Explained: Indonesia’s palm oil crisis, and its implications for India

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).

Soyabean oil, too, is facing supply issues due to dry weather in South America. The USDA has projected the combined soyabean output of Brazil, Argentina and Paraguay for 2021-22 to fall by 9.4%, translating into the continent’s lowest harvest in six years. 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. The country’s domestic consumption of palm oil is forecast at 17.1 mt, of which 7.5 mt is for bio-diesel and the balance 9.6 mt towards household and other use.

“Palm oil getting increasingly diverted for bio-diesel is leaving less quantity available, both for the domestic cooking oil and export market,” said B V Mehta, executive director of the Mumbai-based Solvent Extractors’ Association of India. 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.

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 (see table).

On March 16-17, the Indonesian government lifted its retail price caps on palm oil along with the 30% domestic market sale obligation on exporters. At the same time, it levied a progressive tax on exports, linked to a reference price for CPO. These rates range from $175 per tonne (when the reference export price is $1,000-1,050) to $375 (when prices are above $1,500).

The restrictions on exports, even in the form of levy, take into cognizance Indonesia’s higher population (27.5 crore, against Malaysia’s 3.25 crore) as well as its ambitious bio-fuel programme (Malaysia is still to fully implement even 20% palm oil admixture in diesel). To that extent, the world – more so, the bigger importer India – will have to get used to lower supplies from Indonesia.

Meanwhile, import prices of edible oils have eased from their last month peaks, although higher than one year back. That should provide some relief, both for households and industrial consumers (including soap and cosmetic makers) in India.

Landed prices of CPO (cost plus freight, Mumbai) are currently ruling around $1,750 per tonne, as against $2,000 and $1,175 at this time last month and a year ago, respectively. The corresponding import prices (current versus month-ago and year-ago) stood at $1,690 ($1,960 and $1,115) for RBD palmolein and $1,800 ($1,925 and $1,290) for crude de-gummed soyabean oil.