Domestic Demand Keeps Indonesian Palm Oil Industry Afloat amid Sluggish Export Markets

Jakarta. The Indonesian palm oil industry, the biggest in the world, has suffered disruption during Covid-19. Although lockdown measures in export destinations have restricted the market, the demand for palm oil has increased domestically. 

“The year of 2020 was marked with market uncertainty due to Covid-19, indeed it has had a great impact not only on the palm oil industry but also Indonesia’s economy,” Tofan Mahdi, Head of Communications at Indonesian Palm Oil Association (Gapki), told Jakarta Globe on Friday. 

The association announced earlier that palm oil exports declined by some 11 percent in the first semester of 2020. 

Although international demand has been restricted, Tofan said that during the pandemic the demand for palm oil products in the Indonesian domestic market has increased either for biofuel products or for oleochemicals. 

Despite this, there is hope that the market will recover as palm oil increases in popularity. Tofan expressed his hope that the price of palm oil will be favorable for the business sustainability of the palm oil industry.

The exportation performance of Indonesian palm oil “declined rapidly” in the first half of 2020, due to the implementation of overseas lockdowns, implemented in order to prevent transmission of the virus. 

“This caused disruption to global demand for vegetable oils, including palm oil,” Tofan said. 

The global palm oil market is enormous, with the market valued to reach $60 billion by the end of 2025. Indonesia is currently the world’s largest supplier of palm oil, where 15 million of the 50 million tons of the palm oil produced in Indonesia is absorbed by the domestic market. The biggest foreign importers of palm oil are India, China, and the European Union respectively. 

Tofan confirmed that the Indonesian palm oil market recovered in the third quarter of 2020, following an increased demand of vegetable oil in the global market.

“Domestic consumption has also increased due to the oleo chemical industry which supports the prevention of virus transmission through the development of sanitary products, such as soap and disinfectants,” he said. 

He said he believes that the pandemic has made people more aware of the importance of hygiene and sanitation, which will continue to benefit the palm oil market. 

“With this change, I believe that the trend will continuously show positive growth even after the pandemic ends,” Tofan said. 

The pandemic has forced the government to pay $195 million from the state budget to cover the palm-oil based biodiesel subsidy. This figure is likely to grow if the government proceeds with its phasing out of diesel in favour of a blend entirely derived from palm oil, known as B100. This has occurred due to the drop in price of palm oil, as the subsidy is funded by tariffs on palm oil exports. 

In 2015, the Indonesian government began subsidizing palm-oil based biodiesel in order to make the price more competitive with that of conventional diesel. This has been in an effort “to reduce Indonesia’s dependence on fossil fuel imports, and has helped to maintain and stabilize domestic consumption”, Tofan explained.  

A blend of diesel which is 30 percent palm oil, or B30, can be found at gas stations all over Indonesia. The government was set to transition to a B40 in 2021 but issues with funding suggest that this is now unlikely to happen for some time. In order to meet the domestic demand for biodiesel, 15 million hectares of additional plantations will need to be established in Indonesia, infuriating environmental activists. 

Despite these financial struggles, palm oil plantations have continued to operate throughout the pandemic in order to meet market demand. 

“There have not been any layoffs nor salary cuts within the entire Indonesian palm oil industry,” Tofan said. Gapki has also implemented health protocols across all plantations to better protect workers, such as providing health checks and enforcing social distancing. 

Although the market has suffered a blow during the pandemic, there remains optimism that palm oil’s growing popularity internationally as well as the government’s support through the mandatory biodiesel program will facilitate its recovery and growth. 

“Palm oil is currently the most used and the most productive vegetable oil in the global market. Moreover, palm oil is also known as the most efficient crop oil,” Tofan stated. 

“According to WWF (2019), palm oil currently supplies 35 percent of global demand for vegetable oil, with only 10 percent of the land use,” he said.

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