Executive director of Tenggara Strategics
A bird in the hand is worth two in the bush. This proverb fits the current state of Indonesia’s palm oil trade, in which the government is busy looking for new export markets but forgets to nurture existing ones.
When opening the 14th Indonesian Palm Oil Conference here last Monday — three days before the actual conference began — President Joko “Jokowi” Widodo called on palm oil players to explore new frontiers, especially in Iran, Africa and South Asia.
Speaking at the conference on Thursday, Trade Minister Enggartiasto Lukito cited potential export markets the government is targeting in Africa such as Mozambique, Morocco, Tunisia and Algeria. He hoped palm oil businesses would follow suit.
Opening new markets, however, is always easier said than done. According to Association of Palm Oil Producers (GAPKI) chairman Joko Supriyono, palm oil businesses faced tough challenges in opening new markets. First, a new market has no strong demand.
Second, new markets have their own barriers. Iran, for example, is cut off from the international financial system as a result of United States sanctions and therefore, trading with it has to go through a third party. African countries, meanwhile, have no storage infrastructure for palm oil, and therefore, exports to Africa have to be delivered in packages, resulting in higher costs.
The initiative to open new markets for palm oil is apparently driven by the rising barriers in a number of Indonesia’s traditional markets like the European Union, India and the US.
A strong drive to penetrate new markets, however, must not weaken efforts to maintain existing ones. Despite their problems, traditional markets still absorb a significant amount of Indonesia’s palm oil exports. Therefore, ignoring the interests of these countries would result in the further reduction of exports.
Indonesia should learn from its bitter experience in dealing with Pakistan and now Turkey. They are two good examples of Indonesia’s neglect when dealing with palm oil importing countries, resulting in a significant loss
Indonesia’s exports to Pakistan was surging back in the 2000s and reached its peak of 740,000 tons in 2007, when Pakistan and Indonesia were negotiating a preferential trade agreement (PTA) to reduce the former’s deficit. The stumbling block at the time was Pakistan’s Kinnow.
One director general at Indonesia’s Agriculture Ministry was adamant that it should not allow Kinnow to enter the market because Indonesia had a lot of orange products. Pakistan then cut its palm oil imports from Indonesia and shifted to Malaysia.
As a result, Indonesian palm oil exports to Pakistan dropped to 560,000 tons in 2008, 220,000 tons in 2009 and a low of 87,000 tons in 2010 before rebounding to 220,000 in 2011 when Indonesia finally agreed to allow Kinnow to enter the country for two months a year. Last year, Pakistan was Indonesia’s fifth largest palm oil export destination, with over 2.2 million tons.
A similar misstep happened with Turkey. Back in 2012, Indonesia’s palm oil exports to the country reached 600,000 tons when the two began their PTA negotiations. The talks, however, have gone nowhere due to the Turkey wheat issue. It wanted to sell more wheat to Indonesia, but it — reportedly because of lobbying by the country’s biggest wheat importer — refused to comply.
In the meantime, Malaysia clinched a free trade agreement — higher than the PTA — with Turkey. As a result, there is now a 10 percent price difference between Indonesia’s palm oil and Malaysia’s. Indonesia’s exports to Turkey slumped to around 40,000 tons last year.
Just like Pakistan and Turkey, every importer of Indonesian palm oil will try to get something in return, especially those who suffer a trade deficit with Indonesia. They have their own domestic interests.
India, for example, has complained about the big trade deficit with Indonesia. As the second largest importer of Indonesia’s palm oil after China, India has every reason to demand something in return. It has slapped between 44 and 54 percent tariffs for palm oil to protect local farmers. It is only a matter of time before we see a slide in Indonesia’s exports to India.
Indonesia also faces the prospect of declining exports to the EU after a decision to phase out palm oil for biodiesel by 2030 on the ground of the unsustainable production of palm oil. So far, around half of EU palm oil imports are used for biodiesel.
Indonesia’s response to the EU has been the strongest so far. But failure to understand the interests of the EU will only result in the loss of Indonesian palm oil exports. Therefore, it is important that we play by their rules so that the EU market remains open to Indonesian palm oil beyond 2030.
Keeping the export markets open is important considering Indonesia’s huge output, which reached 42 million tons last year of which 31 million were exported. This year, because of restrictions in some markets and abundant supplies from Indonesia and Malaysia, palm oil prices have slumped from US$636 per ton at the beginning of the year to $485 at the end of October.
The challenge is even bigger now, considering the sector’s big contribution to the Indonesian economy. It brings in $22.9 billion in export revenue, out of the total $168.7 billion in exports last year, absorbs around 17.5 million jobs directly and indirectly and contributes 2.46 percent to the country’s gross domestic product.
Therefore, Indonesia needs to go the extra mile to keep its export market open. It needs to actively pursue trade agreements with the traditional markets so that the produce will not suffer further setbacks. Indonesia cannot afford to lose another traditional market.
The writer is the executive director of Tenggara Strategics, a business intelligence institution, founded by the Centre for Strategic and International Studies (CSIS), The Jakarta Post and Prasetiya Mulya University.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.