Indonesia’s palm oil crisis
Context: It’s rare for any country that is the largest producer and exporter of a product to experience domestic shortages of the same product — so much so as to force its government to introduce price controls and curbs on shipments.
Indonesia & Palm Oil sector
- It has been estimated that Indonesia’s palm oil production for 2021-22 (October-September) at 45.5 million tonnes (mt).
- That’s almost 60% of the total global output and way ahead of the next bigger producer:
- Malaysia (18.7 mt). It is also the world’s No. 1 exporter of the commodity, at 29 mt, followed by Malaysia (16.22 mt).
Recent Crisis in Indonesia
- The country has seen domestic prices of branded cooking oil spiral, from around 14,000 Indonesian rupiah (IDR) to 22,000 IDR per litre between March 2021 and March 2022.
- On February 1, the Indonesian government imposed a ceiling on retail prices.
- The price caps, however, led to the product disappearing from supermarket shelves, amid reports of hoarding and consumers standing in long queues for hours to get a pack or two (14,000 IDR is less than $1 or Rs 74).
- Besides domestic price controls, the government also made it compulsory for exporters to sell 20% of their planned shipments in the domestic market at pre-determined prices.
How does one explain this conundrum — consumers unable to access or paying through the nose for a commodity in which their country is the preeminent producer and exporter?
There are two possible reasons.
- The first has to do supply disruptions — manmade and natural — in other cooking oils, especially sunflower and soyabean.
- Ukraine and Russia together account for nearly 80% of the global trade in sunflower oil, quite comparable to the 90% share of Indonesia and Malaysia in palm.
- Russia’s invasion of Ukraine on February 24, which is ongoing, has resulted in port closures and exporters avoiding Black Sea shipping routes.
- Sanctions against Russia have further curtailed trade in sunflower oil, the world’s third most exported vegetable oil (12.17 mt, according to USDA estimates for 2021-22) after palm (49.63 mt) and soyabean (12.39 mt).
- Supply tightness in sunflower and soyabean — from war and drought, respectively — has, in turn, transmitted to palm oil
- The second factor is linked to petroleum, more specifically the use of palm oil as a bio-fuel.
- The Indonesian government has, since 2020, made 30% blending of diesel with palm oil mandatory as part of a plan to slash fossil fuel imports.
- Palm oil getting increasingly diverted for bio-diesel is leaving less quantity available, both for the domestic cooking oil and export market.
- Such diversion has become all the more attractive with Brent crude prices hardening post the Ukrainian war — to a closing high of $127.98 per barrel on March 8 and staying elevated at $100-plus levels.
What is the impact on India?
- India is the world’s biggest vegetable oils importer. Out of its annual imports of 14-15 mt, the lion’s share is of palm oil (8-9 mt), followed by soyabean (3-3.5 mt) and sunflower (2.5).
- Indonesia has been India’s top supplier of palm oil, though it was overtaken by Malaysia in 2021-22.
- India will have to get used to lower supplies from Indonesia.