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As the world tries to minimise its dependence on fossil fuels, Indonesia has targeted a 50% usage of biodiesel blends in its gasoil sector by 2029. The key question is what will this mean for the food industry and India - its largest importer - whose population is set to grow in the coming years?

Indonesia, the world’s largest palm oil supplier, has recently begun trials for B40 blends on its trains to test the efficiency of the 40-60 palm oil to diesel blend on heavy machinery. After implementing the B35 mandate in 2023, the country aims to enter the next phase of biodiesel mandates from 2025. If the trials on public transportation are successful, the next phase will include trials on shipping and power generation.

Indonesia first introduced the mandatory palm oil-based blending in 2008, which Malaysia, the next largest producer, followed in 2011. Since then, Indonesia has been more successful in implementing higher blending ratios for public transportation. Meanwhile, Covid became an obstacle to Malaysia’s journey.

Biodiesel blends enable lower carbon emissions and less dependency on fossil fuels. This allows for greater savings on foreign reserves and increased demand for natural resources but at the cost of its export supply.

Figure 1: Biodiesel blending mandate timeline

Source: Drewry Maritime Research, GAPKI

Since the introduction of blending mandates in both countries, their biodiesel industry has grown consistently, and it has also strengthened domestic demand. While palm oil production and its use in blending grew, exports saw a rough patch in 2020-21 amid the pandemic, caused by labour and vessel tonnage shortages.

The year 2022 also saw a tumultuous period of sparse supply in the vegetable oil market due to the disruption in the sunflower oil market caused by the Russia-Ukraine war. Amid the supply-side bottlenecks in the shipping sector, global palm oil exports continued to decline in 2023 due to the Black Sea grain deal, which allowed for a surge in sunflower oil exports.

Figure 2: Share of palm oil exports in total production by country

Source: USDA, TDM, Drewry Maritime Research

The outlook for the global vegetable oil market looks bright, led by tremendous soybean harvests in Brazil, Argentina and the US. The palm oil production is also expected to grow modestly. The El Nino weather phenomenon at the end of 2023 and early 2024 could curb harvests. However, La Nina is likely to offset some of the damage. The USDA projects production of Indonesian and Malaysian palm oil to be around 47.5 million tonnes and 19 million tonnes, respectively, this year.

Figure 3: India import vegetable oil prices, 2023-24

Source: Solvent Extractors Association of India, Drewry Maritime Research

While palm oil production is expected to improve, the same cannot be said for exports amid the growing domestic demand in Indonesia. The palm oil blending usage is estimated to be around 12.5 million this year, a growth of 2% YoY. In the first five months of 2024, the country’s exports slid 9 million tonnes, 11% lower YoY for the same period. Moreover, price of Crude Palm Oil (CPO) was higher than soybean and sunflower oils between February and April, which caused its imports to decline in the largest importer, India.

Nevertheless, CPO prices have returned to be below the prices of other vegetable oils, which will mostly play in favour of Malaysia. It has filled some gaps left by reduced Indonesian exports this year. Malaysia exported around 6.3 million tonnes of palm oil in the first five months, an increase of 7% YoY.

Figure 4: Growth of palm oil blending share in Indonesia

Source: USDA, Drewry Maritime Research

Post-2024, the imminent growth of palm oil usage in blends means that exports are likely to shrink. While vegetable oil demand is expected to increase, especially in India, soybean oil demand will rise, while Malaysian exports will also counterbalance some share of Indonesia’s exports. Sunflower oil exports will remain volatile until the Russia-Ukraine war is over. Ageing plantations and erratic weather patterns could also impact the overall production of palm oil.

For the shipping sector, the decline in palm oil exports means a decline in short-haul trade. Conversely, this will shift the global edible oil demand towards soybean oils, which will boost trade on long-haul routes, mostly from the East Coast South America to Asia. Thus, it will support charter rates in in the short run as tonne-mile demand expands.

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