balance. As a result, palm oil prices could experience upward pressure if the B40 mandate is realised, industry sources told Mintec.
Beyond the concerns surrounding the blending mandate, market players have raised another issue related to the growing likelihood of an El Nino event in H2 2023. Historical data indicates that moderate El Nino events have historically caused a decline of approximately 13-15% in Malaysia's and Indonesia’s palm oil output. Considering this historical trend, there is a legitimate concern that a potential El Nino event in 2023 could lead to reduced yields of Fresh Fruit Bunches (FFB) for processing to create palm oil, further straining supplies. Should the anticipated El Nino occur, a limited supply of FFB towards the end of 2023 and throughout 2024 could exacerbate the tightening palm oil market, potentially leading to sustained price increases.
The combination of the proposed B40 mandate and the potential impact of an El Nino event highlights the need to closely monitor the palm oil market in the coming months. According to market players, the outcome of these factors could continue to drive bullish market sentiment toward year end.
Mintec will update this story as more details emerge.