Indonesia shakes palm oil market again, eyeing biodiesel over exports
08.02.2023 (Nikkei Asia) - TOKYO -- Indonesia has sent new shock waves through the palm oil industry as it devotes more to domestic use, less than one year after its brief ban on exports propelled international prices on a roller coaster ride.
Jakarta this month mandated a higher blend of palm oil-based fuel in biodiesel, leaving less for exports.
Palm oil, used in a wide range of applications from food to cosmetics, is the most heavily consumed vegetable oil. Indonesia, the biggest producer and exporter, imposed an export ban in April 2022 as it sought to curb inflation and secure local supplies.
The move fueled concerns about global supplies of the commodity, sending the benchmark Malaysian palm oil futures soaring to 7,229 ringgit per tonne ($1,680 at current rates) in late April, close to the all-time high. Indonesia lifted the ban in less than a month, causing the contracts to plummet, sinking to the 3,200 ringgit level in September.
The market looked stable until it started climbing this winter, now hovering in the 3,800 ringgit range. The upturn is driven by Jakarta's mandate to increase the blend of palm oil-based fuel in biodiesel to 35% from 30%. The so-called B35 program is designed to cut greenhouse gas emissions and reduce the country's dependence on imported crude oil.
B35 is expected to increase the amount of palm oil used for fuel by 20% in 2023. This will curtail Indonesia's export capabilities, and the Indonesian Palm Oil Association anticipates the country's 2023 shipments will fall about 20% from just over 30 million tonnes last year.
Indonesia also may have an ulterior motive for the move: to combat being edged out of European markets for palm oil.
Oil palm tree plantations have expanded across Southeast Asia, drawing blame for the increasing loss of tropical forests. The European Union struck a preliminary deal in December to adopt a regulation requiring companies to show their palm oil and other commodities sold in the bloc are not associated with deforestation. The EU also has a renewable energy directive to phase out the use of palm oil-based fuels by 2030.
Biodiesel consumption in the U.S. and Europe will continue to decline toward 2031, the Organization for Economic Cooperation and Development predicts.
With a projected dip in overseas demand, Indonesia wants to "increase local demand to protect prices," reckons Tatsuji Koizumi at the Policy Research Institute of Japan's Ministry of Agriculture, Forestry and Fisheries. Jakarta has taken steps toward boosting the biodiesel blending rate to 40%.
Buyers are concerned about the risk of a supply crunch in any weather-related drop in output.
"If climate change causes an increase in poor crops while consumption for energy use grows, this will lead to price fluctuation," said Takayuki Kawarabayashi at Norinchukin Research Institute in Japan.
A fertilizer shortage and heavy rains have sparked worries about this year's harvest in Malaysia, the world's No. 2 producer and exporter. Combined shipments from Indonesia and Malaysia account for nearly 90% of exports worldwide.
Global demand remains firm. In India, one of the leading consumers amid population growth, demand is expected to rise nearly 10% for the 2022/23 fiscal year. Consumption likely will rebound in China with the end of the country's stringent zero-COVID policy as well.
Indonesia's B35 program will not "disrupt supply needed for [food] consumption," said Airlangga Hartarto, the coordinating minister for economic affairs. But one year after Russia's invasion of Ukraine first threatened food security around the globe, roadblocks remain for the vegetable oil supply chain.