Palm Oil Industry Update: Indonesia & Malaysia Cooperate in Council and Special Zone
Indonesia and Malaysia, the world's leading crude palm oil (CPO) producers and exporters, will cooperate for the development of a special economic zone on Indonesian territory to boost the palm oil industry's downstream industry. Private companies will be given incentives to invest in this zone and develop industries to process CPO into olein, a key ingredient for the production of cosmetics and margarine. Furthermore, both countries plan to establish the Council of Palm Oil Producer Countries.
The exact location of the special economic zone for the downstream palm oil industry remains unknown. Reportedly, Indonesia proposed to establish it on land in Pontianak (West Kalimantan), Dumai (Riau), or somewhere in East Kalimantan.
Indonesian Coordinating Minister for Maritime affairs Rizal Ramli said that by boosting the development of a downstream CPO industry, global demand for CPO is bound to rise, implying higher CPO prices. Due to weak global demand (particularly falling demand from China), CPO prices are currently down about 40 percent from the peak in 2011. However, CPO have entered a bull market after being in a bear market one month earlier due to concerns that the El Nino weather phenomenon will impact heavily on H1-2016 palm oil production in top growers Indonesia and Malaysia. Moreover, Indonesia's rupiah and Malaysia's ringgit have depreciated to a near 17-year low against the US dollar hence aiding the rally. Last week, palm oil futures in Kuala Lumpur hit a 15-month high.
Although crude palm oil sales continued to decline, palm oil plantation firm Astra Agro Lestari, a subsidiary of Astra International, saw its sales of olein jump 85 percent (y/y) in the January-August 2015 period hence indicating the advantage of boosting downstream development.
Council of Palm Oil Producer Countries
Over the weekend it also became known that Indonesia and Malaysia are planning to set up an intergovernmental palm oil council (to be called Council of Palm Oil Producer Countries) that aims to control the global palm oil supply, stabilize CPO prices and promote sustainable practices in the palm oil production. As Indonesia and Malaysia (together) account for about 85 percent of global palm oil output, policies in these countries have a major influence on the global palm oil market. It was also said that the council will harmonize the standards of the Indonesian Sustainable Palm Oil (ISPO) and Malaysian Sustainable Palm Oil (MSPO). Other countries are welcome to join the council.
More will be known about this council after Indonesian President Joko Widodo has met Malaysian Prime Minister Najib Razak later this month. Both countries have tried to establish better palm oil relation in the past but with limited success. Currently, Indonesia's palm oil sector is under the global spotlight as forest fires on parts of Sumatra and Kalimantan have caused a severe haze that is plaguing Singapore and Malaysia.
Indonesian Palm Oil Production and Export:
(million metric tons)
(million metric tons)
(in USD billion)
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture