Palm oil is the largest vegetable oil in the world in terms of produced volume, just ahead of Soybean oil. Palm oil is a tropical oil and the production takes place almost entirely in Asia. The mesocarp (or fruit) of the oil palm has an oil content of about 50% and the palm kernel has and oil content of around 45%. This high oil content makes palm oil by far the most efficient vegetable oil crop in the world. An oil palm produces 10 times as much oil per hectare as soybeans, 5 times as much as rapeseed and 2 times as much as coconuts. Palm oil prices are in general also the lowest between the different oils.
Palm oil prices and investments have a very different structure than other vegetable oils. 85% of all the palm oil is produced in Malaysia and Indonesia. The tree typically grows in an area 10 degrees north or south of the equator. Oil palms have an economic lifecycle of 20 to 25 years. The planting of the trees can be done at any time of year; however, the most successful period is between June and December. First harvest can normally be done 30 months after planting the tree. Fruits can be harvested throughout the year, but the peak season for fruit is between July and September. The time long time before the palm produces means that palm oil production is very inflexible and palm oil prices can be volatile. Palm oil figures are mainly produced by PORAM and the USDA.
Several products can be produced from the oil palm: palm oil, palm kernel oil, palm olein, palm kernel olein, palm stearin, palm kernel stearin, palm fatty acid distillate (PFAD) and palm kernel expeller. The oils have different characteristics and all have their different uses in products. Palm fatty acid distillate for instance is a by-product of palm oil production. Prices of PFAD are lower than crude palm oil prices; the product also isn’t fit for human consumption. Palm kernel expeller is the by-product of the palm crush process. The product has an average protein level of 22% and is used as a cheap source of protein in animal feed. Because of the low protein value it is no serious competition to for instance soybean meal.
Despite the many uses for the different palm oil products still 75% of global palm oil is used for food and cooking purposes. The oil is a staple in Asia, like soybean oil is a staple in the US and rapeseed oil is a staple in Europe. Because of this high regional demand there are clear seasonal spikes in palm oil prices. Demand for palm oil normally rises just before Ramadan or any of the important festivals in India.
Human consumption usage aside, palm oil is an important component of soap, detergent, pharmaceutical products, cosmetics, fuels and oleo chemical products. Fatty Acids derived from the splitting process can also be used in products such as candles and rubbers. The popularity of palm oil comes from some unique traits that the product has that are hard to reproduce. Palm oil prices fluctuate according to the supply and demand factors in these industries. For example, in recent years the usage of palm oil for biodiesel has gone up significantly. In Europe palm oil is used as a cheap feedstock for the many biodiesel plants in the port of Rotterdam. Palm oil prices are normally lower than rapeseed oil prices or soybean oil prices. Due to blending mandates in Malaysia and Indonesia , there is a steady demand for biodiesel. Because biodiesel directly competes with fossil fuels in the energy market, palm oil prices are correlated more and more with petrol prices these days.
Palm Oil Prices In Indonesia
85% of all the palm oil in the world is produced in Malaysia and Indonesia. Indonesia produces about half of all the palm oil in the world and exports about half of all the palm oil in the world. Total palm oil production in the country is around 30 million tons. Besides being the biggest exporter, the country is also the largest consumer of palm oil. The country consumes between 25-30% of all palm oil domestically. The government has several systems in place to increase or decrease local demand and this has a great influence on local palm oil prices.
One of the most important support systems is the biodiesel mandate. At the moment 10% of palm oil based biodiesel is blended through normal diesel. The government has announced plans to increase this to 20% in 2016. In times of surplus and low palm oil prices, the government has the possibility to increase the biodiesel mandate and increase demand. Biodiesel is a good new market for palm oil, but it also increased the correlation of the market with the fossil fuel market.
The main growing areas for the oil palm are Sumatra, (70% of total production), and Kalimantan (30% of total production). Large private companies such as Wilmar and Musim Mas produce half of all the palm oil in Indonesia. Small holders produce another 35% and the remaining 15% is produced by the state. Small holders tend to be the most vulnerable to international swings in palm oil prices.
Since the areas where palm trees grow are highly vulnerable ecological areas, an international lobby tries to reduce palm oil production. While deforestation remains an issue, opponents argue that the high oil yield of the product makes it extremely efficient for the acreage that is used. To limit the negative effects of palm oil, some companies these days demand that the product is labeled sustainable. Europe has the intention to make palm oil imports 100% sustainable in 2015. The price of sustainable palm oil is normally higher than the normal palm oil price.
Indonesia has a flexible export tax regime in place that fluctuates together with global palm oil prices. When palm oil prices are higher than $750 the tax will fluctuate between 7.5%-22.5%. When prices are lower than $750 for a period of 3 weeks export tax goes to 0%. The $750 is determined by looking at the average prices in Jakarta, Rotterdam and Kuala Lumpur. At the end of 2014 the Indonesian government decided to cut the tax rate to 0% as a reaction to the fall in prices of other vegetable oils as well as fossil fuels. By cutting the tax rate Indonesian palm oil prices became more competitive on the international market. The influence of these measures on the market is reported by PORAM (Palm Oil Refiners Association Malaysia) which reports have the same influence on the market that the USDA reports have on the Oilseed markets.
