Palm oil producers gain as Malaysia, Indonesia raise biodiesel blends
Rising biodiesel mandates in Malaysia and Indonesia, lower Indian edible oil inventories, and possible strong El Niño conditions are expected to tighten global palm oil supplies through 2027. CPO prices climbed from RM4,019 to RM4,568 per tonne since January, supporting stronger plantation sector earnings despite rising input costs.
APRIL’S stronger-than-expected plantation production suggests strong quarter two (2Q) production could lie ahead but the dip in quarter-on-quarter (QoQ) exports could be temporary.
Malaysia’s decision to raise its biodiesel blend from B10 to B15 starting June 1, together with Indonesia’s move to increase its B40 mandate toward B50 from July 1, is expected to drive stronger palm oil demand.
At the same time, edible oil inventories in India — the world’s largest edible oil importer — are estimated to be around 10% to 20% lower than levels recorded a year ago.
Looking ahead, global edible oil supplies are projected to remain constrained throughout 2026, with the possibility of even tighter conditions in 2027 should a strong El Niño materialise later this year. Supply concerns were already evident before the outbreak of tensions in the Middle East.
Subsequent increases in energy prices have further strengthened interest in biodiesel as an alternative fuel source.
In response, countries such as Indonesia, Malaysia and Thailand have accelerated plans for higher biodiesel blending mandates, which could generate additional demand of roughly three mil to four mil metric tonnes of palm oil annually, equivalent to about 10% more consumption once fully rolled out.
Planters are set to face higher fertiliser and energy costs from the second half of calendar year 2026 (2HCY26) onwards but the plantation sector is still likely to be a net gainer from the Middle East conflict.
This is thanks to the higher crude palm oil (CPO) prices which have surged from RM4,019 in Jan to RM4,568 per MT in Apr on resilient demand with likely growth of 3%-4% and growing demand for palm bio-diesel.
At the same time, the likelihood of CPO prices staying firm beyond 1HCY26 and into 2027 is increasing due to the rise in the possibility of a very strong El Nino taking shape.
Historically, El Nino does not affect oil palm yields much, even “strong” ones. However, “very strong” El Nino can disrupt flowering, hence the following season’s FFB yields.
In the past, Indonesia is also less affected than Malaysia by a very strong category El Nino, due possibly to younger trees then and oil palm planting spread over a wider geography.
Nevertheless, on the whole, a very strong El Nino tended to pull down the region’s output by 2%-9% in the following year, hence potentially nudging CPO prices up by another 5%-10%.
Basic oleochemical prices have risen by 10%-15% since Jan 2026 but so has input prices such as CPO and PKO while oleochemical demand may often soften in view of slower global economic outlook.
As it is, sector ROE is expected to stay robust over 2026-2027 while gearing decline on growing smaller planters’ cash hoard and debt trimming by larger integrated players.
“Our sector picks are KLK for better harvest and property earnings, PPB given its earnings recovery, re-rating potentials as well as potentially higher dividends TSH for its long-term organic growth prospects,” said Kenanga.
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Source : Focus Malaysia
