Overview

The reversal of crude palm oil (CPO) prices to below US$900 per ton and its repercussions in the domestic market have forced the government to take yet another drastic measure to help the commodity by advancing the B35 biodiesel mandatory program later this month. The policy is expected to reduce the mounting local CPO inventories but not really help the government’s effort to bring down cooking oil prices. 

CPO prices continued to plunge in recent weeks as a result of a major surplus in CPO inventories, following Indonesia’s anti-market policies of requiring a domestic market obligation (DMO) of CPO to curb cooking oil prices and abrupt decision to ban exports of CPO and its derivative products for three consecutive weeks in April and May. The situation worsened following the difficulties faced by CPO exporters in finding cargo vessels to carry CPO. At the same time, oil palm farmers were entering the harvest period.

Palm Oil Producers Association (GAPKI) data showed that Indonesia’s stocks of palm oil reached 6.1 million tons in April, above the average level of 3.5 million to 4 million tons, as a result of the DMO. According to the Palm Oil Agribusiness Strategic Policy Institute (PASPI), the export ban caused stocks to soar to 8 million tons by the end of June. Worse, inventories in Malaysia, the world’s second-largest producer after Indonesia, also rose to a new record of 1.66 million tons in June.

Responding to the situation, the government decided to make B35 biodiesel – a mixture of 35 percent CPO and 65 percent diesel fuel – mandatory beginning July 20. Dadan Kusdiana, the director general of new, renewable energy and energy conservation at the Energy and Mineral Resources Ministry, explained that the program would begin on July 20, and it would add demand for biofuel by 727,805 kiloliters to a total of 10.88 million kl this year. Dadan further explained that the mandatory B35 biodiesel program was a stop gap to reaching the actual target of the mandatory B40 biodiesel program, which he expected could be implemented by the end of this year.

The government claimed that the rising usage of domestically grown palm oil for biodiesel not only drove up local demand for CPO but also saved the country from foreign exchange used to import diesel fuel. Last year alone, savings reached Rp 66.5 trillion (US$4.42 billion). Moreover, the production cost of biodiesel is much lower than imported diesel fuel; Rp 21,000 per liter for imported diesel as opposed to Rp 13,775 for biodiesel.

The mandatory B35 biofuel program, however, will likely have a negative effect on the government’s target of lowering cooking oil prices. Our sources said that CPO companies mostly preferred to supply CPO for biofuel production rather than for cooking oil because the former has a mechanism in place to compensate CPO producers for price differences but not the latter. Moreover, the government’s flip-flopping in cooking oil policies has mostly penalized CPO producers.

What’s more

Palm oil prices fell from their peak of US$1,840 per ton in March to $885 on Wednesday’s close. In the domestic market, the price of fresh palm fruit bunches (FFB) at the farmers’ level plummeted uncontrollably throughout the beginning of the second half of the year. Although local governments set FFB prices mostly above Rp 2,000 per kilogram, in reality, the prices fell to Rp 1,300 per kilo for plasma farmers – farmers affiliated with plantations – and even below Rp 1,000 for independent farmers.

A source at GAPKI said the fall of FFB prices happened because oil palm companies are not buying much FFB from farmers because their CPO storage tanks are full, while at the same time, they could not easily export their CPO because of the high export levy and the difficulty of finding cargo vessels. Giving an illustration of the high export levy, he said, when CPO prices hit $1,223 per ton, the exporters would have to pay $688 to the government for export levies and taxes, and keep only $545 ton for themselves.

Responding to concerns from CPO companies, Coordinating Maritime Affairs and Investment Minister Luhut B. Pandjaitan promised earlier this month that the government would soon reduce CPO export levies. The government, Luhut said, would first study export performances in the following weeks before announcing a new set of tariffs. As for now, Luhut continued, the government would like to focus more on accelerating the implementation of the mandatory B35 biodiesel program and speeding up the development of the B40 biodiesel program as a way to prop up prices.

What we’ve heard

A source in the palm oil industry explained that the mandatory B35 and B40 biodiesel programs create a dilemmatic situation in the local market. On the one hand, the policy could help increase CPO demand and thus help increase CPO prices. On the other hand, the fact that CPO selling price for biodiesel producers is higher than those for cooking oil producers makes it hard for CPO producers to fulfill their commitment to support the domestic market obligation (DMO) and the domestic price obligation (DPO) for cooking oil.

“I am worried CPO companies will choose to sell their supplies to biodiesel producers instead of cooking oils producers, especially because they don’t feel secure with the ever-changing policies related to cooking oil,” he said.

He projected that the mandatory B35 biodiesel program would eventually reduce domestic inventories and thus could drive up prices again, and this would be bad for cooking oil. As for biodiesel, he said, there is already a system in place to cover the price difference; that is, through money collected from the export levy.

Another source, however, projected that the B35 would not be able to reverse the current CPO price falling trend as CPO inventories are already piling up. And thus, the policy would not help palm oil farmers’ fresh fruit bunches (FFB) prices either.

“I don’t think it will affect FFB price. It’s just a short-term sentiment because CPO prices are projected to continue their drop to the end of the year. With the B35 or B40 programs, I think the government seems to have lost its mind on how to control cooking oil prices and at the same time, help increase farmers’ FFB prices.”

A top-tiered source among palm oil industrialists made similar projections that CPO and FFB prices would continue to drop, despite the mandatory B35 program. The program would add an additonal demand of less than 1 million tons of CPO, while inventories in companies’ tanks are way above 6 million tons.

“I’m rather pessimistic the B35 and B40 mandatory programs could help emptying those tanks, let alone raising FFB prices.”

He suggested the only way to solve the palm oil conundrum is by enacting a set of measures to ease CPO exports. The first step is to lift the DMO and DPO policies; the next, to reduce the export levies.

“DMO and DPO really take a toll on CPO-export performance. We cannot quickly reduce our CPO inventories with those B35 and B40 biodiesel mandatories. Without DMO and DPO, we could export more and reduce the stock to between 3 million and 4 million tons. Then, we could start purchasing FFB again.”

Disclaimer

This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia’s political and business landscape. Access our latest edition to read the articles listed below:

Politics

1. Anies’ presidential hope hinges on NasDem. Will it deliver?
2. Election-rule changes urgent to accommodate new regions
3. House, govt settle dispute over personal data protection bill
4. ACT case reveals deep-seated misappropriation of public donations

Business and Economy

1. 2nd Tax Amnesty: Underperformance, moral hazards
2. Rushed food estate program now on brink of failure
3. Pertamina ups nonsubsidized LPG and fuels prices, again

Popular

To my horror, it’s just a movie!

RI, Australia strengthen partnership on taxing crypto assets

Pentagon chief congratulates Prabowo on being elected President