Will the price of palm oil decrease in 2023?

Contemporary Trends in Palm Oil Sector

The most popular vegetable oil is palm oil. It serves as a feedstock for biofuels and is an ingredient in a variety of foods and personal care items. Increased energy levels, postponed aging, improved sight, immune response support, and a lower risk of cancer and heart disease are just a few of the many health benefits of palm oil. One of the main reasons influencing the market's growth is the increased customer consciousness of these health benefits. Demand for the product is also being driven by the booming food sector because it is widely used for cooking and a crucial component of recipes for nutritious foods. In addition, palm oil is rapidly replacing petroleum-based goods as a viable substitute in the energy and transportation sectors. As an alternative to mineral oil, it is also employed in power generation to generate electricity.

Impact Analysis for COVID-19

· Products made from palm oil are one of the good, healthier foods that customers are seeking out since they have become more health conscious. Therefore, it is possible to see an increase in demand during COVID-19.

· Due to the rise in infections and the decline in economic activity, it is anticipated that the market demand would experience superior growth in the near term.

· However, it is unavoidable that lockdowns, supply chain disruptions, and issues with product supply were caused by the propagation of COVID-19.

Production of Palm Oil

Worldwide production of palm oil reached 73.5 million metric tonnes in 2018–2019. (81.0 million short tons). By 2050, 240 million metric tonnes (260 million short tonnes) of palm oil will be produced annually. The Indonesian government forbade the export of palm oil during the 2022 food shortages caused by the Russian invasion of Ukraine with crop disasters in other regions of the world as a result of extreme weather brought on by climate change. This led to a significant spike in global pricing along with a decreased Malaysian crop, which had a knock-on impact on the worldwide supply chain by lowering availability. The Indonesian government resumed trading on May 23, 2022, to balance supply. Indonesia and Malaysia generate the vast majority of the world's palm oil. Between 85% - 90% of the total volume of such vegetable oil is produced by them collectively. Nigeria, Colombia, and Thailand are additional important producers.

1. Indonesia

In 2006, Indonesia overtook Malaysia as the region with the highest production of palm oil, generating more than 20.9 million metric tonnes (23.0 million short tonnes), a figure that has since increased to more than 34.5 million metric tonnes (38.0 million short tonnes) (2016 output). By the end of 2030, Indonesia plans to have doubled its production. By 2019, 51.8 million metric tonnes had been produced (57.1 million short tons). 60% of the production was exported as crude palm oil at the end of 2010. According to FAO figures, production rose to approximately 8.7 million metric tonnes between 1994 and 2004. (9.6 million short tons).

2. Malaysia

Malaysia is the second-largest manufacturer of palm oil in the world. In response to worries over deforestation, Malaysia's government committed in 1992 to limit the growth of palm oil cultivation by preserving at least half of the country's territory as a forested area.

On around 5,000,000 hectares (19,000 sq mi) of land, the nation produced 18.8 million metric tonnes (20.7 million short tonnes) of crude palm oil in 2012. Malaysia is the global highest exporter of palm oil, even though Indonesia generates more of it; in 2011, it sent 18 million metric tonnes (20 million short tonnes) of palm oil-derived goods abroad. The top importers of items made using Malaysian palm oil are India, Pakistan, China, the European Union, and the United States.

Effects of climate change and how palm oil has adapted

It is quite concerning how oil palm development and climate change interact and interact in Southeast Asia. Due to Malaysia's position as the world's second-largest producer of palm oil, this is particularly relevant to the country. Extreme occurrences including drought, flooding, heatwaves, and pest and disease infestation have all been made worse by anthropogenic activities and agroecological techniques used in oil palm plantations, such as overuse of fertilizers, bushfires caused by clearing land, and cultivation of peatlands.

These detrimental effects on oil palm productivity emphasize the value of implementing efficient adaptation techniques. The study's objectives are to evaluate how climate change has affected Malaysian oil palm productivity and to determine the farmers' adoption options. The articles published between 2000 and 2021 that discussed Malaysia's oil palm production and climate change were thoroughly reviewed for this study. The analysis demonstrates the diverse effects of climate change on Malaysia's oil palm production.

This led to the identification of several adaptation strategies, including the development of heat-tolerant hybrid varieties, sustainable soil management, pits and trenches to improve water management in plantation areas, negligible use of fertilizers, herbicides, and pesticides, no burning, and minimal tillage. According to the reviewed studies, a sustainable national climate change policy, the preservation of the current carbon stock, the effective implementation of tropical rainforest wildlife, afforestation for sequestering carbon, and a decrease in greenhouse gas (GHG) emissions are all necessary to lessen the negative effects of climate change.

In 2022–2023, India would import 14 million tonnes of vegetable oil

India's domestic consumption is anticipated to increase to 22.85 million tonnes in 2022–23, a 2.5% increase from the previous season and a turnaround from a three-year decline of 7-8%.

According to the premise that India would continue to have a sizable domestic soybean & mustard harvest, similar to 2021–22 levels, the total domestic supply is predicted to reach 11.83 million tonnes in 2022–23.

In 2021–2022, a high mustard harvest & crushing aided India's domestic pressure on cooking oil. This happened at a time when there was a shortage of vegetable oils on the world market and prices were going up as a result of the earlier this year-imposed export embargo on Indonesian palm oil and the ongoing conflict between Russia and Ukraine.

