Markets and Traders Bearish
As published by Chain Reaction Research, the environment committee of the European Parliament last week adopted a resolution, in a 56 to 1 vote, urging the European Commission to phase out the use of vegetable oils for biofuels by 2020. Lawmakers also urged that all palm oil entering the EU by 2020 be covered by a single clear set of certification mechanisms. The next step occurs next month, when the full House of the EU Parliament will vote on the resolution.
At the same time, according to median estimate of analysts compiled by Bloomberg, Q4 2017 palm oil futures on the Bursa Malaysia in Kuala Lumpur are forecast to be $595 (MYR 2,650) a metric ton compared with MYR 3,020 so far in Q1 2017.
Interestingly, Olam International Ltd., one of the world's largest food traders, said in its earnings call last week they are also bearish on palm oil in H2 2017.
Current EU Policy
Current EU policy promotes biodiesel as an option to reduce carbon emissions from the transportation sector. Most biodiesel used in the EU is produced from vegetable crops. This has created possible competition between land for crops destined for biodiesel vs. food production.
RSPO supported the vote, and used it as an opportunity to promote the Amsterdam Declaration. The Amsterdam Declaration is a separate voluntary mechanism signed by various EU governments. It aims to achieve sustainable and deforestation-free agricultural commodity supply chains in Europe by 2020, including in government procurement. RSPO said:
"(RSPO) welcomes the Committee's call for an EU-wide commitment to source 100 percent sustainable palm oil by 2020 and for all EU member states to sign the 'Amsterdam Declaration.'"
Emmanuel Desplechin, Secretary General of ePURE, the European renewable ethanol association, supported the environment committee vote but emphasized that EU domestic biofuel production already applies some of the most rigorous global standards.. Desplechin said:
"We believe the contribution of transport fuels from palm oil and its derivatives to the share of renewables in transport should be limited until global peatland conversion is halted. By strengthening sustainability criteria for all biofuels, the EU can reduce greenhouse gases without creating environmental problems elsewhere in the world."
EU Biodiesel Impacts, Emissions and Demand
According to sustainability advocates Transport & Environment, 46 percent of all palm oil used in Europe in 2015 - including palm oil used for food ingredients - was used as a biodiesel by automobiles. This is a six-fold increase from 2010 when only 8 percent of palm oil imports were used for biodiesel.
Separately, last week, leading global palm oil biodiesel producer Neste Oil reported that its biodiesel products reduced global emissions by 6.7 million metric tons in 2016.
By 2014, EU palm oil demand had reached 3.22 million metric tons. This was an increase of 2.76 million metric tons over 2010 EU demand of 456,000 metric tons. During the same period, by 2014, EU consumption of soybean oil used for biodiesel decreased by 555,000 metric tons - from 995,000 metric tons in 2010 to 440,000 metric tons in 2014.
The EU analyzed 14 crop-specific biofuels scenarios. This showed that EU demand for biofuels by 2020 could result in deforestation worldwide the size of Austria, or 8.8 million ha. Just EU palm oil biodiesel demand could cause 2.1 million ha of deforestation in SE Asia - an area slightly smaller than Armenia. However, for now, until the results of the April 3-6, 2017 vote, the European Commission considers biofuels as renewable energy and carbon neutral regardless of the carbon footprint of crop expansion.
These concerns are not unique to Europe. Current Indonesian B20 or Malaysian B10 palm oil biodiesel mandates also fail to address palm oil sourcing standards to protect shareholders from investing in firms exposed to financial risks resulting from clear cutting forests and land grabbing. Separately, for example, the Malaysian Palm Oil Board reported record high biofuel exports in February 2017 at 41,019 metric tons valued at MYR 141.10 million. January 2017 biofuel exports were 9,102 metric tons valued at MYR 33.59 million. Indonesia also announced last week it was considering lowering its domestic biofuels subsidy.
U.S. biofuels import requirements in the Energy Independence and Security Act of 2007 only require that importers register their refining facilities to meet U.S. EPA requirements and that they distill palm methyl ester to be compliant with ASTM D6751. According to the U.S. Department of Agriculture, U.S. imports for all palm oil products, including for biofuels and foods, in 2016 is estimated at 1.27 million metric tons. On 1 March 2017, palm oil futures trading on the Bursa Malaysia jumped after President Trump stated he might change U.S. policy on renewable fuel standards.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article and its independent analysis and research was written for Chain Reaction Research by Climate Advisers. Chain Reaction Research is a coalition of Aidenvironment, Climate Advisers and Profundo.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.