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Indonesia’s palm oil finds silver lining in biofuel, China amid EU trade row

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Indonesia and Malaysia, the first- and second-largest palm oil producers, have threatened to challenge the EU via the World Trade Organisation if the EU continues to phase out palm oil from transportation fuel. CHAIDEER MAHYUDDIN/AFP

Indonesia’s palm oil finds silver lining in biofuel, China amid EU trade row

As Indonesia, the world’s top palm oil producer and exporter, commits to fighting the EU’s ban on the use of palm oil for its member countries’ biodiesel, it may find solace near home.

President Joko “Jokowi” Widodo has asked stakeholders to speed up the mandatory proportion of diesel blended with crude palm oil (CPO) from 20 (B20) to 30 per cent (B30) by January next year, and 50 per cent (B50) by the end of next year, hence pushing up the domestic use of palm oil.

Coincidentally, China will remove import tariffs for palm oil in a move that will open up new markets for Indonesian palm oil.

“We need to anticipate pressures on CPO [by driving up] domestic demand and so that we can have good bargaining positions, whether with the European Union or other parties that try to weaken our bargaining position,” Jokowi told a press briefing on Tuesday.

Palm oil, a top plantation contributor for tropical Indonesia, is a significant foreign exchange revenue generator for the country and has contributed around 1.5 to 2.5 per cent to gross domestic product. Smallholder palm oil farmers account for more than three million hectares of land in the country.

The European Commission decided in March to completely phase out the use of palm oil by 2030 as it is considered a high-risk vegetable oil over deforestation concerns, sparking a trade spat between the EU, one of the world’s top importers of palm oil, and producing countries Indonesia and Malaysia.

During a bilateral meeting in Malaysia last week, Jokowi and Malaysian Prime Minister Mahathir Mohamad agreed to “fight against palm oil discrimination”, Indonesian Foreign Minister Retno LP Marsudi said.

The agreement came after the latest spat with the EU over biodiesel, a CPO derivative, in which the 28-member bloc had accused the Indonesian government of subsidising biodiesel producers such as through the Indonesian Oil Palm Estate Fund incentive as well as export financing from Indonesia Eximbank. In consequence, the EC proposed imposing temporary duties on biodiesel imports produced by Indonesian companies.

Jacking up local demand

By speeding up of the adoption of B30 and B50, the government is aiming at jacking up local demand for palm oil at a time when India, the top importer of Indonesian palm oil, increases duties on the commodity while demand from the EU dwindles. It is also expected to reduce imports of fossil fuels that have pressured Indonesia’s trade balance.

“The calculation is that if we are consistent in implementing the B20 product, we can save $5.5 billion per year. This is a massive figure,” Jokowi said.

According to Statistics Indonesia, the country’s diesel imports during the January-October period last year reached 12.9 billion litres, valued at $2.87 billion.

Speaking after the cabinet meeting on Monday, Coordinating Economic Minister Darmin Nasution said the Energy and Mineral Resources

Ministry was conducting tests over the usage of B30, which was expected to be finished by mid-September. He added that so far there were no serious issues found in the tests.

China opening up

As the government is trying to jack up domestic consumption of palm oil, news surfaced last week from China that the Chinese Ministry of Commerce removed palm oil – among other commodities – from its import tariff quota.

As a repercussion of Chinese companies’ decision to stop buying US agricultural products in light of the ongoing trade war with the US, the move is expected to boost Indonesian palm oil exports to China, the only major export destination of the commodity that showed positive growth in the first half in comparison to other palm oil export destinations such as the EU and India.

“Their will to lower this barrier is a positive development and the effect is big because this highly relates to China’s staple needs,” said Indonesian Palm Oil Producers Association secretary general Lakshmi Sidarta.

“They consume a huge amount of vegetable oils but palm oil comprises only a small part of it,” she added.

Aside from palm oil, China also plans to remove import quotas for soybean oil and rapeseed oil.

Indonesia’s exports of CPO and its derivatives to China rose 39 per cent in the first half to 2.54 million tonnes compared with the same period last year. Contrastingly, exports to the EU stagnated by a mere 0.7 per cent increase to 2.41 million, followed by declines by 17 per cent to India to 2.1 million tonnes, 12 per cent to the US, 10 per cent to Pakistan and 19 per cent to Bangladesh.

Overall exports increased 10 per cent at a total of 16.84 million tonnes compared to the first half of last year.

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