Cover Story / May 2018
Indonesia scored a victory in March with a ruling by the European Court of Justice that the European Union must scrap anti-dumping duties on imports of Indonesian and Argentine biodiesel products. The decision has sparked predictions of a boost for Indonesian palm oil derivative exports. The industry, recognizing that while it may have won this battle, it still has not won the war, has re-elected Joko Supriyono for a further five years at the head of the Indonesian Palm Oil Producers Association (Gapki).
By Muhamad Al Azhari
The Indonesian palm oil community breathed a deep sigh of relief on March 21 when Director General of Foreign Trade at the Trade Ministry Oke Nurwan announced that the European Court of Justice (ECJ) had ruled that the European Union must scrap anti-dumping duties of between 8.8% and 23.3% on imports of Indonesian biodiesel products.
The duties had made exports of biodiesel uncompetitive and, along with pressure in other markets including the United States, had represented a critical challenge for an industry believed to provide sustenance for up to 50 million Indonesians.
In the wake of the ECJ decision, the Palm Oil Producers Association (Gapki) in April re-elected its chairman, Joko Supriyono, by acclamation to serve a new term at the head of the business lobby. The association’s national assembly decided to extend the term of the chairmanship and executive board from the previous three years to five.
Industry players realize that the organization, which unites major producers in the country, continues to face more challenging work as more and more markets for the commodity are raising trade barriers. Joko’s long experience in the industry was seen as suited for the job. As well as leading Gapki, Joko is also vice president director at Indonesia’s largest listed plantation company, PT Astra Agro Lestari, and an agriculture graduate from Gajah Mada University in Yogyakarta.
While at home the industry is considered the pride of the nation, providing millions of people with jobs and now representing the largest source of foreign exchange, on the international stage it is often linked to major negative issues such as deforestation, climate change, destruction of biodiversity, child labor and human rights abuse of indigenous people.
Indonesia is the world’s top producer of palm oil. It exported 31 million tons of the commodity last year, 75% of its total production, bringing in $22.9 billion in foreign exchange.
The palm oil price has enjoyed a steady rise this year, as it tracks strength in crude oil prices and its price trails movements in rival edible oils as they fight for a market share in the global vegetable oils market.
Speaking to GlobeAsia at his office at Astra Agro’s headquarters in Pulogadung, East Jakarta, Joko highlighted the importance of making palm oil a priority in Indonesia’s economic diplomacy.
He pointed out that Gapki is important: hundreds of member companies provide jobs directly to about 5 million people and are responsible for the incomes of about 20 million smallholder farmers. Some studies state that, combined with activities in downstream industry, the lives of as many as 50 million people depend on the commodity.
The Dominance of Palm Oil
The veteran executive defended the industry, stating that negative campaigns against the commodity are a form of unfair trade practices by producers of other vegetable oils like rapeseed, soybean and sunflower oil that compete with palm oil, the most widely used vegetable oil in the world.
“Of all the battles we are facing, we feel the nuance in Europe is more political,” said Joko, whose career in the agriculture industry stretches back to the 1980s, when he was working with state-plantation company Perkebunan Nusantara II in Medan.
Palm oil is a presence in people’s everyday lives. Its by-products are used in cooking, baked products, cosmetics, soaps and as a fuel. But negative publicity about how palm oil plantations operate in the world’s top two palm oil producers, Indonesia and Malaysia (which together contribute 85% of world output), appears to have shaped the perspectives of policymakers in Europe.
In January, the European Parliament issued a resolution aimed at prohibiting the use of palm oil in renewable energy by 2021, due to reports stating that the commodity was linked to deforestation. The EU also plans to ban vegetable oil altogether from its renewable energy program by 2030.
