In February the Indonesian government announced to increase biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in an effort to protect the domestic biofuel industry (compensating biofuel producers for the price differences between regular diesel and biodiesel that are caused by low petroleum prices since mid-2014). In April, the mandatory biofuel content in diesel blending was raised from 10 percent to 15 percent.

Apart from the funding of these subsidies, proceeds from the new CPO export levies will also be channeled to replanting, research and human resources development in the palm oil industry.

Amid low global palm oil prices, the Indonesian government currently holds a zero percent export tax for palm oil shipments and therefore cannot generate revenue from exports in this sector. However, when the government’s reference CPO price exceeds the USD $750 per ton threshold over a four-week period then an export tax kicks in (ranging between 7.5 and 22.5 percent depending on the CPO price). The new CPO export levies are in addition to the regular export tax. However, when exporters are required to pay the regular export tax because the CPO price is above the government’s threshold, then the levies are taken from the regular CPO export tax payment, implying that these new levies are not an additional burden when the CPO export tax comes back to life.

As such, the Indonesian government introduced these new levies only to obtain revenue in times of low global CPO prices. However, as a side-effect of the new CPO export levies, palm oil prices jumped 1.8 percent to USD $614 per ton in Kuala Lumpur on Monday (06/04).

Read Column: Palm Oil Industry Update Malaysia and Indonesia

The CIMB Group estimates that Indonesia’s new CPO export levies can provide the government with USD $885 million worth of additional funds, enough to subsidize 2.5 million tons of biodiesel. However, Sofyan Djalil, Indonesian Coordinating Economic Minister, said that the new CPO levy policy would generate between IDR 5 trillion (USD $385 million) to IDR 7 trillion (USD $538 million) of funds, adding that the country’s biofuel program requires at least IDR 5 trillion of funds.

In 2015, Indonesia - the world’s largest producer and exporter of crude palm oil - is expected to produce about 31.5 million tons of CPO. However, only ten million tons are absorbed by the domestic market, half of which (five million tons) are used to produce biodiesel.

Read Column: Palm Oil Update Indonesia: Subsidies for Biofuel to Lift CPO Prices

The Agriculture Ministry’s Director General for Plantations, Gamal Nasir, stated on Monday (06/04) that the new export levy may also be applied to coffee, rubber and other commodities. However, such a move would not be implemented hastily. First the government will monitor and evaluate whether the introduction of CPO export levies will become a success.

Indonesian Palm Oil Production and Export:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    27.0    31.0    31.5
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    21.2    20.0    19.5
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    19.0      

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture