The palm oil and PME story in 2016 was dominated by acute drought across Southeast Asia, caused by the most severe El Nino event since 1997-98.
Palm trees were badly affected by the higher-than-average temperatures and lack of rainfall, prompting market participants to predict palm prices would breach the MR3,000/mt mark ($669.94/mt) after the Malaysian Price Outlook Conference in March due to falling production.
However, CPO front-month futures hit MR3,000/mt only on November 24, the highest since September 2012, although prices remained strong for most of the year in the MR2,500-2,850/mt range.
The after-effects of the El Nino caused a sharp drop in palm oil production, with Malaysia hit harder than Indonesia.
Malaysia's CPO production was down 14.63% year on year at 15.85 million mt over January-November, latest Malaysian Palm Oil Board, or MPOB, data showed.
But while production fell, Malaysia's palm oil export volume remained steady, resulting in palm oil inventories sliding to a five-and-a-half year low of 1.46 million mt in August.
The low season for production also arrived two months earlier than usual in October, with production falling to 1.68 million mt in the month from 1.72 million mt on September.
In India, one of the biggest importers of palm oil, buyers were caught up in the Modi government's demonetization and had to drastically reduce imports.
In Europe, PME demand was weak amid high palm oil prices and weak demand for gasoil, especially during the summer driving season. This lowered the volume of PME exported from Malaysia to Europe.
Malaysia's PME exports totaled 83,526 mt over January-November, less than half the 168,939 mt exported in the same period of 2015, according to MPOB data.
The PME arbitrage opportunity between Asia and Europe opened three times in 2016 as FOB Southeast Asia prices remained high during the year, with offers going beyond the $800/mt level several times.
Trades for ISCC-certified PME took place mostly in the range of $700-$755/mt FOB Southeast Asia.
However, premiums for ISCC-certified palm oil shot up during the year, partially due to low palm production, but mostly because several major palm plantations decided to discontinue their ISCC-certified palm supply chains.
The additional crunch in ISCC-certified palm oil caused premiums to widen to as high as $15-$30/mt from the typical $5-$15/mt range, especially towards the end of the year.
INDONESIA FINDS SUCCESS IN US
Indonesian PME exports into the US met with success, with an estimated 400,000 mt exported by two main EPA certified producers, Wilmar and Musim Mas, in 2016.
The Indonesian PME industry also received a potential boost from an EU court ruling in September that struck out European antidumping duties on Indonesian and Argentinian biodiesel imports into Europe.
Indonesian producers, who have been shut out of the European market since 2013, were cautiously optimistic, but did not see any immediate effect on their PME exports, mostly because the EU was expected to challenge the decision in the courts and any resolution could take another year or two.
The year went well for Indonesian PME overall, because the Indonesian B20 biodiesel mandate progressed well, despite record low gasoil prices, which limited the funding the Indonesian government could channel into the program.
The mandate utilized an estimated 31% of the country's 10.5 million kiloliters/year of installed PME production capacity in 2016.
Pertamina and AKR Corporindo conducted two joint tenders for biodiesel procurement during the year, most recently in October.
The Indonesian government estimates it is now blending up to B16 biodiesel into gasoil, although market sources estimate the blend ratio at between B7 and B12.
Lower forecast palm oil prices in 2017 due to a rebound in production, combined with higher gasoil prices, bode well for the Indonesian biodiesel mandate in 2017.
In Malaysia, the mandate has not progressed as well.
The Malaysian government announced in late May that it would increase its biodiesel blending mandate from B7 to B10. But after protests by automakers, the Malaysian Ministry of Plantations flip-flopped on the timing of the B10 implementation before saying finally that it would not be implemented in 2016.
The fate of the B10 mandate now hangs in the balance, with no clear direction seen from the Malaysian government.
As oil prices go up after a November OPEC decision to cut production, things may look rosier for biodiesel exports from Malaysia into Europe, but the US election of Donald Trump as president has added a question mark to Indonesia's PME exports to the US.