Some prefer to take a tough line in combating the opposition to the industry. Trade Minister Enggartiasto Lukita on April 18 was reported to have warned Norway's Fisheries Minister Per Sandburg that Indonesia could reject fish imports from Norway if a ban on palm oil proposed by the country's parliament was adopted. Sandburg responded that the proposal was mainly supported by opposition parties in Norway, which dominate the parliament, but would not be taken up. In the past, Lukita has talked about Indonesia needing to be ready for a trade war should the EU curb palm oil imports.
Coordinating Minister for Maritime Affairs Luhut Panjaitan is taking a more diplomatic tone. After talks with EU trade commissioner Cecilia Malmström during a working visit to Brussels on April 23, he said he wants to build an “equal partnership” with the EU on the issue.
“We want to build dialogue between partners and we hope whatever the decision they make, it will be a win-win solution for every party involved," Panjaitan said, noting that issues such as palm oil’s role in reducing poverty was one factor that would be emphasized.
The momentum to ban palm oil is strong, however. Also last month, British supermarket chain Iceland announced it had decided to remove palm oil from its own-brand food products. “For the European market, it seems to us more like unfair trade practices,” said Joko.
In the early 2000s, palm oil was still the second biggest contributor to the world’s vegetable oil market, with a 35.64% share. Rapeseed and sunflower sat in third and fourth spots, with 20.2% and 13.62% market share respectively. Indonesian producers believe the EU threat of a ban is a means of boosting the role of the two important European crops.
They argue that palm oil has many advantages. It is the highest-yielding vegetable oil crop, making it cheaper for consumers. That helped it take the lead in the global vegetable oil market in 2008, with 41.47% market share. Over half of the supply came from Indonesia. In that year, soybean oil’s market share declined to 32.03%. However it was sunflower oil that was the most affected by rising demand for palm oil, with its market share dwindling to 9.4% from a high of 18.14% in 1990.
Industry players believe a push from the EU’s domestic agriculture sector is behind various policies, including a renewable energy directive in the EU in 2009, that discriminated against palm oil. Gapki and the industry players can’t understand why their super-efficient crop, which produces 4-10 times more oil than other crops per unit of cultivated land, can be beaten by other crops like sunflower, rapeseed oil and soybean.
Producers argue that replacing palm oil with other types of vegetable oil would need a much larger amount of land and this could lead to serious environmental damage as more forests would need to be cleared for agricultural land.
Europe’s Biodiesel Market
Considering the vital role of the sector to the nation, Gapki has constantly pushed the government to strengthen efforts to lobby the EU. The association believes a government-to-government approach will be most effective.
“I recently met Arif Havas Oegroseno, Indonesia’s ambassador in Germany,” said Joko. “I told him that it is not just a battle of the industry anymore. We have done our homework. Today it is more about politics and I urge diplomats to come to the front line.”
In a bid to change the perceptions of the international community, industry players have to loudly promote their ‘no deforestation’, ‘no peat’, ‘no child labor’ policies and they must secure various certification, including from the United Nations Global Compact, the International Sustainability and Carbon Certification and the Roundtable on Sustainable Palm Oil.
A number of palm oil producers have put a ‘sustainability dashboard’ in their official websites to promote their commitment to sustainable practices.
The visit of Luhut Panjaitan to Europe demonstrates that the government has got the message and realizes it has to work hard to defend the industry. The EU, up until today, has been a stable market, contributing the second biggest demand after China. But opposition has been growing to the commodity. In 2013 the grouping applied anti-dumping duties, which until they were overruled by the ECJ, saw the value of Indonesia’s biodiesel exports to EU countries contract to just $14.7 million in 2015 from $1 billion in 2012.
And while China continues to outstrip Europe as a market for palm oil products, the biodiesel market in the economic grouping is important, with a requirement for about 11.36 million tons of biodiesel annually. The push for renewables is gaining strength in Europe as the region intensifies efforts to reduce its dependency on fossil fuels.
THE US MARKET
Another battle has to be faced in the US market. The US Commerce Department in February imposed punitive import duties on biodiesel from Indonesia and Argentina. That priced Indonesia’s biodiesel out of the market.
