By BLOOMBERG / Pic By TMR

A surge in demand for biofuel in China and Europe — despite controversial new rules in the bloc that may limit sales — is proving a bright spot for palm oil, which has been plagued by mounting stockpiles in Malaysia.

Shipments of palm methyl ester (PME) — a kind of biodiesel made from palm oil — climbed from South-East Asia in the first quarter (1Q) as Malaysian exports improved, according to consultancy PRIMA.

The main reason is the widening gap between the price of Brent crude, which has jumped 27% in the first three months, and palm oil, which is little changed.

“China started buying, and the flows are seen to be healthy in the next several months”, though they still depend on diesel prices, said PRIMA’s Singapore-based analyst Heather Zhang. “The arbitrage opened in February with the plunging prices, which makes palm more attractive to European buyers versus other feedstock such as waste-based biodiesel.”

The increase in shipments is a rare bright spot for growers in Malaysia and Indonesia, who saw palm prices sliding more than 8% in the past two months amid concerns over the size of inventories and lacklustre demand. Benchmark futures in Kuala Lumpur traded at RM2,107 a tonne last Friday.

The decline obliterated gains made in January, and also came as the European Union (EU) moved to cap the amount of palm-based biofuel that can be counted toward its renewable-energy goals.

Farmers have lambasted the proposal, while Indonesian and Malaysian governments have threatened to retaliate.

Shipments of PME from Malaysia and Indonesia to Europe probably climbed more than 30% to 145,000 metric tonnes in the 1Q, Zhang said, citing her analysis and discussions with industry executives. The export flowing out of Malaysia alone could reach 100,000 tonnes this month, including shipments to the EU and China, she said.

Palm’s discount to diesel reached about US$106 (RM432.48) a tonne on March 14, the widest since November, and was at US$91 last Friday, according to data compiled by Bloomberg. That compares to an average discount of about US$66 over 2018.

The gap needs to widen to US$120 for buyers in some other markets to purchase more, according to Sathia Varqa, owner of Palm Oil Analytics in Singapore.

China’s PME imports grew almost 50-fold to 751,056 tonnes last year, thanks to the low prices, Chinese customs data show.

The country has pledged to increase its use of alternative energy, including solar power and biofuel, to cut fossil fuel emissions. At least five cargoes have been booked to ship 30,000 tonnes to 50,000 tonnes of PME to China for the March-May delivery, according to PRIMA.

Chinese buyers want to purchase more biodiesel for May and June delivery, but they’re facing difficulties because Indonesia’s plant capacity is being fully used, according to Rajesh Modi, a trader at Sprint Exim Pte Ltd. Indonesian facilities are fully committed because the country increased mandates that require more palm-based biodiesel in its fuel mix. — Bloomberg