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Post at: Jun 08 2022

Indonesia’s Palm Oil Export Ban

Recent Context

  • In April, 2022, the President of Indonesia has announced that it would be banning all exports of the palm oil related commodity and its raw materials to reduce domestic shortages of cooking oil and bring down its skyrocketing prices.
  • Indonesia is the world’s biggest producer, exporter, and consumer of palm oil.

How important is palm oil to global supply chains?

  • Palm oil is the world’s most widely used vegetable oil with its global production in the year 2020 being over 73 million tonnes (MT).
  • It is estimated to be 77 million tonnes for the current year. 
  • Made from the African oil palm, it is used as cooking oil, and in everything from cosmetics, processed foods, cakes, chocolates, spreads, soaps, shampoo, and cleaning products to biofuel.
  • The oil palm industry has come under criticism for what are reportedly unsustainable production practices leading to deforestation, and exploitative labour practices carried forward from the colonial era. 
  • However, palm oil is preferred by many as it is inexpensive, oil palms produce more oil per hectare than some other vegetable oil plants like soybean.
  • Indonesia and Malaysia together account for almost 90% of the global palm oil production, with Indonesia producing the largest quantity at over 45 million tonnes in 2021.
  • Palm oil makes up 40% of the global supply of the four most widely used edible oils: palm, soybean, rapeseed (canola), and sunflower oil. 
  • Indonesia is responsible for 60% of the global supply of palm oil. 
  • India is the biggest importer of palm oil.

Why are the prices of edible oils rising?

  • The prices of palm oil rose this year as demand increased because of the short supply of alternative vegetable oils. 
  • The production of soybean oil, the second most-produced oil, is expected to take a hit this year due to a poor soybean season in major producer Argentina. 
  • Supplies of sunflower oil, 80-90% of which is produced by Russia and Ukraine, has been badly hit by the ongoing conflict .
  • After Indonesia’s unprecedented announcement to ban palm oil exports altogether, global markets of other vegetable oils saw spikes. 

How bad is Indonesia’s palm oil crisis?

  • Indonesia uses palm oil for cooking purposes. 
  • The palm oil used for cooking is made by processing crude palm oil (CPO). 
  • Due to short supply of alternative vegetable oils, lower-than -expected output from second-biggest palm oil producer Malaysia due to pandemic-induced labour shortage, and the global food inflation linked to the pandemic and the Ukraine crisis, the global prices of CPO had risen significantly since the end of last year.

How will it impact India?

  • India is the biggest importer of palm oil, which makes up 40% of its vegetable oil consumption, as per the USDA.
  • India meets half of its annual need for 8.3 million tonnes of palm oil from Indonesia. 
  • Already grappling with record-high wholesale inflation, the late January export controls exercised by Indonesia had led to a 38% rise in the landed cost of CPO in India. 
  • The price of soybean oil, most consumed after palm, rose by 29% in the country this year, while sunflower oil, 90% of which India gets from Russia and Ukraine, stopped coming in almost completely.
  • Despite the rising prices of the commodity, India’s palm oil imports jumped 21% in March from the previous month as traders moved to secure alternatives to sunflower oil that could no longer be bought from Ukraine.
  • Local prices in Indonesia may fall as a result of this decision, but prices in India may skyrocket. 

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