Palm Oil Monitor Weekly Update – 7th August 2019

EU Introduces Duties on Indonesian Biodiesel

The EU has announced that it will introduce countervailing duties (CVDs) on exports of biodiesel from Indonesia. The EU has set the duties ranging between 8 and 18 per cent across the board, with a slightly reduced level for some producers such as Wilmar and Musim Mas.

CVDs are introduced when countries believe that products are subsidised in exporting countries, and therefore harm local producers in the importing country. The European producers in this case are the members of the European Biodiesel Board.

The CVD investigation was initiated in 2018, almost precisely when the EU’s antidumping tariffs on Indonesian biodiesel were declared illegal under WTO rules.

The EU has laid out the CVD case, and it’s thin at best. The leading example it uses for a subsidy is the provision of preferential export financing via Indonesia’s export-import bank.

Whether this is a subsidy is contingent upon whether the preferential terms are sector-specific, i.e. specifically directed towards the biodiesel industry. If they are for agricultural commodities, they don’t count.

But the politics of the investigation couldn’t look worse for the EU given that Indonesia has just launched its WTO case against the EU for excluding palm oil from the RED.


WTO RED Update

Both the Indonesian and Malaysian governments have stated that they are proceeding apace with action against the European Union regarding the RED at the World Trade Organization.

Word from Jakarta is that Indonesia has engaged European law firm Sidley Austin to handle the case; the latest from Malaysia is that the Ministry of Primary Industries (MPI) and the Ministry of International Trade and Industry (MITI) are working together jointly.

In the meantime, MITI has called on the EU to recognise MSPO certification within the RED as meeting regulatory requirements. This is definitely a neat technical solution, and would also likely require recognition of RSPO and ISPO alongside it.

However, it doesn’t provide the political solution that the EU is seeking: the EU is looking for ways to keep palm oil out of the European market for biodiesel and – in the longer term – food.  The antidumping and countervailing cases against Indonesian biodiesel are clearly the best examples of this ambition.

MITI has stated that it expects the case to go on for at least five years – which would appear to be about right. Any prospect of regulations being loosened on palm oil will raise the ire of both European farmers and NGOs.

Our prediction is that once the RED case ends, the implementation of the “EU Action to Protect and Restore the World’s Forests” (see last week’s issue) will commence. This is a clear pattern and palm oil producers appear to be on the brink of pushing back in a big way.

GAPKI, Indonesia’s palm oil producers’ body, has called on the Indonesian government to slap retaliatory tariffs on products imported from Europe. The Indonesian trade ministry is signalling that it is prepared to do so, with one trade official stating that the government is preparing to respond to the ‘discriminatory and negative’ campaign.

This would mark a significant escalation in the response to the RED: it would also confirm media reports during the RED that the imposition of palm oil restrictions would be met with economic retaliation from southeast Asia. Will the EU’s anti-palm oil coalition hold up, if and when the RED measures begin to show a negative impact on European exporters?


Quick Take: Indonesian Vs Russian Fires

The annual dry season is approaching Southeast Asia – at the same time a dry and hot summer is gripping parts of Europe. In both cases this has resulted in wildfires.

Estimates of the impact in both areas vary, but here’s a rough comparison on the area affected, action taken and international response.

Russia Indonesia
Area affected (ha) 2,300,000 30,000
GFW fire alerts (5-day period) 96,001 3,856
Personnel deployed 2,700 9,000
Google Trends average interest (7-day period) 20 21

There does seem to be a particular skew of interest here towards Indonesia. Neither global media, international NGOs nor the European Union have shown much interest in the catastrophic Russian wildfires – certainly nothing like the level of interest that typically accompanies haze season in SE Asia.

There isn’t any oil palm grown in Russia; does the environmental community simply prefer to lecture southeast Asian countries, compared to a European one? Is this about Western donor priorities? It certainly looks like a double standard.

There are a couple of other things worth mentioning:

These fires in vastly different parts of the world are an environmental tragedy. But to prevent fires from happening, we need to know what the causes are. So, before the finger gets pointed at palm oil – and this has already started – it’s worth reminding ourselves of some basic facts.

The best estimates reckon that less than 20 per cent of the fires and haze from Indonesia in 2015 were caused by oil palm cultivation – and that’s data from the European Commission.


Analysis: Used Cooking Oil a T&E Target?

If the RED case seemed as though it couldn’t get any odder, it just has. A new report by the UK’s National Non-Food Crops Centre (NNFCC – established by the UK government) suggests that imports of used cooking oil (UCO) into the European Union are actually potentially a new source of climate change – and they’re being exacerbated by the RED.

The logic is as follows. According to the report, imports of UCO from China have increased significantly over the past few years. The assumption is that much of the UCO is originally from palm oil, and that this demand in the EU is contributing to greater palm oil demand in China – and therefore deforestation and climate change.

