Palm Oil Set To Soar As Indonesia’s Biofuel Push Tightens Supply

Palm oil is poised for a bullish run as Indonesia ramps up its biofuel ambitions, a move that is expected to slash supplies available for export from the world’s top producer and deepen a global squeeze.

Already a world leader in biofuels, the Southeast Asian nation plans to channel even more palm oil stocks toward expanding its domestic biodiesel mandate from 40% to 50% by the second half of next year. The so-called B50 program is part of Indonesia’s efforts to slash a hefty fuel import bill and greenhouse gas emissions all at once.

But the initiative — coupled with stagnating output growth in the world’s biggest producers — could drive up global prices, shift flows of vegetable oils, and even stoke food inflation if buyers are forced to seek costlier alternatives. The price of palm oil — used in everything from chocolate to cosmetics — has fluctuated in recent months as investors weigh swelling stockpiles and uncertain demand, and is currently down 6% year-to-date at 4,145 ringgit ($999.61) a ton.

If the Indonesian government pushes ahead with B50, prices may climb to as high as 5,000 ringgit per ton in the January-June period, Eddy Martono, chairman of the Indonesian Palm Oil Association, or Gapki, told Bloomberg News ahead of an industry conference on the resort island of Bali this week.

On the domestic front, the policy could be followed by a hike in export levies, which will likely be borne by smallholders, he added.

On the global front, it means consumers may have to look elsewhere for supplies as Indonesia substantially curbs exports to achieve the higher biodiesel blend at home, according to Matthew Biggin, senior commodities analyst at BMI.

“It will require deliberate government intervention to prioritize domestic biodiesel production over exports, likely impacting traditional importing markets, particularly India and China, who will need to source alternative supplies,” he said.

The timing of the program’s rollout will be crucial in determining the direction of the market, and will be closely watched at this week’s Gapki-led conference. Veteran trader Dorab Mistry, a director at Godrej International Ltd., had earlier forecast the move would drive palm prices to a three-year high of 5,500 ringgit in the first quarter of 2026.

Indonesian authorities have completed laboratory tests for the B50 blend but road-safety tests have yet to commence. Gapki Secretary-General M. Hadi Sugeng Wahyudiono said expanding the mandate would boost Indonesia’s palm oil use for biodiesel by a quarter, and potentially slash the country’s total palm exports to 26 million tons in 2026, from an estimated 31 million tons this year.

The industry is also eying other supply risks, like the weather. Forecasts are for a La Niña event, which could bring above-average rainfall to the region and disrupt palm oil harvesting and output between November and February. Other factors that could drive the market include China-US trade deals on agriculture products, US biofuel policies which could limit the country’s soy oil exports, and inventories of other edible oils including from sunflower and canola.

Moreover, the seizure of hundreds of thousands of hectares of plantation land by the Indonesian government has prompted concern that improper management may result in a drop in the nation’s production next year, said Sahat Sinaga, acting chairman of the Indonesian Palm Oil Board.

All these factors make for a bullish outlook, according to Jacquelyn Yow, associate director of research at CGS International Securities Group.

"Full B50 implementation may begin from June next year," Yow said. This timeline could increase biodiesel demand by 1.7 million tons, bringing Indonesia’s total biofuel consumption to 15.6 million tons. That’s roughly 18% of global palm oil use, compared with 17% under B40 this year.

"This will create a favourable environment for prices," she said.