20 January 2020 (closed)
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Due to the Indonesian government’s plan to increase biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter - in a move to protect the domestic biofuel industry - palm oil futures climbed the most in 28 months. Amid the world’s current low crude palm oil (CPO) prices, Indonesian biofuel producers have it rough as production costs exceed market prices and therefore requested the government to raise biofuel subsidies to offset losses. If approved by Indonesian authorities then this move should result in higher palm oil demand.
Although having been approved by the Indonesian parliament’s energy commission, the government’s proposal to raise biofuel subsidies to IDR 4,000 (USD $0.32) per liter still requires approval from the parliament’s budget committee. Currently, there are 11 Indonesian palm oil companies that produce a total of 5.2 million tons of palm oil-derived biodiesel (which these companies supply to state-owned energy company Pertamina for further distribution). As two or three more Indonesian companies are expected to commence biofuel production in 2015, total production may hit 7 million tons this year. However, as CPO prices have lost about a quarter in value from their peak in March 2014, these companies may be forced to temporarily stop biofuel deliveries to Pertamina as the business has become unprofitable.
Palm oil prices have plunged about ten percent over the past year partly because of sharply falling crude oil prices (which declined about 50 percent since mid-June 2014) and weakening CPO demand from India and China (the world’s two most important palm oil importers) as both countries have difficulty to maintain their economic growth at higher paces. Moreover, soybean oil declined to a six-year low on increased output in the USA as well as South America. The tighter price difference between CPO and soybean oil may lead to CPO importing regions to turn to soybean oil imports as both oils are interchangeable.
In August 2013, the Indonesian government introduced an ambitious regulation that set a higher mandatory content of fatty acid methyl ester (which is derived from palm oil) in biodiesel (the mandatory content was raised from 7.5 percent to 10 percent). This new regulation was designed to curtail expensive oil imports (for domestic fuel use) which had triggered a wide trade and current account deficit. When introduced in August 2013, the government stated that the new scheme would save Indonesia about USD $3 billion in oil imports. However, since its implementation the program has been plagued by several obstacles such as logistical and infrastructure hurdles, as well as sharply falling crude oil prices making biofuels a less attractive alternative. In 2014, domestic biodiesel demand in Indonesia was only 1.7 million tons, and although demand is expected to climb to 2.8 million tons in 2015 it is still far from the government’s target of 3.5 million tons. MP Tumanggor, General Chairman of the Association of Indonesian Biodiesel Producers (Aprobi), said that it is important for the government to boost biodiesel consumption as each additional one million tons of consumption translates into a CPO price increase of about USD $98 per ton.
For the Indonesian government a higher CPO price is also important in terms of foreign exchange earnings. Indonesia is the world’s top CPO exporter but has set a zero percent CPO export tariff since October 2014 due to low CPO prices. Indonesian authorities use a specific formula to set the CPO export tax. When international and local CPO prices fall below USD $750 per metric ton, then a duty free export tariff is set. If above USD $750 per ton, then the CPO export tax starts at 7.5 percent but each USD $50 per ton price increase triggers a 1.5 percentage point export tax growth. As the government’s CPO reference price has been below USD $750 per ton since October 2014, the government has been missing out on tax revenue for four consecutive months. For this reason, the government recently indicated that it may lower its reference rate in a move to collect tax revenue from the CPO export industry.
Indonesia, Southeast Asia’s largest economy, is expected to produce 32.5 million tons of crude palm oil in 2015, while exports are projected to rise to 21.6 million tons.
Indonesian Palm Oil Export in 2014:
Source: Indonesian Palm Oil Association (Gapki)
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
Overcoming the 2013 Law on Limited Oil Palm Plantation Size
In 2013 Indonesia introduced a law that sets a maximum of 100,000 hectares to oil palm plantations in a move to protect Indonesian smallholders (who account for about 40 percent of the country’s total palm oil output). However, this law does not apply to those listed companies on the Indonesia Stock Exchange (IDX) that are majority owned by the public. As a consequence of the new law palm oil companies need to list on the IDX or inject plantation assets into a listed company as strategies in order to expand plantations sizes. Moreover, given the current low profitability of palm oil businesses, smallholders will be more willing to sell their assets to larger palm oil companies. In late 2014, Green Eagle Holdings (the palm oil unit of the Rajawali Group), took advantage of the ‘loophole’ in the 2013 law and injected its plantations assets in publicly listed BW Plantation in a backdoor listing, allowing Green Eagle to expand its oil palm plantation size in Indonesia. Meanwhile, Malaysia’s palm oil giant Sime Darby said that it may list on the IDX in order to expand its business in Indonesia. Other major Southeast Asian agri-conglomerates that have already reached the acreage limit in Indonesia are, however, less enthusiastic to test the loophole.
Palm oil, used in a wide variety of products (such as food, cosmetics, hygiene and biofuel) is one of the world's most popular oils as it is relatively cheap, production-efficient and highly stable. A negative side effect of palm oil production, however, is that this industry is a key driver of deforestation in palm oil producing countries such as Indonesia and Malaysia. The world’s CPO production is dominated by these two countries, combined accounting for about 90 percent of total worldwide CPO production.