Transportation is another major factor of palm oil prices. The fruits have to be transported from the plantation to the mill, and then the crude oil has to be transported to the ports. The crude oil is consequently transported to refineries abroad. Export of Indonesian palm oil is relatively concentrated in a few ports. The port of Dumai in Sumatra is the largest export port and handles 40% of all Indonesian exports. Other significant ports in Indonesia are Belawan, 20%, Padang, 10%, and Panjang, 10%. Benchmark palm oil prices are normally quoted FOB Belawan or FOB Dumai. Most palm oil plantations are located around these ports.
Palm Oil Prices In Malaysia
Palm Oil Production:
Malaysia produces about a third of all palm oil in the world. The palm oil is produced in peninsular Malaysia as well as Borneo. Total palm oil production in the country is around 20 million tons per year. Around 15% of the palm oil is consumed directly in the country. Because Malaysia is so dependent on exports, palm oil prices in Malaysia are very much driven by international supply and demand. Like Indonesia, Malaysia uses a flexible export tax rate. When Indonesia cut its tax rate for palm oil to 0% at the end of 2014, Malaysia followed suit. Malaysia currently has a biodiesel mandate of 7%. The government has indicated it is looking at possibilities to increase the mandate to 10% in order to increase demand for the product.
Malaysia exports 85% of its palm oil and has major ports on the peninsula as well as on Borneo. The largest port on the peninsula is port Klang (20% of exports) followed by Pasir Gudang (15%). On Borneo the two most important ports are Lahad Datu (<15%) and Sandakan (<15%).
Malaysia is the second largest producer and exporter of palm oil but, unlike Indonesia, does have a futures exchange for palm oil price discovery. Palm oil is traded in three forms: the physical market, the paper market and the futures market. Palm oil prices in the physical market are normally quoted FOB Malaysia/Indonesia. Physical palm oil can be picked up at the major ports in Malaysia and Indonesia. The most important futures exchange on which palm oil is traded is the Bursa Malaysia. The exchange is the most important indicator of palm oil prices in the world.
To complement the physical and futures market there is also a Malaysia based paper market. The paper market in the origin is traded FOB Port Klang/Pasir Gudang (PK/PG). On the demand side the paper market is traded CIF Rotterdam. Palm oil prices in the physical, futures and paper market are different because of transparency, liquidity and ease of execution. Paper markets are criticized for their lack of transparency and enabling the trade in unapproved palm oil.
Palm Oil Prices In Major Importing Countries
India is the biggest importer of palm oil with around 8-9 million tons per year. The EU is the second largest importer with 7 million tons followed by China with 6 million and Pakistan 2.5 million tons. India is unable to produce enough vegetable oil to fulfill local demand; in 2013/2014, 65% of total domestic vegetable oil demand was met by oil imports. Palm oil prices in India are normally quoted C&F Mumbai, C&F Kandla (both West-Coast) and C&F Kakinada (East-Coast).
Importing palm oil seems to be an obvious choice because palm oil prices are normally the lowest of all vegetable oils. Furthermore the origins from which the product is sourced are close to India. Because India relies so heavily on imports there are plans to start palm oil plantations in the country. The long-term goal is to produce upward of 5 million tons of palm oil per year, become less dependent on imports and have more control over palm oil prices. As palm oil prices are often traded at a discount to other vegetable oils, the government taxes palm oil imports. By doing this they want to protect local farmers and crushers of products such as soybean oil and rapeseed oil.
The European Union imports around 7 million tons of palm oil every year. The vast majority of imported palm oil goes through the port of Rotterdam. International players such as Cargill, Sime Darby, Wilmar and IOI Loders all have palm refineries in Rotterdam. On the international market Rotterdam is one of the most liquid markets for palm oil prices. Palm oil in Rotterdam is traded physically as well as in the paper market, CIF Rottterdam. The Netherlands has set itself the goal of only importing 100% sustainable oil (RSPO) before the end of 2015.
Palm Oil Prices In The Minor Producing Countries
Aside from the two dominating countries Indonesia and Malaysia there are also a few smaller countries producing palm oil. The runners up with regards to palm oil output are Thailand and Colombia. These countries are much less influential when it comes to global output and palm oil prices. Palm oil production in Thailand is about 2 million tons per year, Colombia produces 1 million tons per year. Thailand exports approximately 500.000 tons of palm oil every year and Colombia around half of that.
In Thailand and Colombia, the use of palm oil for biodiesel is popular. About 30% of palm oil in Thailand goes into biodiesel, in Colombia this is around 30%. Palm oil prices in these countries are supported by biodiesel subsidies and mandates, however these mandates are not as extensive as in Malaysia and Indonesia. Encouraging biodiesel usage is an important clean energy strategy for Colombia. Usage of palm oil for biodiesel requires less acreage than oilseeds or sugar cane for the same amount of energy. Using more oil palms instead of oilseeds could be a solution for more countries in South America. A far smaller area of land needs to be cultivated in order to produce the same amount of oil. At this moment palm oil makes up a very small percentage of agriculture in South America.