Indonesia as top source of palm oil

Even as the world relies heavily on Indonesia for palm oil and its raw materials, President Joko Widodo on 23 April announced the government will ban the export of palm oil to ensure the home market is able to enjoy availability of cooking oil at affordable prices. 

The ban which takes effect on 28 April, should be able to help lower the price of cooking oil in Indonesia during this time when food inflation is rising and being made worse by the Russia-Ukraine war.

The top source of palm oil, Indonesia accounts for 60% of global production. In 2021 it recorded an output of 46.2 million metric tons, according to Statista. In 2021/22 the country’s export volume was at 28 million metric tons. Local consumption amounted to 15 million metric tons in 2021.

Stepping up to the plate, Malaysia said it would increase its output of palm oil, following Indonesia's plan to halt exports. The second largest producer of palm oil, Malaysia produces 18,700 million metric tons in 2021/22, and exports mainly to China and the EU, according to Statista.

Plantation Industries and Commodities Minister Zuraida Kamaruddin told media that the country would be able to increase its supply now that its borders have begun to open up, reports CNA.

Over two-thirds of palm oil goes to the food industry, says Our World in Data, where it is used for everyday cooking, commercial bakery products, chocolates and snacks, to frozen foods processing, and more. Outside this industry, palm oil has its applications in personal care and cosmetics, cleaning solutions, as well as biofuels. 

Impact on prices, demand for other edible oils

According to a report by Financial Express, global consumption of edible oils is at 240 million tonnes. Of this, 80 million tonnes or 34% is palm oil.

Rising prices of palm oil and other edible oils – have been due to factors such as low supply as drought and typhoon hurt agriculture, as in the case of soy and palm; sunflower oil supply has been interrupted by unrest in Ukraine and Russia, which happen to be the world’s top two producers of sunflower oil. Ukraine produces 4,400,324 tonnes, and Russia, 4,063,080 tonnes annually, according to Atlas Big. As a result, some consumers have looked to palm oil as alternative.

In a news release, GlobalData consumer analyst Ramsey Baghdadi, shared his view on Indonesia’s decision, saying: “As alternative vegetable oils tend to be higher in price, Indonesia’s palm oil export ban will add further obstacles for global manufacturers such as Mondelēz and Unilever to keep product prices low.

“Consumers continue to be sensitive towards prices, as economic uncertainty proves to be a key influence on their decision making. According to GlobalData’s survey, the majority (*60%) of people globally claim to be extremely or quite concerned about their personal finances. Manufacturers will need to focus on price promotion strategies to keep prices down and maintain a good relationship with customers.

“As manufacturers such as Mondelēz have established a long-term relationship with the Indonesian government to source palm oil responsibly, this ban puts them back to square one. There will be a need to find suitable alternatives, however, these each come with their own challenges – rapeseed oil, for instance, has limited supply which has led prices to skyrocket.

“Going forward, fast-moving consumer goods (FMCG) companies need to be careful in choosing suitable alternatives. Due to a shortage of sunflower oil as a result of the Russia-Ukraine conflict, a lot of companies were returning to palm oil, so Indonesia’s ban is another setback. When choosing the next potential ingredient supplier, transparency will be very important. Using innovative methods such as blockchain to track the supply of raw materials in real-time will help consumers understand where the vegetable oil is sourced and whether it is sustainable.

“Ultimately, the ban will severely impact affordability and sustainability for FMCGs manufacturers, and they will have to adapt supply chain strategies quickly to avert risk from declining sales.”