Commodity product: Rough road for Indonesian CPO
This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia
30 January 2023
By: Rinaldi M. Azka
Several sentiments may influence the production, domestic consumption, and export of crude palm oil (CPO) and its derivative products.
The market conditions for CPO and its derivative products from Indonesia are expected to be influenced by several factors this year.
These influences include the potential for a shift in export market share, changes in domestic consumption, and sentiments that may disrupt palm oil production activities in Indonesia.
In terms of production, there is a chance that Indonesian CPO would experience a correction this year. One of the factors comes from the plantation yield of independent smallholders.
Head of the Central Executive Board of the Indonesian Oil Palm Farmers Association (Apkasindo) Gulat Manurung said that this year’s palm oil production from independent smallholders could decrease by 50% compared to last year. This condition is caused by the high price of fertiliser and the slow replanting process at the farmer level.
Gulat said farmers complained that fertiliser prices have increased in recent years. This affects the fertilisation activities by farmers.
According to him, currently only about 20-25% of independent smallholders still regularly use fertiliser on their oil palm plants. Meanwhile, the rest reduces the fertiliser dose or do not use fertiliser at all.
The situation is exacerbated by the average price of fresh fruit bunches (FFB), which is below the cost of production for farmers. He said the average price of FFB is at Rp2,200 per kilogram (kg), while the cost of production for palm oil farmers is at Rp2,250 per kg.
“This could get worse if the price structure is not corrected immediately,” he explained on Wednesday (25/1).
Meanwhile, the Head of the Indonesian Palm Oil Association (IPOA) Joko Supriyono said that in 2023 the production of palm oil and its derivative products from Indonesia tends to stagnate compared to 2022.
He also sees that the stagnating production is caused by decreased fertilisation activities by independent smallholders and companies. In addition, another factor affecting production is the delay in the replanting process carried out by most oil palm plantations in Indonesia.
“Regarding the numbers, I estimate it would still be stagnant, it could go up or down a little, but it tends to stay flat, because first, we replanted late. Second, I think many people do not use fertiliser. Farmers reduce the fertiliser, companies reduce the fertiliser. That must have an impact,” he explained on Wednesday (25/1).
For information, based on data from IPOA, CPO production in 2022 reached 46.7 million tonnes. This achievement was down 0.34% compared to 2021. Meanwhile, crude palm kernel oil (CPKO) production reached 4.5 million tonnes in 2022. Thus, Indonesia’s total production of palm oil products reached 51.2 million tonnes.
Amid the potential stagnation of the production volume of Indonesian palm oil products, there is potential for an increase in domestic consumption portion. This is due to the biodiesel 35 (B35) policy which will be implemented starting February 1, 2023.
According to Joko’s calculations, the increased CPO mix in fuel from B10 to B35 could increase domestic demand by 1.5 million kilolitres per year from last year’s total consumption of 8 million kilolitres.
“This will definitely [cause CPO] export quota to decrease because domestic [demand] is increasing significantly [due to B35],” he explained.
For information, IPOA data shows that in 2022, CPO absorption in the domestic market increased by 13.82% annually to 20.9 million tonnes. In more detail, the largest consumption growth came from the food sector which reached 11% to 9.94 million tonnes.
Meanwhile, the oleochemicals sector increased by 2.78% to 2.1 million tonnes, and biodiesel grew 20.43% to 8.84 million tonnes.
European market
On a separate occasion, related to the sentiment of the new European Union policy which regulates the import of several plantation products that must be free of deforestation, Joko admits that he is not too worried. However, this policy may hamper Indonesia’s exports of CPO and its derivative products.
He stated that, if exports of CPO and its derivative products to Europe are hampered, Indonesia can divert it to boost shipments to other markets such as Eastern Europe, Pakistan, and Africa.
Joko believes that the global palm oil market would continue to grow. This is evidenced by the case of the United States which is currently increasing imports of palm oil from Indonesia.
“The US has imported more than 2 million tonnes right now. Previously, it was only around 400,000 tonnes," said Joko.
Likewise, Director of the Indonesian Vegetable Oil Industry Association (Gimni) Sahat Sinaga said that Indonesia would not lose the market for palm oil.
Moreover, Sahat said, China and Pakistan are starting to increase their import quotas. In addition, Sahat explained that the market potential in Central Asian countries is also huge.
Based on data from IPOA, Indonesia’s palm oil exports in 2022 amounted to 30.8 million tonnes, lower than 2021 at 33.67 million tonnes. This achievement is the 4th year that palm oil exports have decreased in consecutive years.
The export value of CPO, refined, and derivative products in 2022 reached US$39.28 billion, higher than 2021 at US$35.5 billion. This is because the price of palm oil products in 2022 was relatively higher than the 2021 price.
Meanwhile, the 10 major export destination countries for Indonesian palm oil by ranking are China, India, the United States, Pakistan, Malaysia, the Netherlands, Bangladesh, Egypt, Russia, and Italy. The United States’ ranking rose from the 5th place in 2020 to the 3rd place as the main importer country of Indonesian palm oil products in 2022.
