There is an opportunity for CPO export behind the conflict

  • 03 Nov 2023

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 - Ada peluang ekspor CPO di balik konflik

By Dwi Rachmawati & Hendra Wibawa

Behind every difficulty there is an opportunity. These words seemed to emerge at the Indonesian Palm Oil Conference (IPOC) and 2024 Price Outlook meeting in Nusa Dua, Badung, Bali from 1-3 November 2023.

One of these opportunities is the potential advantage from the heated geopolitical conflicts between Russia and Ukraine and Palestine and Israel. Moreover, there is a potential for an increase in the export value of palm oil products when the rupiah exchange rate weakens against the United States (US) dollar.

Data from the Indonesian Palm Oil Association (IPOA) records that crude palm oil (CPO) export in 2022 reached 3.46 million tonnes, while export of processed CPO reached 24.4 million tonnes. Meanwhile, the downstream products that are in great demand are olein and oleochemicals.

In 2021, the export volume of CPO was only 2.48 million tonnes, whereas processed CPO reached 25.48 million tonnes. The peak volume of CPO export occurred in 2019 at 7.39 million tonnes, while export of processed CPO was 23.67 million tonnes.

However, the largest export value of CPO and processed CPO was recorded in 2022, reaching US$30.80 billion, whereas in 2019 it was only US$21.86 billion.

IPOA Head Eddy Martono said that the large value of palm oil exports last year was triggered by a price spike amid the turmoil of global geopolitical conflicts in 2022. In particular, when Russia's invasion of Ukraine disrupted energy and food supplies, increasing commodity prices, including CPO.

"We do not hope the conflicts to make the global economy worse, but we have to take advantage of the existing opportunities," he said to Bisnis at the IPOC event.

According to him, demand for vegetable oil from overseas buyers tends to occur regularly as it is part of daily needs. However, Eddy also emphasised that prolonged geopolitical conflicts that cause a global economic crisis is also risky for palm oil businesses. That risk could be a decrease in demand.

"When the global economy is declining, demand will definitely fall, for example, demand fell during Covid. Do not let it last for a long time, that is not good," he said.

Therefore, Eddy plans to re-optimise export potential to China amid the heat of global geopolitical conflicts.

The plan to optimise exports emerged due to China’s recently weakening demand for palm oil.

"We will increase [exports to] China so that it could return to 8 million [tonnes], because there was a decline recently," said Eddy.

Apart from China, Eddy said that exports of palm oil products would be intensified as well to non-traditional trading partner countries, including countries in Eastern Europe, Central Asia, and Africa.

Currently, exports of palm oil products are starting to be dominated by downstream products. Most of the processed palm oil products are finished goods and semi-finished goods.

"Now the demand for CPO products is really small. They [importing countries] are now [more interested in] downstream products," he said.

Throughout 2023, Eddy reckoned that the performance of the palm oil industry was not as smooth as in the previous year. The reason is that the windfall of strategic commodity had passed.

According to him, palm oil prices also declined in the last few months. The deterioration of palm oil prices was triggered by weak purchasing power due to economic downturn in various palm oil importing countries. At the same time, supply in producing countries was abundant.

Trading Economics noted that palm oil prices have decreased by 9.61% since the beginning of this year based on Contract of Difference (CFD) trading. The price of palm oil as of 2 November 2023 fell 13% on an annual basis to 3,773 Malaysian ringgit per tonne. However, Eddy still believes that CPO prices will rebound in 2024. One of the factors underlying this optimism is the El Nino phenomenon which will suppress production next year. When supply decreases due to El Nino, he believes it will increase the price of palm oil on the global market.

Unfortunately, the momentum of increasing CPO prices is overshadowed by the condition of domestic palm oil production. Indonesia, as the world's largest palm oil producer, is experiencing stagnation in terms of production.

Data collected by IPOA in the last 5 years shows that the average production of palm oil, including CPO and palm kernel oil (PKO), is 50.6 million tonnes.

The stagnating production is caused by, among others, the slow progress of replanting in smallholder plantations.

According to data from Statistics Indonesia (SI), the total area of oil palm plantations owned by smallholders in 2021 reached 6.08 million hectares.

Eddy hopes that the government will implement the right policies to maintain optimism to capture palm oil trade opportunities in 2024.

"We believe that, with the right government policies, the palm oil industry can grow steadily amid the market and economic dynamics," said Eddy.

Regarding the European Union Deforestation-Free Regulation (EUDR), he forecasts that it will increase the operating expenses of palm oil businesses.

He believes that the increase in production costs does not only occur in plantation commodity and agricultural product companies, but it is also experienced by the food and beverage industry which is part of the supply chain.

"Because they have to comply with new regulations regarding the use of material sources, plastic packaging, single-use items, and reducing food waste," said Eddy.

All increases in production costs arising from the implementation of EUDR are at risk of being borne by end consumers.

On the other hand, this policy would certainly put pressure on smallholder farmers in the palm oil supply chain on the global market. "In the end, the costs incurred will be borne by the end consumers," said Eddy.

While palm oil industry players are optimistic in viewing global geopolitical conflicts, the government has an opposite view instead.

When opening IPOC virtually, Trade Minister Zulkifli Hasan assessed that the global market is now fragmented due to the outbreak of Russia-Ukraine and Israel-Palestine wars. "This increases the trend of trading based on similar political views or ideologies," said Zulkifli.

Therefore, the Trade Minister suggested collaboration among all stakeholders, from the central government, regional governments, to business players. This collaboration is the key to supporting palm oil trade amid global challenges.

"This collaboration is the key to advancing the palm oil industry as an industry that is the backbone of Indonesia's economic development," he said.

Regarding the EUDR in particular, Coordinating Minister for Economic Affairs Airlangga Hartarto stated that several countries affected by the regulation agreed to work together with the European Union to build a framework for sustainable agriculture.

"This includes vegetable oil products in an inclusive, holistic, fair, and non-discriminatory manner," said Airlangga.

The European Union's recognition of certification and standardisation of sustainable agricultural practices for several commodities is vital. However, he stated that Indonesia Sustainable Palm Oil (ISPO) certification has not yet been recognised by the European Union. In fact, full recognition of ISPO could make it easier for producers to access markets in Europe.

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