Biodiesel production will tighten the supply of palm oil in Indonesia, but it is expected to recover by 2025.

Analysts predict that Indonesia's palm-oil production will recover next year after a drop expected this year. However, prices are likely to remain high due to a planned increase in the country's mandate for biodiesel, they said.

This year, the benchmark palm oil price in Malaysia increased by more than 35%. This is due in part to the slowdown of production, but also to plans by Indonesia to increase their biodiesel blend mandatory for domestic sales from 35% to 40% starting January. The biodiesel program aims to reduce fossil fuel imports.

Julian McGill of Glenauk Economics told the Indonesia Palm Oil Conference that production in Indonesia next year is expected to increase by 1.5 million metric tonnes compared to an estimated decrease of over one million metric tons last year.

Thomas Mielke of Hamburg's Oil World research firm predicted that Indonesian palm oil production would increase by up to 2 million tons in 2019 after dropping 2.5 million tons in 2024.

The supply of vegetable oil from other countries and Indonesia is expected to tighten.

The palm oil production of Malaysia's rival is expected to drop slightly next year after rising by approximately 1 million tons by 2024.

Mielke stated that the combined exports of sunflower, rapeseed and soya oils are decreasing.

He said that the price spike in palm oil over the past seven week has been "frightening". It may have reached its peak if Indonesia delays the implementation of B40 biodiesel.

Mielke stated that if Indonesia implemented the policy, then the price of palm oil would rise by 10%-15% between January and March. He added that the current palm oil premium had already led to palm losing some market share compared to other oils.

Indonesia Palm Oil Association says that additional feedstock in the amount of 3 million tonnes will be required for B40 implementation.

McGill of Glenauk estimates that the price of Malaysian palm oil will be around $950 to $1,000 per metric tonne in 2025.

On Friday, the benchmark Malaysian palm was trading around 5,000 Ringgit ($1,140.51). $1 = 4.3840 Ringgit (Reporting and Writing by Fransiska Nanangoy, Editing by John Mair & Jane Merrill)

(source: Reuters)