Palm oil also surges as crude jumps…hits a six-month high

PRICE

Will snack foods and instant noodles get pricier amid the oil shock?

Traded at 4,408 ringgit per tonne in Malaysia

Up 10% from just before the Middle East war

Driven by a sharp rise in demand for biodiesel feedstock

Top producer Indonesia’s policy also a wildcard

Palm oil prices—widely used as frying oil in processed foods such as snacks, instant noodles and bread—have jumped more than 10% in two weeks on the back of an oil shock triggered by the Middle East. With signs that elevated crude prices may persist, palm oil, which is also a biodiesel feedstock, is emerging as an alternative energy source. The spike is fueling concerns that processed food prices could rise further.

Cooking oil turned fuel

On the 10th (local time), palm oil futures on Bursa Malaysia in Kuala Lumpur traded at 4,408 ringgit per tonne (about 1.64 million won). That is up 10.03% from 4,006 ringgit on the 25th of last month, before the U.S.-Iran war began. On the 9th, prices climbed as high as 4,568 ringgit, the highest level in six months. During the session, prices at one point surged about 9% from the previous day to 4,774 ringgit, marking the biggest one-day gain since mid-2022.

Palm oil is an edible oil made from the fruit of oil palms grown in Indonesia, Malaysia and elsewhere. It is mainly used as frying oil for processed foods such as snacks, instant noodles and bread. Indonesia and Malaysia supply 85% of the world’s palm oil.

Through last year, palm oil prices faced downward pressure as inventories built up on rising output in Indonesia and Malaysia. The shift in price momentum is tied to a crude rally driven by the Middle East war. With both Brent and West Texas Intermediate (WTI) oscillating above $100 a barrel, demand has surged for palm oil as a biodiesel feedstock, analysts say.

The 'POGO spread'—the price gap between palm oil and gasoil—has narrowed sharply. As of the 6th, the POGO spread stood at $177.96 per tonne, down 44% from a year earlier. That means soaring gasoil prices have made palm oil-based biodiesel relatively more economical. Rising exchange rates and concerns over shipping delays are also boosting demand among Asian importers such as India for Southeast Asian palm oil that can be procured for immediate delivery, adding to upward pressure.

Anilkumar Bagani, head of research at Sunvin Group, said, "Palm oil is currently trading at a discount to gasoil, making it an attractive window," adding, "As biodiesel demand reacts sensitively to international crude prices, palm oil is being highlighted as an energy-linked commodity."

Indonesia weighs the 'B50' card

Supply-side uncertainty is also fanning the rally. Indonesia, the world’s largest palm oil producer, has signaled it may push again around mid-year for its 'B50' policy, which would allow the blending ratio of palm oil in biodiesel to rise to as high as 50% as an energy-security response to a crude price surge.

If Indonesia raises the permitted blending ratio from the current 40% to 50%, export volumes of palm oil to the global market would inevitably take an immediate hit. If Iran blocks the Strait of Hormuz and freight rates rise, import costs for palm oil could climb further. Another headwind is the Indonesian government’s recent sharp increase in palm oil export taxes and levies to $241 per tonne from $165, effectively tightening control over volumes.

If palm oil’s sharp rally persists, the processed food industry will have little choice but to move toward product price hikes. A food-industry official said, "We will keep a close watch on palm oil price trends and work out countermeasures."

Reporter Hyun-jin Ra raraland@hankyung.com