Palm oil: Joint action to push the price
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.
Palm oil: Joint action to push the price
16 January 2023
By: Iim Fathimah Timoria & Hendra Wibawa
Crude palm oil price is expected to heat up this year after several countries producing this commodity enforced export restriction policies.
After experiencing a decline since the middle of last year, the price of crude palm oil (CPO) in 2023 is predicted to be on an upward trend.
Several factors driving the increase in CPO price stem from Indonesia’s policy to increase the mandated biodiesel volume. Other catalysts include production uncertainty and Indonesia’s stricter export policy.
The Malaysian Palm Oil Board (MPOB) estimates that crude palm oil would be traded at a price between 4,000 Malaysian ringgit per tonne to 4,200 Malaysian ringgit per tonne or around US$961 per tonne throughout this year.
MPOB Director General Ahmad Parveez explained that the estimate is higher than the previous projection with an average of 3,800 Malaysian ringgit per tonne.
“The main driving factors for increased CPO price include the increase in Indonesia’s biodiesel mandate, production uncertainty, and Indonesia's stricter export policy,” he said at a conference as cited by Bloomberg on Thursday (12/1).
At trade closing on Friday (13/1), CPO price fell 1.79% or 70 points to 3,841 Malaysian ringgit per tonne. CPO price saw a declining trend from around 4,100 Malaysian ringgit at the end of 2022.
He added that Indonesia’s policy changes regarding exports and an increase in biofuel allocation for the B35 program may put a strain on global palm oil supply.
On the other hand, the demand for Malaysian palm oil is forecasted to rise, thus reducing the domestic supply.
The Trade Ministry has announced that the quota ratio for palm oil export rights would be cut starting 1 January 2023 to secure domestic supply.
According to the Trade Ministry’s Director General of Foreign Trade Budi Santoso, the exportable volume by producers would be cut to six times the domestic market obligation (DMO).
Meanwhile, the previously applicable provisions stipulated the export rights quota ratio for CPO and its derivative products at eight times the DMO for CPO and/or cooking oil or 1:8.
In addition to the continued DMO policy, the Energy and Mineral Resources (EMR) Ministry announced that the biodiesel mix would be increased as of 1 February 2023 from 30% to 35% (B35).
The price of palm oil has been rising since mid-December 2022 towards its highest record in seven weeks at 4,253 ringgit per tonne in early January 2023. However, the price shows a declining trend as investors are still anticipating the prospect for demand from China which is currently facing a spike in Covid-19 cases although restriction policies had ended.
The MPOB also expects vegetable oil supply to remain tight with concerns over soybean production in Argentina due to dry climate and lower sunflower seed production in Ukraine, which support palm oil price.
Malaysia’s palm oil production is expected to increase by 3% in 2023 to 19 million tonnes. Exports are estimated to increase by 3.7% to 16.3 million tonnes and supply by the end of 2023 is expected to decrease by 8.7% to 2 million tonnes.
The plantation issuer PT Austindo Nusantara Jaya Tbk (ANJT) made a similar prediction. Austindo Nusantara Jaya Finance Director Nopri Pitoy estimates that the price of crude palm oil would remain high in 2023.
According to her, potentially increasing demand is one of the positive catalysts for this commodity.
She said that this year’s vegetable oil supply would remain tight, thus keeping high demand for CPO.
“Extreme weather in several parts of the world poses a risk of hampering the production of other substitute vegetable oils [soybean oil, rapeseed oil, and others],” she said in a written answer to Bisnis on Saturday (14/1).
The persisting Russian-Ukrainian conflict also has an impact on global commodity supply chains. In that case, Nopri said the production of CPO substitute commodities, such as soybeans, sunflower seeds, canola oil, and rapeseed oil, is also affected.
“The price of this commodity has the potential to increase when the supply is tight, which forces countries around the world to look for cheaper commodities, so they turn to CPO,” said Nopri.
Apart from the prognosis of vegetable oil raw material production, a catalyst for the palm oil industry also stems from the hope of an economic recovery amid the overshadowing recession.
The easing of the Zero Covid-19 policy by the Chinese government and the increase in CPO allocation for the B35 biofuel needs also become positive catalysts.
“These factors are positive catalysts for CPO demand and price to remain high this year,” she said.
Positive catalysts
Positive catalysts for the potential increase in CPO price come from two global producers of crude palm oil, Indonesia and Malaysia. The two countries are known to be discussing the notion of halting palm oil exports to the European Union (EU). Special Staff for Strengthening International Economic Cooperation of the Coordinating Minister for Economic Affairs, Rizal Affandi, said the representatives of the two governments would meet to discuss the matter.
“Malaysia’s Minister of Plantation and Commodities would meet the Coordinating Minister for Economic Affairs [Airlangga Hartarto] to discuss the shared position of Indonesia and Malaysia,” he told Bisnis. (Bisnis, 14 January)
As cited from Bloomberg, Malaysia as the second largest CPO producer in the world after Indonesia plans to ban the export of CPO and its derivative products to the European Union. This measure is a response to the ban policy which enforces a regulation to be free of deforestation products.
Malaysia’s Minister of Plantation and Commodities Fadillah Yusof said Malaysia seeks to discuss with Indonesia regarding efforts to deal with the negative campaign of the ban. The two countries produce 85% of the global palm oil.
Fadillah would visit Indonesia this month at the earliest to follow up on Prime Minister Anwar Ibrahim’s recent visit. According to him, Malaysia would focus on demonstrating that its palm oil complies with international environmental standards.
Rizal also added that Indonesia and Malaysia already have palm oil sustainability standards in place, namely Indonesia Sustainable Palm Oil and Malaysia Sustainable Palm Oil. The EU is expected to accept both certifications.
Malaysia and Indonesia are pushing the EU to apply fair trade measures by not discriminating against palm oil.
On the other hand, the Indonesian Palm Oil Association (IPOA) stated that Indonesia and Malaysia require commitment and cooperation to strengthen their position as the largest palm oil producing countries in the world.
IPOA Head of Communication Tofan Mahdi said that the intense discrimination and negative campaign against palm oil by the EU should be a common concern for Indonesia and Malaysia. “Considering such actions aim at reducing the competitive power of this vegetable oil in the global market,” he said.
