Industry Trend Analysis - Growing Obstacles For Palm Oil In Europe Despite Sustainability Efforts - JUNE 2017

BMI View: The ongoing slowdown in the EU ' s use of palm oil will continue in the coming years as the commodity will increasingly suffer from a poor reputation and from the ensuing stricter regulations put in place by authorities. Food use will come under rising pressure, while ongoing reform to the EU's renewable policy will cap the use of palm oil-based biodiesel in the region, which was one of the main drivers behind the strong expansion of palm oil consumption in recent years.

After a decade of spectacular growth in palm oil consumption in the EU in the 2000s, demand has been stagnating since 2014 and we forecast this trend to continue throughout our forecast period to 2021. The two main growth drivers for palm oil consumption - namely the expansion of palm oil in food manufacturing and the growth of biodiesel consumption in the region - are coming under growing pressure which suggests that palm oil will face an uphill battle to defend its market share in this increasingly demanding market. We forecast the EU's palm oil consumption to decline by 0.3% on average annually between 2017 and 2021 to reach 6.5mn tonnes, compared with the 5.2% annual growth rate recorded over the past 10 years.

Stagnant Demand Ahead
EU - Palm Oil Consumption ('000 tonnes)
f = BMI forecasts. Source: USDA, Fediol, BMI

Food: Palm Oil Consumption On The Decline

Palm oil demand for food manufacturing has been on the decline over recent years amid rising public controversies around its poor sustainability performance and increasing consumer awareness on its widespread use in food products. We believe the focus on sustainability among consumers and food manufacturers is going to gain momentum in Europe looking forwards, which will constrain strong palm oil consumption in the region. Private companies in northern Europe and France agreed in 2016 to ensure a fully sustainable palm oil supply in Europe by 2020.

Controversies around the palm oil plantation sector are now multi-dimensional - spanning from hazes linked to forest fires, continued links to deforestation, peat clearance, workers' rights abuse and community conflicts - suggesting a long road ahead in terms of improving its sustainability and global reputation.

To be sure, palm oil's clear price competitiveness relative to other vegetable oil, its unique physical characteristics and non-GM content means palm oil consumption in the EU will not collapse, as the replacement of palm oil in food preparations will be somewhat limited. However, palm oil will struggle to maintain its current market share among vegetable oil use for food of around 27%.

Italy's Confectionery Sector Key To Palm Oil Suppliers
Select Countries - Palm Oil Consumption ('000 tonnes)
Source: Fediol, BMI

Some companies, mainly led by Malaysian producers, have taken steps in order to improve their environmental record, by strictly adhering to and implementing the Roundtable on Sustainable Palm Oil (RSPO) and other certification standards. Respecting sustainability standards in palm oil production is shifting from being a niche to a mainstream strategy and food manufacturers are increasingly using it as a competitive tool. The RSPO is quickly turning into a basic requirement for entry into the European market. As such, large producers are looking at the next step in terms of certification and practices, aiming for a full deforestation policy or to be certified under the Rainforest Alliance, for example.

However, in spite of the efforts of both palm oil suppliers and buyers to be certified RSPO members over recent years, palm oil still suffers from a negative perception among consumers. Palm oil will remain a controversial commodity for European consumers and its reputation will most likely suffer further blows in the future amid negative NGO campaigns and the potential implementation of laws limiting and taxing the use of palm oil by governments.

Palm Oil's Market Share At Risk For Food Use, Stagnant For Industrial Use
EU Vegetable Oil Consumption By Type - For Food Use (LHC) & Industrial Use (RHC), % total
Source: USDA, BMI

Biodiesel: Push For Advanced Bio d iesel To Limit Palm Oil Demand

Palm oil demand for biodiesel will also be lacklustre looking forwards. The fast expansion of the EU's biodiesel sector in the 2000s, driven by the introduction of support policies in 2003 and more especially after the Renewable Energy Directive (RED) policy came into force in 2009, was the main factor behind the boom in palm oil use and imports over the period, as food use grew at a more modest pace ( see chart above).

Looking ahead, biodiesel consumption in the EU will not expand drastically as regulators are focusing on the adoption of unconventional biofuels with lower greenhouse gases (GHG) emissions and not at increasing the compulsory blending mandates. Moreover, weak economic growth in the region in the coming years will constrain overall fuel use growth and therefore biodiesel demand. Our Oil and Gas team forecasts the EU's refined products consumption growth including gasoline and kerosene to remain on its long-term trend decline in the coming years, decreasing by 0.2% on average over the 2017-2021 period.

Lacklustre Biodiesel Consumption Outlook
EU - Biodiesel Production & Consumption (LHC, mn litres) & Production By Feedstock (RHC, % of total)
Note: f = OECD FAO, USDA forecasts. Source: OECD FAO, USDA, BMI

The EU's regulations are moving away from food crop-based biofuels, which will accelerate the use of recycled vegetable oils as biodiesel feedstock in the coming years and be detrimental to absolute palm oil demand in the coming years. The 2015 revision of the RED imposed a 7% cap on the contribution of food crop-based biofuels to the 10% target for renewable energy in transport by 2020, leaving 3% to be covered by non-food, crop-based biofuels. It also introduced the system of double counting of the energy contribution of advanced biofuels towards the 10% blending target for 2020, which means countries need to blend less volumes of biodiesel to reach the objectives set by regulators. The next RED (RED II 2021-2030), which is currently being prepared by European institutions, is likely to gradually lower the cap on food crop-based biofuels from 7% in 2020 to 3.8% by 2030, as proposed by a draft submitted for approval by the Commission.

However, the EU's policy is creating new opportunities for the palm oil sector, as the region is also likely to promote the development of advanced biofuel production and use in the coming years, which will boost demand for recycled palm oil and palm oil waste products, including mill effluent and empty palm fruit bunches. So far, incentives to encourage second generation biodiesel, such as the production of hydrogenated vegetable oils (HVO), have been successful and output is picking up fast.

Ongoing Supplier Diversification
Netherlands - Palm Oil Imports By Country (% total value imported)
Note: Netherlands is the largest importer of palm oil within the EU and re-exports to member countries. Source: Trade Map, BMI
2009 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f 2019f 2020f 2021f
e/f = BMI estimate/forecast. Source: USDA, Fediol, BMI
Palm oil consumption, '000 tonnes 5,240.0 5,220.0 5,120.0 5,520.0 6,550.0 6,800.0 6,750.0 6,615.0 6,482.7 6,469.7 6,456.8 6,443.9 6,431.0
Palm oil consumption, % y-o-y 10.3 -0.4 -1.9 7.8 18.7 3.8 -0.7 -2.0 -2.0 -0.2 -0.2 -0.2 -0.2
Palm oil consumption, kg per capita 11.9 11.8 11.5 12.4 14.7 15.2 15.1 14.8 14.4 14.4 14.3 14.3 14.2