Palm Oil Monitor Weekly Update – 28 January 2020

Europe Moves to Squeeze Indonesian Palm Oil

There’s a significant feeling of anger growing across Indonesia – not just in Jakarta – towards the European Union. The CVD action specifically targeting Indonesian biofuels has sharpened this mood in Indonesia, and it is much more acute than the feeling in KL.  Just as European lawmakers, farmers and NGOs have lined up against palm oil, Indonesian small farmer organisations, lawmakers and business are preparing to line up against the European Union.

Indonesian politicians have already stated their willingness to retaliate against European imports, and businesses are prepared to mobilise efforts in legal forums such as the WTO, and farmer groups are simply angry. The depth of feeling amongst Indonesian leaders is exemplified by a number of recent actions.

The Trade Ministry has stated that its anti-dumping Committee will be investigating EU dairy products, and whether they benefited from subsidies before being exported to Indonesia (this argument echoes, of course, EU justification for its CVD actions against Indonesian biofuels).

Indonesia also noted, during the 9th Round of CEPA negotiations that took place in Brussels in December, that it would come back with a new proposal for how palm oil is addressed in the CEPA text. This development was noted in the EU Commission’s summary of the negotiating round, which was sent to EU decision-makers in January. The EU’s dream scenario – that palm oil is removed altogether from CEPA, therefore undermining the Indonesian industry and boosting the EU Greens – appears to be receding.

Perhaps most significantly of all, Indonesian President Joko Widodo declared publicly that the EU’s actions were “an act of Trade War” – a statement that is sure to have made waves in Brussels. It is (uncharacteristically, for President Jokowi) very aggressive, but also signifies that there is likely to be a strong reaction from Jakarta to the EU’s provocation.

France Moves to Support Palm Biofuel; NGOs Mobilise

The battle over palm biodiesel continues in France. It seemed for a while in 2019 that the anti-palm oil NGOs had gained the upper hand, as they snuck through a provision denying to palm oil any of the tax benefits given to other biofuel feedstocks.

However, in early January 2020, France’s Directorate General of Customs allowed Palm Fatty Acid Distillate (PFAD) to be part of the list of biofuels benefiting from the tax exemption, thus enabling palm biodiesel production – mainly carried out at Total’s La Mède bio-refinery – to continue.

NGOs, of course, challenged the move in the Council of State. In recent days, the Council of State rejected the NGO calls for a suspension of the new rules – but a full decision will be published within three months. The long-term future of palm biodiesel in France remains unclear, but some important blows for common sense have been struck.

How Pro-Palm Oil is RSPO?

The struggle is real.

Several seemingly independent articles in the European press have appeared in the early weeks of January 2020 to push pro-RSPO (but not necessarily pro-palm oil) lines.

In addition to promoting RSPO palm oil, the RSPO message appears to be that boycotts of non-RSPO palm oil are totally fine – and perhaps even to be encouraged. But don’t boycoot RSPO palm oil!

This rent-seeking approach is incredibly counter-productive, given that it encourages the aspirations of those in Europe (and there are many) who only want to throw out palm altogether.

There is no encouragement for other sustainability efforts – chiefly ISPO and MSPO – but rather a blanket disavowal of any efforts that are not RSPO. To be clear, if that is the case, it’s a targeted attempt to diminish the work of the Malaysian and Indonesian Governments. It’s clumsy and foolhardy. Alienating the producing country governments is unlikely to help RSPO’s cause in the long-run, and certainly will not reduce the suspicion that the body is losing any semblance of balance and has thrown its lot in with the NGO/Brussels worldview.

Indonesian Government Charges Activist

Some media attention has been brought onto the fact that Philip Jacobson, of the activist website Mongabay, was detained in Indonesia. Some of the reporting has been mildly hysterical: if Indonesia really wanted to muzzle the press or shut down Mongabay in Indonesia they could have done it years ago. The circumstances of his detention are not clear, but anyone who has travelled in the region knows that the unexpected presence of a wealthy, young Westerner could lead to many different scenarios, from simple money-making attempts to genuine concern – especially in remote regions. Speculation about motives is not very wise at this stage – until it becomes clear whether or not Mr Jacobson had, in fact, transgressed in some way. But what is clear: Mongabay is not journalism; it’s activism.

