CPO export opportunities to ‘break through’ global recession

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Bisnis Indonesia - Peluang Ekspor CPO ‘Terobos’ Resesi Global

15 December 2022

By:  Indra Gunawan & Hendra Wibawa

There is always an opportunity behind every difficulty. This saying illustrates how there would still be export opportunities for Indonesian palm oil derivative products despite the threat of a global recession in 2023. 

Furthermore, the global palm oil market is expected not to decline next year, although many countries are subject to economic recession. 

One of the reasons is the surging demand for second-generation biofuel product from refined, bleached, and deodorised palm oil (RBDPO) called the hydrotreated vegetable oil (HVO) or green diesel. 

HVO is a hydrocarbon oil without oxygenate content for diesel fuel sourced from plant materials. 

Indonesian Vegetable Oil Association (GIMNI) Director Sahat Sinaga noted that crude palm oil (CPO) need for HVO production reaches 2 million tonnes per year. This product continues to overflow the European market through the Singaporean industry. 

According to him, CPO export opportunity to Singapore will remain high particularly because the country supplies HVO for European needs. “From this perspective, the need for palm oil is not going to decrease,” he said in a webinar titled “Optimising Palm Oil Export to Anticipate the Impact of Recession” in Jakarta on Wednesday (14/12). 

Therefore, Sahat said that CPO demand will remain strong based on HVO needs. He believes there are several underlying reasons for CPO market potential next year. First, it is environmentally friendly.

“We must continue to strive and improve our environmental friendliness,” he said. 

Second, Indonesia must become the price reference. 

Indonesia is a strong producer in palm oil production. However, in terms of reference price, Indonesia still fails to compete with Malaysia.

“We must fix this so we can be the price setter. We cannot refer to Rotterdam or Kuala Lumpur forever,” he said. 

Moreover, he hopes that the government will apply a consistent policy for CPO export. 

Sahat refers to the government’s policy that bans palm oil export and enforces domestic market obligation (DMO) for a certain period as a response to the soaring price of domestic cooking oil. This restriction policy triggered instability in the domestic palm oil production. 

Thus, Sahat considers that future challenges in CPO trade still revolve around sentiments against the Indonesian palm oil industry, namely resistance from Europe and even from within the country. 

On the contrary, Indonesian Palm Oil Association (IPOA) Head of Foreign Affairs Fadhil Hasan observes that Indonesia’s palm oil export and production continue to decline recently. From 2020-2022, he noted that exports grew negatively at -7.66%. 

Such decline occurs not only in the export of palm oil, but also the production of this commodity. 

“In 2022, production is estimated to decline compared to 2021, and export as well. This is related to policy inconsistency, for example on [export] ban, which strongly affects performance in 2022,” he said. 

In contrast, the Indonesian palm oil demand from 2005-2015 grew steadily around 11% per year. From 2016-2020, the growth of the Indonesian palm oil demand decelerated slightly to only 8% per year. However, from 2020-2022, palm oil demand contracted by 2.54%. 

The decreasing CPO export in the last 3 years shows the impact of the Covid-19 pandemic. In the first half of 2022, exports saw a destruction and plummeted due to the export ban and restriction policy. Moreover, reduced competitiveness with other vegetable oils also contributed to this situation. 

Fortunately, domestic palm oil consumption increased due to the biofuel program. From 2005-2020, domestic palm oil consumption grew 11.7%. Its growth in the next period from 2010-2015 weakened to 9.25% and subsequently rose to 18% from 2015-2020. From 2020-2022, domestic consumption declined to 7.5%. 

“Consumption is increasing due to the mandatory biofuel program, but the export trend is declining,” said Fadhil. 

Basically, he considers that palm oil demand still has a good prospect since the consumption growth is higher than the production. 

However, the problem lies in the currently decreasing trend of domestic production. 

As long as the Russian-Ukrainian war persists, the global scarcity of vegetable oil supply will continue. Russia and Ukraine are the main producer of rapeseed oil and sunflower oil. 

