MARKET DEVELOPMENT
Crude Palm Oil Update Indonesia: Outlook CPO Export Not too Great
Crude Palm Oil Update Indonesia: Outlook CPO Export Not too Great
02/02/2015 (Indonesia Investments) - The Indonesian Palm Oil Producers Association (Gapki) believes that it is difficult for Indonesia to achieve the government’s target of collecting USD $36 billion by 2019 through crude palm oil (CPO) exports as several government policies disturb the performance of CPO exports. Moreover, global commodity prices (including palm oil) are still showing a downward trend - hence limiting foreign exchange earnings - as global economic growth remains sluggish. Economic growth of China, a major CPO importer, is expected to slow further this year.
Fadhil Hasan, Executive Director at Gapki, said that even if global palm oil prices were to rise above USD $1000 per metric ton, then the government target would still not be met. Besides weak global demand for CPO, another issue is the reduced competitiveness of CPO compared to other vegetable oils such as soybean oil. The price difference between CPO and soy has declined from USD $200 to USD $160 due to enhanced productivity and expansion of soybeans. If the price difference continues to moderate then vital CPO importing countries may prefer to import soybeans rather than CPO as both oil are interchangeable. To avert this situation, Hasan advises the Indonesian government to improve the competitiveness of the domestic crude palm oil industry, for example by improving the country’s infrastructure but also by requesting the Indonesian government to determine why it uses a CPO export tax: is it just to collect state income or is it to boost domestic downstream processing facilities in the palm oil sector?
Indonesia uses a specific formula to set its CPO export tax. When international and local CPO prices fall below USD $750 per metric ton then a zero percent tariff is set. However, the government recently indicated that it may lower the USD $750 per metric ton threshold as palm oil prices have been below this level for over three months implying that the government has not been able to collect export tax income from this sector.
In recent years, Indonesian crude palm oil exports have also been impacted by health and environmental issues. The Eurozone has set higher barriers for imports of Indonesian CPO as it aims to reduce the consumption of palm oil due to the high saturated fat content as well as concerns about deforestation and environmentally unfriendly practices in Indonesia.
Hasan added that CPO exports of Malaysia (the world’s second-largest CPO producer) have in fact improved after the Malaysian authorities signed a free trade agreement with Turkey and a comprehensive economic cooperation with the Eurozone. Therefore, Hasan would support the signing of similar agreements by Indonesian authorities to boost Indonesian CPO exports.
Gapki official Joko Supriyono added that the regulatory framework in Indonesia’s palm oil industry should be improved as well in an effort to raise more investment. Due to several recent policies (for example the temporary stop to the granting of new permits to clear rain forests and peat lands introduced in 2011) investors are hesitant to invest.
Gapki expects CPO exports from Indonesia to rise slightly by 2.5 percent (y/y) to 22.3 million metric tons in 2015 as demand from China and India are not likely to increase significantly. Exports to India declined by 17 percent (y/y) to 5.1 million tons in 2014 due to higher Indian palm oil import taxes. Meanwhile shipments to China fell by 9 percent (y/y) to 2.43 million tons due to the country’s economic slowdown. But perhaps the weaker CPO export performance to China and India can be offset by higher imports to Pakistan and the Middle East. CPO shipments to Pakistan rose by 84 percent (y/y) to 1.66 million tons in 2014 as import duties were reduced after the signing of a trade agreement between Indonesia and Pakistan. Exports to the Middle East climbed 16 percent (y/y) to 2.29 million tons last year.
Gapki expects Indonesian palm oil production to rise by roughly 4.5 percent (y/y) to the range of 32.5 - 33.0 million tons in 2015.
Fadhil Hasan, Executive Director at Gapki, said that even if global palm oil prices were to rise above USD $1000 per metric ton, then the government target would still not be met. Besides weak global demand for CPO, another issue is the reduced competitiveness of CPO compared to other vegetable oils such as soybean oil. The price difference between CPO and soy has declined from USD $200 to USD $160 due to enhanced productivity and expansion of soybeans. If the price difference continues to moderate then vital CPO importing countries may prefer to import soybeans rather than CPO as both oil are interchangeable. To avert this situation, Hasan advises the Indonesian government to improve the competitiveness of the domestic crude palm oil industry, for example by improving the country’s infrastructure but also by requesting the Indonesian government to determine why it uses a CPO export tax: is it just to collect state income or is it to boost domestic downstream processing facilities in the palm oil sector?
Indonesia uses a specific formula to set its CPO export tax. When international and local CPO prices fall below USD $750 per metric ton then a zero percent tariff is set. However, the government recently indicated that it may lower the USD $750 per metric ton threshold as palm oil prices have been below this level for over three months implying that the government has not been able to collect export tax income from this sector.
In recent years, Indonesian crude palm oil exports have also been impacted by health and environmental issues. The Eurozone has set higher barriers for imports of Indonesian CPO as it aims to reduce the consumption of palm oil due to the high saturated fat content as well as concerns about deforestation and environmentally unfriendly practices in Indonesia.
Hasan added that CPO exports of Malaysia (the world’s second-largest CPO producer) have in fact improved after the Malaysian authorities signed a free trade agreement with Turkey and a comprehensive economic cooperation with the Eurozone. Therefore, Hasan would support the signing of similar agreements by Indonesian authorities to boost Indonesian CPO exports.
Gapki official Joko Supriyono added that the regulatory framework in Indonesia’s palm oil industry should be improved as well in an effort to raise more investment. Due to several recent policies (for example the temporary stop to the granting of new permits to clear rain forests and peat lands introduced in 2011) investors are hesitant to invest.
Gapki expects CPO exports from Indonesia to rise slightly by 2.5 percent (y/y) to 22.3 million metric tons in 2015 as demand from China and India are not likely to increase significantly. Exports to India declined by 17 percent (y/y) to 5.1 million tons in 2014 due to higher Indian palm oil import taxes. Meanwhile shipments to China fell by 9 percent (y/y) to 2.43 million tons due to the country’s economic slowdown. But perhaps the weaker CPO export performance to China and India can be offset by higher imports to Pakistan and the Middle East. CPO shipments to Pakistan rose by 84 percent (y/y) to 1.66 million tons in 2014 as import duties were reduced after the signing of a trade agreement between Indonesia and Pakistan. Exports to the Middle East climbed 16 percent (y/y) to 2.29 million tons last year.
Gapki expects Indonesian palm oil production to rise by roughly 4.5 percent (y/y) to the range of 32.5 - 33.0 million tons in 2015.
Indonesian Palm Oil Export in 2014:
|
Month |
Volume |
|
January |
1.57 |
|
February |
1.58 |
|
March |
1.79 |
|
April |
1.38 |
|
May |
1.70 |
|
June |
1.79 |
|
July |
1.84 |
|
August |
1.72 |
|
September |
1.69 |
|
October |
2.47 |
|
Total |
17.53 |
Source: Indonesian Palm Oil Association (Gapki)
Indonesian Palm Oil Production and Export:
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014¹ |
2015¹ |
|
Production |
19.2 |
19.4 |
21.8 |
23.5 |
26.5 |
27.0 |
31.0 |
32.5 |
|
Export |
15.1 |
17.1 |
17.1 |
17.6 |
18.2 |
21.2 |
20.0 |
22.3 |
|
Export |
15.6 |
10.0 |
16.4 |
20.2 |
21.6 |
19.0 |
18.4 |
|
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture