KUALA LUMPUR: Crude palm oil (CPO) prices are expected to trade as high as US$700 a tonne by mid-2016 due to the prolonged El Nino drought and more palm oil-based biodiesel usage in Indonesia, said LMC International Ltd chairman Dr James Fry.
“The dry weather is limiting CPO supply. We should see palm oil inventories are coming down, there's a pick-up in consumption as Indonesian Estate Crop Fund is raising biodiesel mandate,” he said.
Indonesia, the world’s largest palm oil producer, officially launched its mandate to have a minimum of 15 per cent blend of biodiesel in sold diesel products. This will rise to 20 per cent in 2016 and 30 per cent in 2020.
Indonesia is encouraging biodiesel usage to create higher demand for palm oil, which is used for blending into biodiesel. The world's top palm producer began collecting a US$50 per tonne levy on crude palm oil exports since July to fund higher biodiesel subsidies.
The Indonesian Estate Crop Fund, known as the CPO supporting fund, was established seven months ago to administer the collection and disbursement of levies imposed on palm oil exports. It will be used for subsidising the price of the fuel national oil company Pertamina must pay.
“I would estimate around US$600 million of this fund will go to biodiesel subsidies” Fry said.
"The amount of subsidised biodiesel depends on CPO prices. What we are certain is that stocks will slump next year," he told participants at the Palm Oil Refiners Association of Malaysia (PORAM) forum here today.
Fry reiterated his long-held view that palm oil prices would continue to be highly influenced by petroleum prices.
Since palm oil prices is relatively low, biodiesel companies in Indonesia and Malaysia have started to mop up CPO from the market to blend with regular diesel.
MPOB data shows that for the first 10 months of this year, biodiesel exports rose fourfolds to 168,835 tonnes from the same period a year ago.
Yesterday, Brent North Sea crude oil for January rose US$13 to trade at US$44.31 a barrel. At the same time, the third-month benchmark palm oil futures on the Bursa Malaysia Derivatives slid RM12 to close at RM2,287 per tonne.
"Should we see a full blown El Nino panning out further into next year, we can expect CPO prices rising to US$600 per tonne by the end of the first quarter and US$700 per tonne by mid-year," Fry said.