Crude palm oil prices expected to be higher in 2025

[WORLD] The global palm oil market is poised for an upward shift in 2025, with crude palm oil (CPO) prices expected to rise significantly. Industry experts are predicting a surge in CPO prices, driven by multiple factors, including Indonesia’s ambitious biodiesel mandates and strategic policy changes that could reshape the palm oil industry. As the world's largest producer of palm oil, Indonesia’s decision to increase the usage of palm oil for biodiesel production is expected to have major implications on the global market. According to a recent report from RHB Research, CPO prices could average RM4,300 per tonne in 2025, marking a substantial increase from previous years.

Crude palm oil is a type of edible vegetable oil extracted from the fruit of the oil palm tree. It is widely used for cooking, in the production of processed foods, as well as in the manufacturing of biofuels and various consumer products. Palm oil is a crucial ingredient in many industries due to its affordability and versatility. However, the environmental impact and the complexities of the palm oil supply chain have sparked considerable debate in recent years.

As the world’s largest palm oil producer, Indonesia plays a pivotal role in shaping global supply and demand dynamics. With the introduction of the B40 biodiesel mandate in Indonesia, a dramatic shift is expected in the market.

The Role of Indonesia's B40 Mandate

One of the primary factors driving the anticipated rise in crude palm oil prices is Indonesia’s planned implementation of the B40 biodiesel program. The B40 mandate requires the use of a 40% blend of palm oil in biodiesel production, a significant increase from the current blending rates. This ambitious policy change is set to have far-reaching consequences for both the domestic and global palm oil markets.

Indonesia, as the largest producer of palm oil, already uses a substantial portion of its production for biodiesel. However, the B40 initiative represents a substantial increase in the share of palm oil directed toward biofuel production. This will reduce the availability of palm oil for export, putting pressure on global supply and potentially driving up prices.

According to RHB Research, "Indonesia’s government is determined to roll out its B40 mandate and does not plan on rolling back to a lower blending rate, even if crude oil prices fall." This statement underscores Indonesia’s commitment to its biodiesel agenda, regardless of global oil price fluctuations. The increasing demand for palm oil in the biofuel sector is expected to contribute to higher CPO prices in the coming years.

The Economic Implications of Indonesia's Policies

Indonesia’s push for a larger share of palm oil to be used in biodiesel production is not without its challenges. The country plans to implement additional levies on palm oil exports, including taxes on palm oil-related products like used cooking oil and glycerine by-products. These levies will generate funds to support the B40 program, which is crucial for maintaining the subsidies needed for biofuel production.

RHB Research notes that "Indonesia’s strategy includes higher levies on palm oil exports to fund the B40 mandate, ensuring that subsidies for biodiesel are maintained." By increasing export levies, Indonesia aims to ensure that funds are available for the biodiesel subsidies, even as it limits the amount of palm oil available for export. This move is designed to stabilize the market and maintain domestic demand for palm oil while also managing the cost of biodiesel production.

Despite the potential challenges, these strategic moves by Indonesia indicate a long-term shift toward stabilizing the domestic market for palm oil and ensuring the sustainability of its biofuel programs. This shift is likely to create an environment in which CPO prices can rise in response to a reduction in supply.

The Impact of CPO Export Limits on Global Markets

As the world's largest exporter of palm oil, Indonesia's decisions significantly impact global palm oil markets. With Indonesia directing more of its palm oil production toward biodiesel, less palm oil will be available for export. This could lead to tighter global supply, which in turn is expected to drive up prices.

According to RHB Research, "We estimate that with a 10% levy rate, BPDPKS will have sufficient funds to subsidize B40, provided gas oil prices do not drop below US$57 per barrel." This is a critical point, as the funding for Indonesia’s B40 program is closely tied to oil prices. If global oil prices remain stable or rise, the government will have the financial resources needed to maintain the biodiesel subsidies, which will support higher demand for palm oil.

As a result, global palm oil consumers and industries that rely on palm oil as a raw material may face higher costs. These price hikes could affect everything from food products to biofuels and consumer goods. Industries may need to find alternative sources of vegetable oils or adjust their pricing strategies to account for the rising cost of palm oil.

The Role of Other Factors in CPO Price Increases

While Indonesia’s biodiesel push is one of the primary drivers of higher CPO prices, other factors will also contribute to the price increase in 2025. These factors include global supply and demand dynamics, environmental regulations, and the ongoing challenges associated with palm oil production.

Supply Chain Issues and Environmental Concerns: As the palm oil industry has grown, so too has the scrutiny over its environmental impact. Issues such as deforestation and land use change have led to calls for more sustainable palm oil production practices. Certification schemes, such as the Roundtable on Sustainable Palm Oil (RSPO), have been introduced to address these concerns, but challenges remain in ensuring that palm oil is produced sustainably.Moreover, the palm oil supply chain is vulnerable to disruptions caused by extreme weather events, such as floods or droughts, which can affect the harvest and impact supply levels. These environmental factors can contribute to fluctuations in CPO prices, adding further complexity to the market.

Rising Global Demand: The global demand for palm oil continues to grow, particularly in emerging markets where palm oil is used in a wide variety of products. As countries like China and India expand their consumption of processed foods, the demand for palm oil will continue to rise, further tightening supply. This rising demand will likely contribute to higher prices in 2025 and beyond.

Currency Fluctuations: As with many global commodities, currency fluctuations can have a significant impact on palm oil prices. A weaker Malaysian Ringgit or Indonesian Rupiah could make palm oil more expensive for foreign buyers, contributing to higher global prices. Currency movements are an important factor to watch, as they can affect the price competitiveness of palm oil on the global market.

The Future of the Palm Oil Industry

The outlook for crude palm oil prices in 2025 appears positive, with expectations of a substantial rise in prices driven by Indonesia’s B40 biodiesel mandate and other key market factors. As the world’s largest producer of palm oil, Indonesia’s policy decisions will play a critical role in shaping the future of the global palm oil market. With reduced export availability due to the increased domestic demand for biodiesel, global CPO prices are expected to rise.

RHB Research’s forecast of an average CPO price of RM4,300 per tonne in 2025 is a reflection of the significant market shifts underway. While this rise in prices will benefit palm oil producers, it may pose challenges for industries reliant on palm oil as an ingredient. The long-term sustainability of the palm oil industry will depend on how producers and consumers adapt to these changes, balancing environmental concerns, supply chain disruptions, and rising demand.

In conclusion, the palm oil market is entering a new era in 2025, with higher CPO prices on the horizon. Indonesia’s B40 mandate, along with changes in export levies and subsidies, will significantly impact global supply and demand dynamics. For stakeholders across the palm oil supply chain, staying informed and adaptable will be crucial in navigating these changes. As the industry evolves, the future of palm oil will be shaped by these policy decisions, environmental challenges, and shifts in global consumption patterns.