There are two points made in the report that are worth examining. First, that palm oil imports into China have increased alongside UCO exports, and, second, that the price for UCO in Europe is higher than the price paid for palm oil in China.

The first assumption undermines the report. The key metric in China should be vegetable oil consumption.

China imports soybean for animal feed (meal) and for oil (crush) – the amount of soybean oil imported is around 7 per cent of consumption. Palm oil is imported as palm oil.

Between 2000 and 2018, soybean oil imports increased by about 50%, but consumption went up five-fold. Palm oil consumption (and therefore imports) tripled in the same period. But, soybean oil consumption went from 3,542MT to 16,391MT; palm went from 2,028Mt to 6,670MT. So, growth in soybean oil use was significantly larger than palm oil.

The second assumption – related to this – is that the price for UCO is higher than for crude palm (and therefore other vegetable oils). This is true.

But the report aims at palm oil. The report uses a global price for vegetable oils rather than incorporating the domestic price for soybean oil in China. Yes, globally, vegetable oil prices track each other, but the domestic price is different. This is in part because China’s agriculture sector is heavily subsidised at various levels. So, the domestic price of soybean oil might be much lower than global prices for soybean oil or palm oil.

The report’s argument is that Chinese traders might see the arbitrage opportunity created by the high UCO price versus other vegetable oils.

But what has created this? If the EU introduces a mechanism whereby renewables – particularly those derived from waste products – are supposed to replace other forms of energy, then stimulates demand with a subsidy, is it any surprise that they will command a higher price?

There are two basic points to remember.

First, if you create the demand, the price will go up. Second, if you simultaneously tighten the supply – as could happen with certification of UCO – the price will go even higher. And this will increase the incentives for getting UCO to Europe.

There’s a suggestion in the report that UCO is being ‘laundered’ through China. There’s no evidence for this. If researchers want to make this suggestion, they need to undertake ground research, not imply it based on incomplete correlations.

Possibly the worst aspect of this is that NGO Transport and Environment has said the following:

“Making biodiesel from imported UCO is no longer the environmental good it was once perceived to be …There are real concerns some of these oils may not be genuinely ‘used’ or they may be indirectly causing deforestation. Governments need to scrutinise the source of UCO far more closely and require organisations certifying biofuel feedstocks to undertake far more rigorous and extensive checks.”

At this rate of u-turns, T&E may end up recommending going back to fossil fuels. Either way, it’s becoming more obvious that the goal is to keep exports out – whatever their source.


Comment: Is Mogherini Serious About ASEAN?

EU High Representative/Vice-President Federica Mogherini raised some eyebrows among palm producers this week in an interview with the Nikkei Review. When questioned about the palm oil ban under the EU RED, she stated:

The EU is not banning palm oil. What we are doing is taking the climate emergency that our world faces seriously. The EU has for a long time subsidized renewable energies to reach the ambitious climate goals we set for ourselves. We will continue to do so; but the EU also wants to be careful to subsidize those energies that are truly renewable and sustainable. The EU, therefore, decided to phase out subsidies to palm oil if it is produced in an unsustainable way. So this is not about hampering imports or market access but about subsidizing less. And we are confident that what we are doing is in line with our WTO obligations.

The comments have raised eyebrows for a number of reasons.

First, she has said it’s phasing out palm in the RED if it is produced ‘in an unsustainable way’. This implies that existing sustainability schemes – MSPO, ISPO, RSPO and ISCC – aren’t sustainable. And given that the RED’s Delegated Act makes a future certification pathway difficult, if not impossible, it casts doubt on any certification scheme being considered sustainable.  How does this this sit with existing European initiatives like the Amsterdam Declaration? Several European governments have committed to that Declaration; is the Commission now dismissing it?

Second, she says she’s confident this is “in line with WTO obligations”. We probably should forgive Mogherini for simply reading Commission talking points, but there are at least two countries – Malaysia and Indonesia – that are confident that the opposite is true (see above).

Related to this, we’ve been shown some personally signed advice from no less than Jean Luc Demarty also suggesting that Mogherini is wrong – we’ll have more on that in weeks to come.

Third, and this is a broader point about EU engagement in ASEAN, she says the EU “has decided to enhance its engagement on security issues in and with Asia, and we are intent on delivering on that objective.”

This is straight from a policy delivered in 2016, which effectively only covered two things: maritime security (which is really only via the International Maritime Organization) and communications security.

As defence analysts have pointed out, the only real influence the EU has in the ASEAN region on security is via defence equipment sales. This is now under threat – because the EU won’t play ball on palm oil – and both Indonesia and Malaysia are considering going to other countries for arms purchases.

The question Mogherini needs to be considering is whether the EU is actually taking ASEAN seriously as an equal partner. It has little regard for it on trade, and can’t offer anything on security.