Indonesia’s plug on CPO exports could affect local processing sector, says palm oil board

The local processing sector could be affected by Indonesia’s plan to stop the export of crude palm oil (CPO) to foreign markets if the supply of raw material is insufficient for further processing in the country.

Indonesian President Joko Widodo had said that the country wanted to stop exporting CPO and to replace it with processed products including cosmetics, margarine and biodiesel.

He said Indonesia, the world’s biggest exporter of CPO, should be bold enough to take this step despite the risk of action by the World Trade Organization.

Ahmad Parveez Ghulam Kadir, director-general of the Malaysian Palm Oil Board (MPOB), said there were concerns that such a situation could take place although Malaysia’s CPO production is still sufficient to meet the palm oil demand of importing countries.

“Currently, over 70% of exported palm oil products are in processed form,” he told MalaysiaNow.

“If exports in the form of CPO increase to meet demand from countries such as India, China and the European Union (EU), the rate of local capacity use for the refinery sector will likely continue to decline due to the need to meet CPO export demand.

“If this happens, the operations of refineries will be affected, as well as the demand for processed palm oil products.”

Parveez also warned that this situation could affect the government’s efforts to empower downstream industries and increase revenue through value-added products.

MPOB expects palm oil production to increase periodically over the next five to 10 years.

Production is expected to reach 22 million tonnes by 2025 and to increase to 25 million tonnes by 2030.

Indonesia and Malaysia are the world’s largest and second largest exporters of palm oil.

According to data from Statistica, global palm oil consumption is expected to increase from 41 million tonnes in 2008 to 77 million tonnes this year.

Palm oil is primarily used in food preparation, followed by use in industrial and other sectors.

Malaysia and Indonesia are also facing pressure from the EU, which has been carrying out a campaign painting palm oil and its products in a negative light.

In 2019, former prime minister Dr Mahathir Mohamad threatened to buy jets from China if the EU continued its ban on palm oil in the form of biodiesel.

On whether Malaysia should take similar measures, Parveez said the matter would need further study by the ministry in charge.

As far as MPOB is concerned, he added, there are no plans to restrict CPO exports to foreign markets.

“As an export-oriented industry, about 85% of the country’s CPO production is for exports, the majority of which is in the form of processed palm oil,” he said.

“Nevertheless, CPO exports have been and are showing an upward trend due to encouraging demand from importing countries, especially India.”

If Malaysia takes similar steps, he added, the needs of the main importing countries will be affected and, as a result, CPO will be replaced with other vegetable oils.

“It would cause long-term losses for the palm oil industry,” he said.

On Indonesia’s move, he said, a large number of industry players in the country were expected to benefit from the plans, especially plantation companies which also own processing and compaction plants.

He said this means that industry players would have full control over the global marketing network.

“It’s still too early to evaluate the pros and cons of this measure for Indonesia, but it will likely affect the country’s national income as export tax and levy revenue will be impacted,” he said.

“Exports to industrial countries such as India, China and the EU will also be affected because they need CPO as raw material.”

Andrew Cheng, a senior industry player from Sarawak, said Indonesia’s move to encourage downstream industries would add value and diversify the final exported products, which he said could also be used by some 300 million Indonesians without needing to be exported.

“We purchase the finished CPO products from overseas after we sell the CPO,” he said. “The challenges will be the downstream investment costs and technology needed for Malaysia.”

He suggested that industry players join ventures with other countries which could provide both these things.

“Malaysia must find ways to go downstream, to create added value to the CPO industry and improve our marketing strategy,” he said, adding that Malaysia’s population is much smaller than Indonesia’s.