Indonesia and Malaysia: Palm Oil Under Pressure from Substitutes and EU Deforestation Regulation

The palm oil industry, notably in Indonesia and Malaysia, the world’s two largest producers, faces challenges from claimed environmentally friendly substitutes. C16 Bioscience, a US-based company, has been developing palm oil substitutes since 2017 with Bill Gates, the founder of Microsoft, among its investors.

The emergence of new products as substitutes for existing ones is common in the industrial world. To succeed, producers must highlight the advantages of the substitute and the weaknesses of the target products. C16 is doing this through promoting the superiority of its substitute over palm oil.

At the same time, Indonesia and Malaysia’s palm oil industries face pressure from the EU Deforestation Regulation (EUDR), which aims to reduce deforestation-linked product consumption.

In his February 2024 post on gatesnotes.com, Gates revealed C16’s progress in developing palm oil substitutes. C16 oil is produced through emission-free fermentation with micro-organisms, unlike traditional palm oil extraction from deforested areas. Despite some chemical distinctions, C16 oil shares similar fatty acids and application possibilities with palm oil. Gates has criticised Indonesia and Malaysia for contributing 1.4 per cent to global net CO₂e emissions.

In November 2022, C16 announced a milestone in the commercialisation of palm oil substitutes under the brand Palmless, the first industrial-scale fermentation (operating a 50,000-litre  fermentation tank). Palmless can be used in various consumer product applications such as beauty, personal care, household care, and food products. At this stage, C16’s focus is to raise awareness and utilise Palmless to enable other brands to innovate sustainably.

On its website, C16 promotes Palmless by emphasising palm oil’s environmental harm. It doubts the efficacy of the Roundtable on Sustainable Palm Oil (RSPO) certification, as certified palm oil is often mixed with non-certified palm oil, hindering source traceability despite RSPO criteria against primary forest clearance or biodiversity-rich areas.

Now, C16 is leveraging the EUDR to expand the utilisation of Palmless. The company recommends that downstream producers diversify their supply chains by using palm oil alternatives like Palmless, which falls outside the scope of the EUDR.

To contend with potential substitutes and EU unilateral measures, palm oil-producing countries must ensure sustainable supply chains. Palm oil consumption will keep growing in countries where demand for food, especially cooking oil, is increasing while demand for sustainable palm oil is still at an early stage.

The EUDR, which will come into effect on 30 December 2024, requires assessments of seven commodities including palm oil. It also categorises the oil palm as a high-risk crop. EUDR criteria include deforestation-free production, resource traceability, and legal production activities.

The EUDR reflects the EU’s Open Strategic Autonomy (OSA), which strengthens the EU’s ability to act unilaterally while remaining open to cooperation. It enables the EU to enhance the competitiveness of its rapeseed and sunflower oils industry and to regulate palm oil imports but allows cooperation with producing countries.

The EU’s openness is demonstrated in its cooperation with Indonesia and Malaysia in the Ad Hoc Joint Task Force (JTF) on the EUDR. On 2 February 2024, the JTF meeting focused on collaboration to address the EUDR’s challenges and to ensure compliance. The EU is committed to addressing the concerns of Indonesia and Malaysia while seeking solutions.

Meanwhile, deforestation for oil palm plantations in Indonesia persists. A report by the Rainforest Action Network revealed that smaller operators are clearing forests to meet the demand of expanding processing mills. This deforestation is alarming because some of it is happening in the Leuser Ecosystem, specifically the Singkil-Bengkung Trumon peat swamp, one of the ecosystem’s ecologically richest and most vulnerable parts. This shift from large-scale to smaller operations highlights a wider trend in plantation-linked deforestation.

Palm oil which uses materials from deforested areas after 31 December 2020 will be prohibited under the EUDR. Even if sourced from eligible areas, the EU may reject such products if they come without proper due diligence reports and geolocation.

On top of that, according to the EU Agricultural Outlook 2023-2035, palm oil’s use as biofuel feedstock in the EU would drop from 21 per cent in 2020-2022 to just four per cent in 2035, due to sustainability concerns. The share of other vegetable oils, mainly rapeseed, is projected to be stable at around 50 per cent. The share of advanced biodiesels is projected to increase from 32 to 46 per cent, of which waste oils and fats from 24 to 31 per cent, and other advanced biodiesels from eight to 16 per cent.

In the EU food sector, the use of palm oil is projected to decrease by 19.2 per cent from 2023 to 2035, along with an annual decline rate of oilseed oils for food by 0.25 per cent. Sunflower oil’s food use is expected to decline the most, followed by rapeseed and soybean oil. This shift is attributed to increasing EU consumer preference for alternative oils.

The outlook suggests a downward trend in EU palm oil demand – it is now the world’s third largest palm oil importer (10 per cent global share) after India (19 per cent) and China (15 per cent). The EU favours renewable materials for energy and sources for its food which do not harm the environment. Given this, the EU market may positively respond to innovations in eco-friendly and sustainable solutions such as C16’s Palmless as a palm oil substitute.

To contend with potential substitutes and EU unilateral measures, palm oil-producing countries must ensure sustainable supply chains. Palm oil consumption will keep growing in countries where demand for food, especially cooking oil, is increasing while demand for sustainable palm oil is still at an early stage. Nevertheless, with escalating global concerns over deforestation and climate change, non-EU importers like India and China may yet tighten environmental criteria. India has established the India Sustainable Palm Oil Coalition, while China introduced the Global Green Value Chain. There is a possibility that these two countries might use EUDR criteria as a reference in regulating palm oil imports.

Sustainability will become a key aspect of competitiveness, requiring credible action on the part of Indonesia and Malaysia to protect palm oil’s reputation.

Tags: demand, EUDR, EU Deforestation Regulation, Palmless, Indonesia, Malaysia, palm oil, deforestation, biofuel, consumption