The US insists that Indonesia subsidizes its biodiesel industry. Industry players believe the US under President Donald Trump may have misunderstood the role of semi-government agency the Oil Palm Plantation Fund Management Agency as a subsidy for biodiesel producers.
Indonesia plans to take the case to the World Trade Organization, but analysts say fighting the US policy under protectionist President Trump could be tiring work. “For the US, I think it is purely a misunderstanding. We have to explain that it is not dumping,” Joko told GlobeAsia.
This is not the first time the US has been tough with palm oil. In 2012, the US Environmental Protection Agency announced a plan to exclude palm oil from its biodiesel program. It’s no coincidence that the US is the world’s biggest producer of soybean. Losing the market would be a blow to the industry. In 2016 Indonesia exported 350,000 tons of palm oil-based biodiesel to the world’s biggest economy.
Efforts to diversify export markets have been made, including by boosting shipments to China and looking at the prospects in the domestic market. Indonesia, with its big population, is a major consumer for anything, after all. According to M. Fadhil Hasan, director of corporate affairs at Asian Agri Group and a board member of Gapki, the biggest markets to consider are Indonesia, India and the EU.
The government is helping. It has made it mandatory for all biodiesel to contain a minimum 20% blend of bio-content in its B20 program. However, in practice not all biodiesel producers can afford to comply as blending means higher costs.
In the short term, according to Fadhil, the price of palm oil will be determined by crude oil prices, the difference in price of palm oil versus soybean and EU and US policy on palm oil. Indonesia’s mandatory B20 program isn’t strong enough to push prices of the commodity.
According to a Reuters report on April 20, the benchmark palm oil contract price for July delivery on the Bursa Malaysia Derivatives Exchange rose 0.5% to 2,414 ringgit ($619.77) a ton. Fadhil is projecting the price of palm oil in 2018 to hover at $710-$720 per ton.
The industry experts say not too much can be expected from the China market. The giant country is forecast to experience flat consumption growth due to moderation in GDP growth. There is still a slight hope the country will boost its biodiesel demand as authorities are considering adopting a B5 policy that requires biodiesel to be mixed with 5% renewable products.
Like India, China is considered a friendly market for the palm oil industry. The country imported 3.2 million tons of palm oil products in 2016.
Despite a more friendly face toward the industry from the government, illustrated by the participation of President Joko Widodo in a palm-oil replanting program in Musi Banyuasin regency in South Sumatra, the government has implemented a moratorium on licenses for new plantations, on concerns over potential environmental degradation.
The replanting program, in which the government is giving free seeds to smallholders, seeks to improve the quality of palm oil fruit, which in turn means better production volume.
Speaking to reporters after he was re-elected as chairman of GAPKI in the association’s national assembly on March 16, Joko said the organization is grateful to the president for his support for the industry. Operators will bow to the government’s policy curbing palm oil plantation expansion by focusing on intensification of cultivation through increased productivity, he said.
Gapki is committed to support acceleration of the government program, including by looking at options to help finance replanting activities, said Joko. Smallholders control 42% or around 11 million hectares of oil palm plantations.
Joko said Gapki is also committed to fighting the negative narratives hanging over the palm oil industry. After scoring a loss during President Susilo Bambang Yudhoyono’s administration when a moratorium was placed on new plantation permits, Gapki has been more successful under President Jokowi, blocking demands from NGOs for a review of existing palm oil concession permits under the mechanism of the moratorium.
The group’s lobbying led to the formation of an inter-ministerial coordination program that includes a campaign to counter the attacks of the environmentalists. Indonesia moved to establish the Council of Palm Oil Producing Countries, or CPOPC, a body sponsored by Indonesia and Malaysia that serves as a platform against policies that aim to hurt the industry or the interests of producer countries. Clearly, there is no end in sight for the battle for palm oil’s place in the world.
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