B40 implementation could hold off CPO price drop
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Investor Daily - Implementasi B40 bisa tahan penurunan harga CPO
10 May 2023
By: Ridho Syukra
Jakarta - Palm Oil Agribusiness Strategic Policy Institute (Paspi) is suggesting the government to implement the mandatory 40% biodiesel (B40) programme in the second half of 2023. It is an effort to prevent crude palm oil (CPO) price in the global market from plummeting further. A similar strategy, which is the B30 implementation in 2022, has been proven to be successful in increasing the global CPO price by 25% compared to 2019. The latest CPO price in the international market remains under US$1,000 per tonne.
Paspi Executive Director Tungkot Sipayung said that the decrease in the global CPO price, which includes domestic fresh fruit bunch (FFB), was caused by the oversupply of palm oil in the global market. It can be seen from the supply in importing countries that has reached the pre Covid-19 pandemic level, even surpassing it. The massive flush-out that was conducted by Indonesia in the second half of 2022 was used by importing countries to hoard supply, so their supply is currently full. “Hence, global palm oil demand weakens. Moreover, global fossil energy prices are also decreasing, which reduces global CPO demand for bioenergy,” Tungkot said.
Tungkot explained that global palm oil production this year was predicted to increase by 3-5% compared to 2022, so the oversupply of the market can cause the price to go down. On the other hand, purchasing power in the European Union (EU), India, and China as the primary markets for palm oil in 2022 and 2023 is predicted to weaken due to recession and high inflation. Hence, palm oil price this year is predicted to decrease lower than last year. “The weakening economy in several palm oil importing countries will reduce the commodity’s price. To prevent further price drop, domestic absorption needs to be increased. The biodiesel programme is a crucial effort to sustain palm oil price amid global economic disruption,” he explained on Tuesday (9/5/2023).
He reckoned that increasing the biodiesel blending rate, such as from mandatory B30 to B35, can be a suitable strategy in managing the domestic palm oil market. The amount of domestic palm oil allocated to accommodate the B35 policy lowered Indonesia’s palm oil export to the global market, so that palm oil supply in the global market remained relatively stable and it could create excess demand. The implication was the increase in the global palm oil price, which consequently resulted in the increase of FFB price of farmers as well. “This strategy has been proven to be successful in the implementation of the mandatory B30 programme in 2020, which was a game changer for global demand that boosted the global palm oil price. At the time, the global palm oil price increased by around 25% compared to 2019. The price increase trend continued to around 36% during the implementation of mandatory B30 from 2020 to 2022,” Tungkot said.
Tungkot explained that the FFB price of farmers that increased at the time followed the global palm oil price. Data from the Indonesian Oil Palm Farmers Association (Apkasindo) shows that the FFB price of farmers after the implementation of mandatory B30 increased to Rp1,800-2,550 per kilogram, which is higher than the years prior that reached around Rp700-1,200 per kg. “Hence, due to the urgency to expand mandatory biodiesel in Indonesia amid the disruption of the global palm oil demand, mandatory B35 and B40 can be implemented simultaneously this year. Mandatory B35 has been implemented in the first half of 2023, while mandatory B40 can be carried out in the second half of 2023,” he added. Biodiesel development has three main goals, which are to reduce reliance on fossil energy (especially imports), reduce greenhouse gas emission, and develop villages.
Based on data from the World Bank, the average global palm oil price from January to March 2023 reached US$955 per tonne, which is lower than the average price from January to March 2022 that reached US$1,548 per tonne. Meanwhile, the average global palm oil price in 2022 was US$1,276 per tonne, which is higher than the average price in 2021 that reached US$1,131 per tonne and the average price in 2020 that only reached US$752 per tonne. The global palm oil price reached an all-time high in March 2022 at US$1,776.96 per tonne. The World Bank forecasts that the international palm oil price this year will reach US$980 per tonne.
FFB price plummets
Meanwhile, Aceh Apkasindo mentioned that the selling price of oil palm FFB from farmers in that region decreased to Rp1,500 per kg from Rp2,490 per kg. “It is the lowest FFB price in the last several months,” Aceh Apkasindo Secretary Fadhli Ali said as quoted by Antara in Banda Aceh on Monday (8/5/2023). In the last two months, the oil palm FFB price of farmers reaches Rp2,200 per kg in the southwestern area of Aceh and Rp2,490 per kg in the eastern area of Aceh. However, the oil palm FFB price of farmers in Aceh continues to fluctuate, almost reaching Rp1,000 per kg.
Fadhli reckoned that the oil palm FFB price was low as the CPO export price was under pressure from the low demand of CPO from India and several other countries in Europe that are Indonesia’s CPO export destinations. “India is one of Indonesia’s main CPO export destinations. In 2022, India imported the most CPO from Indonesia,” he revealed. Moreover, several countries also have many options for vegetable oils, such as corn oil, sunflower oil, soybean oil, and canola oil. In the current condition, vegetable oil is the people’s choice in foreign countries as the price is quite affordable and the production is good. Moreover, vegetable oil is a substitute commodity. “The prices of the substitutes are cheap, which is why CPO is also cheap. The prices of substitute commodities are cheap as they are produced in large quantities,” he stated.
Another factor that causes Indonesia’s CPO price to be low is because the EU Parliament has approved the law that bans the import of goods linked to deforestation, which include oil palm as a harmful commodity that is correlated to deforestation. “With the law passed, palm oil cannot freely enter their countries [EU],” he explained.
