Impact of Palm Oil Ban by Indonesia

On April 28, 2022, the Indonesian government imposed an export ban on crude palm oil (CPO), refined bleached deodorized (RBD) palm oil, red palm oil (RPO), used cooking oil, and palm oil mill effluent (POME). This is followed by the Indonesian government’s latest imposition i.e., Domestic Market Obligation (DMO) in January 2022, which required palm oil producers to supply a share of their palm oil production to the domestic market in order to get export permits. Furthermore, the temporary ban on the commodities is mainly due to limited supply and rising cooking oil prices in the domestic market. Importantly, Indonesia is the largest producer of palm oil, accounting for approximately 59% of global production. However, it is imperative to consider that Indonesia’s ban on palm oil exports is unlikely to last longer due to mounting pressure from buyers to resume shipments and the limited infrastructure to store the surplus palm oil.

Globally, the export ban by Indonesia on crude palm oil will further push up food prices resulting in high inflation rates. Moreover, the rise in prices will likely spill over into other end-user industries since 50% of packaged foods and related goods contain palm oil.

Global Palm Oil Market

Globally, palm oil is mainly produced in Asia, Africa, and Latin America as palm crops grow in humid tropical conditions, which can be found around the north and south of the equator. ASEAN countries including, Indonesia and Malaysia, are the leading palm oil-producing countries. Both account for nearly 85% of global palm oil production, followed by Thailand (4%), Colombia (2%), and Nigeria (2%).

Source USDA, RationalStat Analysis 2022

Impact on India Market

India is the second-largest consumer and one of the leading importers of palm oil, accounting for around 30% of India’s edible oil consumption. Since 2021, prices of palm oil have been observing a higher range compared to other edible oils. To meet domestic demands, India is dependent on oil imports, roughly 70%. Some of the key takeaways in the Indian palm oil market concerning its dependency on Indonesia include,

• Crude palm oil imports made up 57% of total edible oil imports in 2020-21 as compared to 50.5% in 2019-20.
• Indonesia’s share of the total crude palm oil imports last year was 45%, while it accounted for 70% of the total refined bleached deodorized (RBD) palm shipments. Thus, it is evident that India will be hard-pressed to find alternatives for cheaper edible oil such as palm oil.

In the short term, FMCG players are likely to be impacted by Indonesia’s ban on palm oil. Also, with sufficient palm oil stocks in warehouses, end-users are set to observe the marginal impact. Nonetheless, industry players operating in the food & beverages sector are likely to reduce their reliance on palm oil and shift to alternatives such as cottonseed oil and rice bran oil.

Price Dynamics

According to Indonesia Commodity and Derivatives Exchange (ICDX), on 28^th April 2022, crude palm oil was trading at US$ 1,830 per ton, compared to US$ 1,300 per ton on 5^th April 2022, moved to US$ 1,850 per ton on 6^th May 2022.

In terms of palm oil/crude palm oil (CPO) prices, the recent export ban is set to widen the spread between Indonesian and Malaysian prices. Prices of crude palm oil for Indonesia-based producers are significantly lower due to the export levy and tax of over US$ 500 per ton imposed by the government.

Future Viewpoint

The long-term perspective looks promising for the global palm oil market as Indonesian president Joko Widodo “once domestic needs have been met, I will lift the export ban.” Nevertheless, food inflation is expected to remain at an all-time high in many parts of the world, predominantly in Southeast Asia, India, and Africa. The ban on crude palm oil exports by Indonesia has led to the need for timely price intelligence and market assessment.

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