Prices, India and more…

There’s a bullish mood among traders this week around prices, with most predicting an additional surge in early 2020. The two common factors among analysts are flat output levels and increased demand for biodiesel in both Indonesia and Malaysia under their B20 and B30 programs. Tan Sri Yusof Barison, director general of CPOPC, points to depleting inventories from around March 2020, stating that palm oil will “have a stellar performance throughout the year”.

Indonesia appears to be the main beneficiary of the current trade spat between Malaysia and India over palm oil.  The spat started – supposedly – because of comments made by Malaysian PM Mahathir in relation to Kashmir. POM has it from good sources that the comments were generally not noticed. However, some saw this as an opportunity to capitalise on nationalist sentiment in India – leading to a switch away from Malaysian palm oil.  According to numerous reports Indian traders are now charging a USD15-20 premium on Indonesian palm oil. So who’s paying? As with all trade wars, costs just get passed on to consumers.

The ASEAN agreements may see a new path for palm oil in region. ASEAN this year is conducting a mid-term review of its trade in goods agreement. There’s already potentially good news for palm oil. Thailand, which has one of the most protected palm oil markets in the world, has stated it is seeking to open up the review to revisions on so-called sensitive goods, such as palm oil. This may see the Thai market finally opened up to palm imports.

And before we close, we would be remiss if we did not look back at some of the trends in the palm oil world from 2019.

The fire and haze season was less severe than expected

Last year’s haze event across Malaysia and Indonesia was bad, but it was by no means the worst. The extended dry period looked like it would create an epic fire season. However, the total number of fires was considerably less than the acute seasons in 2015, 2014, 2009, 2006, 2004 and 2002.

This was encouraging to say the least, particularly because better data meant that the number of fires on palm oil concessions could be tracked closely. The number of fire alerts on oil palm areas (10%) was considerably lower than those on moratorium areas (32%), pulp plantation areas (13%), and on par with those in protected areas (10%).

Despite this, NGOs – mostly Greenpeace – attempted to blame palm oil for the entire season.
It’s worth noting that the emissions from Australia’s tragic bushfires are on track to eclipse those from Indonesia for the year.

Orangutans and palm oil can co-exist

New survey data from conservation areas in Sabah turned up new and compelling data on orang-utan populations in Borneo.  The brightest news was that orangutan populations in conservation areas had stabilised, and that new populations had been discovered. The downside was that fragmented landscapes largely showed a population decline – but that’s not at all surprising. Overall, what the study showed is that coexistence of oil palm and orangutan is completely achievable. What it requires, though, is the required amount of resources being put into land use planning and conservation. More importantly, bans on palm oil had nothing to do with it.

Prices recovered

POM generally doesn’t go into the world of pricing that often, but the 40 per cent surge over the course of 2019 was a cause for celebration among many producers.

Depending on who you spoke to, the causes were myriad. Among them: flat production increases in Malaysia along with declining inventories; swine flu in China lowering demand for soybean for feed in China with a corresponding lower crush; plus lower fertiliser use and dry weather. 

Adding to this is surging demand in one of the largest palm oil markets of all: Indonesia. Because so much palm oil discussion is about trade and trade policy, it’s easy to forget how much of a difference domestic policy can make in Indonesia. According to many, the big change is Indonesia’s revamped biofuels mandate.

The EU showed its true colours on palm oil and trade

The EU made 2019 one of its most aggressive towards the world’s palm oil industry with three moves.

In March, the bloc adopted the Delegated Act for the revised Renewable Energy Directive (RED). As a result, the regulation effectively banned palm oil from the EU’s renewables programmes.

In August, the Commission put countervailing duties on palm-based biofuels from Indonesia, making these duties permanent in November. The move came just a few years after the EU’s antidumping duties were found illegal under WTO rules. In both cases, the push had come from European industry and farm groups.

Finally, the EU Commission published its Communication on an “EU Action to Protect and Restore the World’s Forests” to which the Council gave its seal of approval by putting together a ‘Conclusions’ document inviting the Commission to take action to reduce the EU’s ‘imported deforestation’ footprint. The document underlined that the EU is now looking at ‘demand side’ (i.e. trade) measures on palm oil and other commodities going to the EU.

The upside, however, is that palm oil producing countries are in a better position than they think. The economic position of the EU – particularly Germany – is right now slightly perilous. Although there will be more moves by EU policymakers to limit imports, there will be just as much of a push to boost exports to growth markets, particularly Southeast Asia.

This will only happen if EU policymakers put up some compromises. Nothing underlined this more than Indonesia’s muscular response to the EU’s trade actions.