To wrap up what has been an extremely volatile year, vegetable oil prices finished 2020 at multi-year highs. Where in May, vegetable oil producers were faced with surging stocks and depressed prices, the end of the year saw India, the world’s biggest importer of vegetable oil, lower import duties on crude palm oil from 37.5 to 27.5% - a move to shield lowest income households from these price increases. Recent high prices are mostly the result of a couple of one-off constraints on the supply side. Most notably, Malaysia’s on-and-off Movement Control Order (MCO) continues to pose great difficulties for Malaysian palm oil producers, which rely for a large part on foreign manpower to harvest their oil palm fruit bunches. Reduced availability of soybean oil in Argentina, and lower than expected rapeseed and sunflower harvests in EU and the Black Sea region further compounded a tight market for vegetable oils in H2 2020.
As some of these supply-side constraints are of temporary nature, many analysts have stated that they expect recent high vegetable oil prices to be of temporary nature. Malaysian palm oil producers will ramp up their production to pre-COVID levels and thereby remove some stress from the market. This is justified, and their production resumption will likely be good news to vegetable oil importers. There are, however, several underestimated, structural factors that will make a return to “business as usual” unlikely.
On the demand side, demand for vegetable oil-based biodiesel is projected to grow from around 30.3 million metric tons (MMT) in 2020, to around 33 MMT in 2021, and 34.4 MMT in 2023 (our forecasts assume biodiesel blending in Indonesia to stay at 30%). What is often discounted, however, is that demand for certain waste-based biofuels also indirectly leads to additional demand for vegetable oils. This is especially the case for FAME and HVO produced from animal fats, the consumption of which is projected to grow from 3.1 MMT in 2020, to 5.9 MMT in 2023, and 6.6 MMT in 2025.
With output growth by sunflower, rapeseed and palm/palm kernel oil constrained for various reasons, additional supply for vegetable oils would have to come mainly from soybean oil. Unlike the other vegetable oils, soybean oil is merely a by-product, which means that its supply is mostly driven by demand for meat, and in turn soybean meal. Soybean production needs to grow at a CAGR of 2% between 2020 and 2025 to keep the vegetable oil market from being undersupplied. Soybean production has grown at a CAGR of 3.5% over the past decade, so 2% certainly is feasible. However, it is inevitable that most of the incremental supply will come from Brazil, where soybean acreage has grown explosively over the past decade, in part accompanied by deforestation. As a result, the marginal supply of vegetable oils will likely be increasingly unsustainable.
What it looks like the sector is headed for, then, is a situation where high HVO margins have drawn numerous energy companies to invest in HVO production capacity. As HVO production capacity grows and feedstocks become scarcer, we expect a shift in the margins from HVO producers to feedstock suppliers (waste and crop).
From a policymaking perspective, biofuel programs may simultaneously become more expensive and less sustainable, as growing demand for waste and crop-based FAME and HVO will lead to increased demand for vegetable oils, which will in most cases lead to increased deforestation. High costs (and technical/logistical issues) have already led Indonesia and Malaysia to postpone further mandate increases. In the EU and the US, increasing costs, increasing import dependency (UCO), lower sustainability, and increased potential for fraud (mostly the case for UCO and POME) may also lead some policymakers to reconsider their support for biofuels as a means to decarbonize transport.