Consequences of Indonesia’s Palm Oil Export Ban

Market analysts doubt Indonesia’s ban on its palm oil exports effective from Thursday (April 28) will ensure the country has an abundant supply of affordable cooking oil in its domestic market.  The move however is poised to raise crude palm oil (CPO) and other vegetable oil prices even further and worsening inflationary pressures.

CPO exporters in Indonesia may suffer as a result while downstream players with refining capacity could benefit as there would be a significant shift in the demand-supply mechanics. That’s the view of RHB Research.

There is no guarantee that there will be additional supply released to the market as CPO refiners may also decide to hold back their refined oil stocks to benefit from higher prices. Refined oils can be kept for as long as six to eight months with no impact to quality while after packaging, they can be kept for a further 12-18 months. Vegetable oil prices could spike as a result of this news but should Indonesia change its stance, this will also reverse quickly.

Meanwhile, Maybank IB Research expects the Indonesian palm oil export ban to worsen the tightness in global edible oil supply given the country’s position as the world’s largest producer and exporter with 31% of global exports in 2020.

As the industry enters into its seasonal peak output period in 2H 2022, this could trigger sharp price correction. 2022 will likely be a year of two halves for CPO price. CPO spot price has averaged RM6,248/metric tonne (MT) year-to-date.

Given the high prices and new export ban, Maybank IB Research expects 2022E/2023E CPO average selling price (ASP) to RM5,000/RM3,400 per MT (from RM4,100/RM3,200 per MT previously forecasted).

In the short-term, for Malaysia this is a good move but we need to examine what is the motive for Indonesia. Is it to reform its industry? To devolve control from a handful of conglomerates to small farmers? Will not Indonesia lose USD2.2 billion in export in one month? How will 30m metric tons of supply glut in Indonesia be handled? Will Malaysia release from its palm oil inventory of over 1.6 million tonnes?

There are several issues here and the winners are soybean and other vegetable oils in this instance.

References:

Indonesia’s palm oil export bank unlikely to achieve its intended objectives, Cheah Chor Sooi, Focus Malaysia, 25 April 2022

With ban on palm oil exports, Indonesia reaps condemnation and praise, Hans Nicholas Jong, 25 April 2022