Global Industry Overview - Palm Oil: Finding Opportunities Despite Rising Challenges - JUNE 2017

BMI View: The global palm oil market value will expand from USD62.3bn in 2016 to USD83.6bn by 2021, based on our production and price forecasts. The sector has been facing increasing challenges in recent years, amidst increasing controversies around its global environmental impact, lower prices and a more subdued production and consumption outlook than in the past. However, the palm oil sector will continue to expand and remain the most consumed vegetable oil and the sector will continue to expand going forward.

After recording spectacular growth in the 2000s, the global palm oil sector has entered a period of slower growth in recent years. Palm oil players now have to adapt to more lacklustre production, prices and profitability fundamentals.

Looking ahead on a five year horizon, some of the long-term drivers of the sector will continue to help the sector expand in the coming years, including the rise in global vegetable oil demand and the price competitiveness of palm oil. More recent trends, such as new replanting programmes, focus on plantation productivity and the positive outlook for palm oil-based oleochemicals providing new end-markets will also support the sector looking forward. However, the operating environment for the sector has become more challenging, amidst growing hurdles to plantation expansion, fast-rising production costs, slowing consumption growth globally and mounting sustainability concerns related to palm oil.

Consequently, although palm oil's golden years of fast growth are now behind us, we believe the sector still boasts some strengths and new opportunities that will help it expand in the coming years, - albeit at a slower pace than in the past. Companies investing in new product applications and new market access and seriously addressing sustainability issues will be well placed to grow going forward. Based on our production and price forecasts, we believe the global palm oil market will expand from USD62.3bn in 2016 to USD83.6bn by 2021, at an average annual growth rate of 6.1%, compared with the impressive 18.2% annual growth recorded on average over 2007-2016.

Global Palm Oil Market Value
2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f 2019f 2020f 2021f
Source: BMI
Global Palm Oil Market Value (USDbn) 28.82 39.93 53.51 53.77 49.66 54.00 54.53 62.34 67.80 70.55 74.68 79.01 83.58
% Chg y-o-y -18.9 38.6 34.0 0.5 -7.7 8.8 1.0 14.3 8.8 4.1 5.8 5.8 5.8

Some of the key trends impacting the industry in the coming years include:

  • Regarding prices, palm oil prices will trend lower in 2017 averaging MYR2,600/tonne over the year, as global supply recovers from El Nino. On a five-year horizon, global palm oil consumption growth will not be as robust as in the past, while production will continue to grow, keeping palm oil supply ample. Although palm oil prices could receive a temporary boost from weather-related global oilseed production disruptions or a cyclical tightening of the soybean market, we believe ample global supply for oilseeds and palm oil under normal weather conditions mean palm oil prices will remain subdued on a five-year horizon ( see ' Palm Oil: Subdued Price Outlook In 2017 And 2018 ' , May 18).

  • Palm oil production is now in a recovery phase following the significant impact of the 2015-2016 El Nino episode on yields and output. In the longer term, we expect the ongoing slowdown in global palm oil production growth to resume. Growing constraints to plantation expansion in Malaysia and Indonesia will drive this trend, due to the lack of available land in these densely populated countries, stricter environmental laws and rising sustainability efforts by the sector.

  • Looking at palm oil consumption in importing countries in the coming years, we believe the bright spot for consumption will remain India for the time being and the country will become an increasingly important driver of palm oil prices given the lacklustre growth we forecast in other key import markets. In contrast, the outlook for palm oil consumption in China and the European Union is subdued (see 'Growing Obstacles For Palm Oil In Europe Despite Sustainability Efforts', May 4).

  • Although palm oil based biodiesel is seen by many as a strong positive driver for the sector going forward, we see it as an insufficient response by the Malaysian and Indonesian governments to offset slower growth in traditional export markets. As such, we believe biodiesel production will provide modest support to palm oil consumption and therefore to palm prices in 2017 and beyond ( see ' Palm Oil Biodiesel: Positive Outlook In 2017 But Uncertainty Beyond ' , March 22).

  • The improvement in palm oil companies' earnings that started in 2016 with the temporary rise in palm oil prices will persist into 2017, driven by the rebound in palm production following El Nino. However, production and prices fundamentals for the sector have been deteriorating over recent years and the operating environment will remain challenging, forcing companies to focus on efficiency gains and investment towards higher-value downstream products, as well as on improving their sustainability record ( see ' Palm Oil Companies: Persisting Challenges & Strategy Shifts ' , May 16).

BMI Palm Oil Sector Forecasts
Geography Indicator 2014 2015 2016e 2017f 2018f 2019f 2020f 2021f
Note: Figures for Europe (region) represents EU data only. Source: USDA, National Statistics, BMI
Global Palm Oil Price, MYR/tonne, ave 2,396 2,235 2,631 2,600 2,580 2,620 2,660 2,700
China Palm oil consumption, '000 tonnes 5,700.0 5,750.0 5,200.0 5,460.0 5,602.0 5,753.2 5,908.5 6,068.1
India Palm oil production, '000 tonnes 171.4 185.0 200.0 220.0 244.2 271.1 300.9 337.0
India Palm oil consumption, '000 tonnes 8,400.0 9,030.0 9,481.5 10,240.0 10,731.5 11,246.7 11,786.5 12,352.2
Indonesia Palm oil production, '000 tonnes 30,480.0 32,980.0 31,900.0 34,898.6 36,678.4 38,714.1 40,804.6 43,008.1
Indonesia Palm oil consumption, '000 tonnes 8,750.0 7,500.0 9,528.0 10,004.4 10,604.7 11,134.9 11,691.6 12,276.2
Malaysia Palm oil production, '000 tonnes 20,160.0 19,880.0 17,690.0 20,078.2 20,921.4 21,235.3 21,553.8 21,877.1
Malaysia Palm oil consumption, '000 tonnes 2,800.0 2,930.0 3,000.0 3,210.0 3,402.6 3,572.7 3,726.4 3,875.4
Europe (Region) Palm oil consumption, '000 tonnes 6,700.0 6,900.0 6,600.0 6,567.0 6,553.9 6,540.8 6,527.7 6,514.6