Is palm oil losing its competitive edge in the vegetable oil market?

Palm oil is currently the most expensive vegetable oil on the market. Demand is dropping in key importers such as the EU and India, while production struggles in Indonesia and Malaysia are tightening supply. With exports facing challenges and biodiesel demand rising, palm oil prices are expected to stay high for the coming years.Palm oil futures on the Bursa Malaysia closed at 4,487 Malaysian ringgit ($1,011.28) per ton on March 12, marking a 1.58% increase from the previous week. Spot prices in Rotterdam remained relatively stable, declining by 0.4% over the week to $1,245 per ton on March 10. On an annual basis, palm oil futures are 8.7% higher than a year ago, while spot prices have increased by 19.7% year-over-year.Palm oil the costliest vegetable oilAccording to the European Commission, palm oil remains the most expensive vegetable oil, with prices rising 4% month-over-month and 21% year-over-year to $1,140 per ton as of March 5. On that date, palm oil was 0.35% more expensive than rapeseed oil, 2.7% higher than sunflower oil, and 13.32% more expensive than soybean oil.Palm oil had the highest price increase throughout the month. Source: European CommissionSimilarly, palm oil had the highest price among vegetable oils over the month. Throughout March, it averaged $1,134 per ton, 0.53% higher than rapeseed oil and 13.66% higher than soybean oil.Palm oil has been the most expensive on average in the last month. Source: European CommissionOverall increase in the vegetable oil categoryAccording to the European Commission, the prices of all vegetable oils have increased between 16% and 49%. Consistently, the FAO vegetable oil price index, an indicator of international oil prices, reached 156 points on average in February, reflecting an increase of 2% over the previous month and 29.1% from the previous year.Price increases have been driven by the rising demand for palm oil for biodiesel production and soybean oil in the food sector. Additionally, there are concerns regarding a potential supply tightening for palm oil, rapeseed oil, and sunflower oil. Vegetable oil prices will not likely decline in the short term and could remain elevated for the next years.Consumer countries reduce importsHigh vegetable oil prices, particularly for palm oil, have led to declining demand. In the EU, palm oil imports fell by 22% year-over-year, totaling 1.86 million tons between July 1 and March 3. Indonesia remains the EU's largest supplier, accounting for 32.3% of imports.The consumption of all vegetable oils, except sunflower oil, has declined compared to the previous year. Source: European CommissionIn India, the world's largest vegetable oil importer, demand is shifting from palm oil to soybean oil. Over the past three months, palm oil inventories have declined by 800,000 tons. This trend is part of a broader reduction in vegetable oil inventories, as total imports have dropped to levels last seen in 2021. The lower supply could boost purchases in the coming months.Despite palm oil imports rising 35.7% month-over-month to 373,549 tons in February, they remain significantly below the monthly average of 750,000 tons from the previous market year. Meanwhile, soybean oil imports dropped 36.1% month-over-month to 283,737 tons in February, while sunflower oil imports declined 20.8% to 228,275 tons. Total vegetable oil imports reached 899,565 tons in February, marking a 12% decrease from the previous month.The potential implementation of additional tariffs by the Indian government could further elevate vegetable oil prices and suppress demand.Production and export declines in key producing countriesStagnating palm oil production has significantly contributed to rising prices. Malaysia's production growth is constrained by limited land availability for new plantations and slow replanting rates. In Indonesia, deforestation concerns and similar replanting challenges have led to a slowdown in production. Replanting is essential because palm trees lose their productivity after 20 years and must be replaced every 25 years. However, since palm trees take three to four years to mature, farmers often delay replanting due to the temporary loss of productivity.In Indonesia, the world's largest palm oil producer and exporter, the Indonesian Palm Oil Association (IPOA) reported a contraction in the market in 2024. Crude palm oil (CPO) production totaled 48.16 million tons, while palm kernel oil (PKO) production reached 4.6 million tons. Total CPO and PKO output declined by 3.8% year-over-year to 52.76 million tons in 2024.Meanwhile, CPO and PKO exports fell 21.88% year-over-year to 2.06 million tons in December. Total annual exports declined 8.32% to 29.54 million tons in 2024. The value of palm oil exports decreased by 8.44% to $27.76 billion. China and India saw the largest drops in imports, decreasing by 2.38 million tons and 1.14 million tons, respectively.Given current production and consumption trends, Indonesia's palm oil production is expected to rise to 53.6 million tons in 2025, an increase of 1.59% year-over-year. Domestic consumption is projected to grow by 9.39% to 26.1 million tons, driven by biodiesel production. However, palm oil exports are expected to decline by 7.27% to 27.5 million tons.In Malaysia, CPO production totaled 1.19 million tons in February, marking a 5.67% decline year-over-year. Palm oil exports also fell 2.19% to 1 million tons, with export values dropping 9.96% to 5.09 billion Malaysian ringgit (€1.05 billion).Palm oil inventories declined to 1.51 million tons in February, down from 1.58 million tons in January. The decrease in production is reducing stock levels, surpassing the decline in exports and supporting higher palm oil prices.According to Reuters, a slight increase in exports was projected for March. However, soybean oil’s higher competitiveness could limit palm oil export growth. India's demand will be a determinant factor in the coming months, as depleting inventories suggest a potential need for increased purchases.