Following the Indian Vegetable Oil Producing Countries Association, India is anticipated to import roughly 14 million tonnes of vegetable oil there in the 2022–23 season, which begins on October 1, 2022, with palm oil accounting for the majority of imports at 8 million tonnes, a 3.5% increase from the previous year (IVPA).

Meanwhile, it is anticipated that imports of soybean oil will decrease by nearly 11% to 3.6 million tonnes. Having seen a decline in market share due to rising imports of sunflower oil, which are anticipated to climb over 19% to 2.25 million tonnes during 2022–2023, Throughout a session at the 25th Global Meeting taking place this week in Agra, India, Mr. Sudhakar Desai, Chairperson of IVPA, said.

Prices for palm oil will decline in 2023 as production rises

Assume that average palm oil rates will be much lower in 2023 due to anticipated increases in industrial output. The margins and EBITDA of Asian companies should suffer from lower pricing, which will increase their leverage. However, increased fruit harvests and oil production ought to support EBITDA. A release of cash flow should also enhance the overall free cash flow (FCF) characteristics of producers.

As opposed to USD1,200/t in 2022, we anticipate Malaysian reference CPO rates to approach USD800/tonne (t) in 2023. An upside potential risk to our pricing projection, however, is a sharp decline in analyst estimates of an increase in the worldwide supply of vegetable oil next year, possibly due to the war between Ukraine and Russia.

Following a dismal 1H22, according to the most recent industry data, yields are going upward from 3Q22. With warmer weather and fewer disruptions from flooding, we anticipate output to increase throughout the upcoming year. Producers in Malaysia will also benefit from a rise in the entry of foreign labor.

Due to rising pricing, businesses reported an increase in inventories in 1H22. Indonesia's three-week export prohibition beginning at the end of April 2022, which caused a rise in local supplies, had a substantial impact on producers there as well. We anticipate that reduced prices and a pick-up in Indonesian exports will aid in the release of working capital starting in 2H22.

Malaysia projects that the price of crude palm oil will be around RM4,300 / tonne in 2023

Malaysia predicted that the price of crude palm oil would fall from RM5,000 / tonne this year to an average of RM4,300 (US$928.93) in 2023.

According to Malaysia's Economic Outlook study (Economic Report 2022/2023), which was released alongside the 2023 budget, this is more than the previous 10-year average of RM2,685 because it is anticipated that the supply of edible oils and fats will remain constrained globally. The second-largest manufacturer of crude palm oil in the world is Malaysia.

Early this year, the Malaysian market surged to a historic high of RM7,268 as a labour shortage and the conflict in Ukraine caused a global shortage of edible oil. Since then, prices have lost about half of those gains.

According to the government, crude production of palm oil will increase in 2023 compared to 2022.

Factors influencing the price of palm oil

1. Supply
2. Demand
3. Environmental impact of palm oil extraction
4. Replacement with different oils

●    Supply

Palm Oil price is mostly influenced by supply and demand, as with any other plant-based fuel. The majority of palm oil plantations are located in Malaysia and Indonesia, two tropical Southeast Asian nations where the production is frequently impacted by erratic weather patterns. Palm oil production and consequently pricing would be impacted by dry spells or times of severe rain that caused flooding.

●    Demand

China and India, two countries in Asia that together account for a 1⁄4 of worldwide consumption, are the main importers of palm oil. 4 These are nations that also anticipate sustained population growth, which is a major driver of rising Palm oil demand. The demand may also be impacted by import restrictions and regulations implemented by importing nations, on the other side.

●    Effects of palm oil production on the environment

The World Wildlife Fund estimates that Malaysia and Indonesia, two islands with some of the planet's most biodiverse tropical forests, are home to about 90% of the world's oil palm trees. Acres of rainforests are still being removed to make room for oil palm plantations, endangering the environment's rich biodiversity. This resulted in a major backlash from environmental organizations and a consumer shift away from many products containing palm oil. However, starting in 2012, the UK government made a commitment to sourcing all of its palm oil from sustainable sources.

●    Replacement with different oils

Alternatives to palm oil have gained in popularity as a result of the aforementioned environmental worries. Some of these, like olive and coconut oil, can be used in place of the different applications to which CPO had been put.

Is palm oil a sustainable investment?

Palm oil is easily regarded as a wise financial investment. Over the past 20 years, industry demand has continually outpaced industry supply, making this the most manufactured and used vegetable oil there in the globe.

But it's not that straightforward; an ethically sound transaction is not always a financially sound one. Extreme deforestation, habitat destruction, and human rights violations have all been linked to the manufacturing of palm oil by detractors of the product's origin. In contrast, the high returns provided by palm oil and the ensuing socioeconomic improvement it may bring to rural areas have been mentioned by the product's supporters. We need to learn everything about both the advantages and disadvantages that oil palm cultivation may have to decide if it is or can be an ethical venture.

The development and spread of oil palm are mainly owing to its four-five times more efficient cultivation than that of crops like rapeseed or sunflower oil, as well as to the wide range of uses for palm oil as well as other palm oil by-products, from food to cosmetics to biofuels.