This condition creates an opportunity for Indonesian palm oil to fill the gap in the market. 

“But, again, the problem is whether we have the capacity to respond since we are also experiencing a declining trend in production,” said Fadhil. 

In 2023, he predicted that palm oil production and consumption will deteriorate under the threat of global economic recession. Therefore, he believes that an accommodative government policy is necessary to encourage palm oil export. 

“Particularly I want to highlight the DMO [Domestic Market Obligation] policy. Do we still need that when domestic cooking oil price tends to be stable?” said Fadhil. 

Production drops

Indonesian Oil Palm Farmers Association (Apkasindo) Head Gulat Manurung expressed a similar view. 

He also expects palm oil production to drop simultaneously from February-August 2023 as farmers reduce fertilisation due to fertiliser price increase. As a result, the soil fertility would decline. 

Based on Apkasindo Central Executive Board’s database, in 2021, farmers were recorded to produce 26% or 12.39 million tonnes out of Indonesia’s total CPO production of 47.79 million tonnes. 

“When 70% of oil palm farmers are not fertilising [their soil], I expect there would be 5%-11% decrease in farmers’ CPO production in 2023,” said Gulat. 

Without mitigation, it would not be impossible for plantations’ fresh fruit bunch (FFB) production to plummet by 50% in 2023. 

“The drop in Indonesia’s national CPO production would certainly trigger a spike in global CPO price due to decreased CPO availability from Indonesia, even more so amid an energy crisis that lasts since the beginning of 2022,” said Gulat. 

On the other hand, the Trade Ministry encourages all stakeholders, especially business actors, to explore palm oil trade with non-traditional countries amid global recession threat. 

Furthermore, it is necessary to have sustainable palm oil governance strategy and policy that are acknowledged by the trading partner countries. 

The Trade Ministry’s Director General of Foreign Trade Budi Santoso stated that all palm oil stakeholders must support the government’s policy on palm oil governance as a vital commodity in the global trade. 

To that end, he explained that they had issued policies supporting palm oil governance through the Trade Minister Regulation No. 49/2022 on the Governance of Cooking Oil for People Program and Trade Minister Regulation No. 50/2022 on the Provisions on the Export of Crude Palm Oil, Refined, Bleached, and Deodorised Palm Oil, Refined, Bleached, and Deodorised Palm Olein, and Used Cooking Oil. 

“We need sustainable palm oil governance strategy and policy that are acknowledged by the trading partner countries and strengthen palm oil trade diplomacy. I encourage stakeholders to support this government policy,” said Budi.

This policy also aims to provide flexibility and ease for business actors to optimise cooking oil supply at an affordable price for consumers. 

He also stated that this policy can also benefit plantation managers. 

“To support national economic growth in parallel through the export of palm oil products and its derivatives. We hope that palm oil commodity will remain strong when facing global market dynamics,” said Budi. 

He explained that some of the efforts made by the Trade Ministry to face recession threat are by empowering the domestic economy, strengthening local products, encouraging Bangga Buatan Indonesia (Proudly Made in Indonesia) Program, and downstreaming natural resources industries to meet domestic and export needs. 

Presently, Indonesia and the United Arab Emirates have signed the Indonesia-United Arab Emirates Comprehensive Economic Partnership Agreement (IUAE-CEPA) on 1 July 2022. 

This agreement provides Indonesia with an entry to the UAE as a hub, which aims to increase export to non-traditional destination countries, such as the Gulf area, Middle East, Africa, and South Asia. 

Statistics Indonesia (SI) recorded that Indonesia’s trade balance from January to October 2022 saw a surplus of US$45.52 billion. This achievement was dominated by non-oil and gas export, where CPO and its derivative products in particular contributed US$28.5 billion or 12.4% of the national non-oil and gas export. 

“The palm oil and its derivative products industry plays a vital role in the national economy for its significant, inclusive, and extensive contribution. Going forward, this commodity will also become an important part of Indonesia’s energy sovereignty as a renewable energy source,” said Budi.