This is despite a three-fold rise in biodiesel demand.
Biodiesel demand in Indonesia is likely to continue rising in 2017, after tripling in 2016. However, this is unlikely to lead to higher average crude palm oil (CPO) prices in 2017, relative to current levels, due to higher CPO output following improved weather conditions, says Fitch Ratings.
Higher biodiesel usage is an important factor behind improving CPO prices in 2016, as CPO is the main raw material for biodiesel.
Indonesian biodiesel consumption over the year to end-October 2016 tripled on an annualised basis from 2015, rising to 2.16 million kiloliters (kl) from 0.86mn kl, according to the Indonesia Estate Crop Fund.
Fitch estimates that Indonesia's higher biodiesel consumption contributed to over half of global CPO demand increase in 2016, even though CPO inputs for Indonesia's biodiesel are only 4% of total global consumption.
The increase in biodiesel consumption follows a government push under its B20 programme, which mandates that biodiesel should be blended with diesel in the ratio of 20:80 in 2016, an increase from the 15% blending in 2015. The government aims to increase biodiesel consumption to 5.5 million kl in 2017, from its 2.9 million kl target for 2016.
"Assuming other demand components show steady growth, we expect global CPO demand to increase by 3 million to 4 million tonnes (t) in 2017. However, global CPO output should rebound by around 6 million t in 2017 after a weak 2016 to outpace demand, as dry weather conditions due to El Nino have dissipated," said Fitch.
According to the rating agency, the higher output should gradually replenish inventories during 2017, but given current low inventory levels, the effect of higher production on prices should be more visible in 2H17.
"Overall, we expect CPO prices at around USD660/t in 2017, slightly lower than current levels of USD670/t, but better than the 2016 average price of USD635/t," it said.
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