Indonesia to lift ban on palm oil exports on 23rd May

by 5paisa Research Team Last Updated: May 21, 2022 - 04:47 pm 27.4k Views
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In what could be a big relief to the Indian FMCG companies, Indonesia is revoking its palm oil export ban effective from 23rd May. It may be recollected that on 28th April, Indonesia had imposed a freeze on export of palm oils (one of its major exports) to stabilize the price of vegetable oils in the Indonesian economy. Apparently, the situation, may not have been resolved but it has mitigated. That has pushed Indonesia to revoke the ban on exports.

The decision by Indonesia was significant to the global markets and especially to India. That is because Indonesia is the largest supplier of palm oil in the world and it is also one of the largest suppliers to India. India remains a key market for palm oil for Indonesia, so the relationship is largely symbiotic.

Currently, India imports around 13-14 million tonnes of edible oils annually of which 8.50 tonnes is palm oil. Indonesia accounts for 55-60% of the total palm oil imports into India, with Malaysia and Thailand accounting for the balance.

For Indonesia, the issue is a double edged sword. It cannot allow the domestic prices of vegetable oils to go up for too long. At the same time, the palm oil industry is a great employment generator in Indonesia and the livelihoods of over 1.75 crore workers is at stake if the ban continues for too long.

The decision to revoke the ban and resume exports has been taken from a more pragmatic perspective as the Indonesian President, Joko Widodo, has underlined.

Apparently, the ban has also helped the Indonesian government to meet its short term objective of rationalizing prices of cooking oil in the country. That has fallen by more than 13% since the ban was imposed.

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Indonesian had been concerned by the sharp spike in the inflation levels as a result of the spike in cooking oil. Now with the 13% correction in cooking oil prices, that part of the food basket should taper to more realistic levels.

The ban on exports by Indonesia was, in a sense, triggered by the Russia Ukraine war. Russia and Ukraine happen to be the world’s largest producers and exporters of sunflower oil, an alternate low-fat oil.

However, with the Black Sea embargo, the pressure on the sunflower oil supplies were mounting. That had aggravated the demand pressure on palm oil from Indonesia, since it producers more than 65% of the global output of palms.

For Indian FMCG companies, which remain the largest importers of palm oil from Indonesia and Malaysia, it has multiple uses. It goes into almost everything from food products to soaps and detergents. Amidst the rampant inflation, this was threatening to push up the prices of all FMCG products.

Thankfully, that impact should taper now and the FMCG companies like Hindustan Unilever, Britannia, Nestle and ITC should breathe a sigh of relief.

The big takeaway for the FMCG companies will be that the price of palm oil in India and globally could fall drastically as the supply floods the markets. This is likely to be helped by the fact that demand for fried foods in summer is normally lower.

Since, April 2022, the supply of 3.25 lakh tonnes of palm oil from Indonesia was entirely being sourced through Malaysia and Thailand. The restoration of supply lines will bring down prices sharply.

Others feel that the impact on India would be quite limited. That is because, India already had a strong pipeline of edible oil inventories to the tune of 2.1 million tonnes even prior to the ban. With another 1.2 million tonnes already in transit, India had about 3 months of reserves of edible oils.

Within days of the ban imposed by Indonesia, there was a huge backlash from Indonesian farmers as their incomes were impacted after the prices of their palm fruit had plunged. Clearly, that was too sensitive to sustain and it is good for India.

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