With aims to secure a steady flow of palm oil exports from Asia toward the EU, Indonesia and Malaysia are sending a joint delegation to Europe to gather more information and present their views on the bloc’s future policy regarding the commodity. A new ban on deforestation-linked commodities may block future imports of palm oil from the two countries.
All the involved players, Indonesia, Malaysia and the EU, have signaled that the future of free trade for palm oil is all but certain.
Indonesia has suspended half of palm oil export permits to maintain domestic supplies during the country’s upcoming Islamic festivities in the nation. Meanwhile, Malaysia has announced it will consider retaliation moves – in the form of export cuts – to restrict palm oil sold to the EU, in case the bloc moves forward with the deforestation regulation.
Meanwhile, the EU is inching closer to approving a new deforestation regulation, which would cut deforestation globally by not allowing the import of products from at-risk areas.
Last January, the EU environment committee cleared the path for a momentous vote on the issue, which will happen in the following months.
Amid these developments, vegetable oil prices have been in a relentless downward trend since March 2022. The FAO’s Vegetable Oil Price Index went down 2.9% in February, with oil prices standing 25% lower than a year ago – the UN body states that there is a “subdued global import demand” for palm oil.
Trade mission
After authorities from Indonesia and Malaysia met last week, they decided to send a trade mission to the EU to give the bloc their view on the new deforestation regulation. The countries affirm that they agree about preserving the environment and clearing land for plantations.
“We always strive to comply with regulations on the palm oil industry, but they must be fair and understand the situation in both countries where we try to help smallholders come out of poverty,” said deputy prime minister of Malaysia, Datuk Seri Fadillah.
Fruit of palm oil trees.
Previously, Indonesia and Malaysia alleged that the EU is being protectionist in an attempt to protect uncompetitive EU farmers.
Fadillah added that the countries plan to contact different UN agencies so that the Malaysian Sustainable Palm Oil (MSPO) and the Indonesian Sustainable Palm Oil certification (ISPO) gain recognition globally.
Palm oil trade retaliation?
After the authorities meeting, Indonesia’s Coordinating Minister for Economic Affairs, Airlangga Hartato, assured that an export boycott was not a tool that would be used to pressure the EU.
“An export stoppage was not discussed. It is not an option,” highlighted Hartato.
However, other measures such a review on imports from the EU, or a slowing down in the trade are on the table, according to Fadillah.
“If we are not fairly treated, I think there should be some counteraction by us,” he underscored.
“Together with Indonesia, we want to make the European Union realize their action is a one-sided, unilateral decision,” continued Fadillah.
Losing the EU as a trading partner will not be a deadly blow for Malaysia. The EU share of Malaysia’s palm oil exports declined to 9.4% in 2022, with the volume of exports to the bloc falling 40% in the last seven years and 10% last year.
Similarly, the trade volume of Indonesian palm oil to the EU declined 14% last year and the bloc now supposes around 13.3% of all the commodity exports. Meanwhile, trade to the US increased 15% and other markets like India, China and Pakistan show an increasing appetite for the vegetable oil.Bottles of oil.
“Palm oil industry will continue to grow. The commodity is a basic need for food manufacturing and bioenergy. So, Indonesia does not need to fear losing the EU because there are other markets out there that will just keep growing,” says Joko Supriyono, chairman of the Indonesian Palm Oil Association.
Indonesia moves to reduce exports
At the same time that a B35 mix for biofuel enters into force this month, which will decrease the supply of palm oil used for food, Indonesia is suspending half of palm oil export permits to secure supply ahead of Islamic festivals in the country and lower prices.
The minister of Maritime and Investment Affairs, Luhut Binsar, explains that he fears producers have little incentive to supply the domestic market, favoring exports.
Under the current export policy, producers can sell abroad six times what they sell at home. With the new policy, only three times will be allowed.
“Exporters can use their export rights after the situation has calmed,” explains Binsar. The minister noted that the normalization of exports wouldn’t happen until May.
Last time that Indonesia implemented export restrictions, vegetable oil prices initially boomed but instantly deflated and have continued decreasing since, with the country’s stocks rising to unseen levels, even preventing some fruit from being harvested.
“Export bans [from April 28 to May 23, 2022] prevented fruit from being harvested not only during the ban period but also several months afterward when stocks were still very high,” according to Mukti Sardjono, executive director of the Indonesian Palm Oil Association.
While palm oil production remained stagnant in the country during 2022, exports fell by almost 3 million metric tons, which led to the country being forced to increase domestic and biodiesel consumption (up 1.5 million metric tons in 2022).
The country is moving toward a strategy of local consumption, which has gone up from 13.49 million metric tons in 2018 to 20.97 in 2022. Biodiesel use and use in the oleochemistry sector has doubled in the last five years.
Reserves remain high at 3.66 million metric tons, although lower than last year.
