Indonesia’s Indonesia’s Indonesia’s

Indonesia’s palm oil ban to have knock-on effects

Commodities 5 minutes to read
APAC Strategy Team

Summary:  Indonesia’s sudden decision to clamp down exports of palm oil has sent inflation shock ripples globally not just for edible oil or food prices but more generally for consumer products. While the ban is unlikely to extend beyond a few weeks, these consequent price increase of consumer goods may be stickier and may especially harm emerging markets. A focus back on palm oil plantation is likely in the medium-to-long term, also as ESG funds turn more accommodative to palm oil products.


Last week, Indonesia made a shocking announcement to ban palm oil exports in the face pf domestic shortages and price pressures that have pushed vegetable prices to multi-year highs. Vegetable oil prices have been on the rise in the last six months, amid a host of factors from labour shortages in Malaysia which have dampened the palm oil supplies to droughts in Argentina and Canada curtailing soybean oil and canola oil exports respectively. Finally, the war in Ukraine has tightened the supplies of sunflower oil, so palm oil has been in key focus.

Indonesia is the world’s largest producer and exporter of palm oil. The US Department of Agriculture estimates that FY21/22 palm oil production volume for Indonesia is 44.5m MT and that Indonesia is responsible for roughly 60% of global production. Malaysia is the second largest producer of palm oil. Palm oil is not just a key source of vegetable oils, but also used in many diverse applications, including other food products such as margarine, instant noodles and snack foods, food packaging and also as an ingredient in cosmetics and toiletries, and as a biofuel. The sector has been running on tight supplies amid the under-investment due to the ESG push.

This clearly means a further push higher to food prices that are already running at record highs, amid sharply higher energy prices, supply constraints as well as the increase in fertilizer prices. We are also concerned about the likely spill over to other industries, especially in the consumer staples space as prices of detergents and toothpaste will be pushed higher. In Asia, India and China will likely see the biggest impact, given the large dependence on palm oil imports from Indonesia and food shortages in China on account of its zero covid policies.

Other emerging markets that are food importers and where food represents a high share of household consumption expenditure such as the Philippines and Africa will also see rising inflationary pressures. Developed markets won’t be spared either, and many European countries have imposed limits on the amount of vegetable oil households can purchase. Malaysia may stand to benefit from substitution demand for palm oil, but this will be with a lag as new contracts are worked out. But it is worth noting that Malaysian supplies still cannot cover up for the lost Indonesian exports.

To be fair, Indonesia is unlikely to sustain this ban into the summer. Palm oil is a key input for Indonesia’s balance of trade and foreign exchange, and there is limited storage capacity for the oil. Meanwhile, Indonesia has excess palm oil supplies, as it consumer only about a third of its production. This means that the surge in palm oil prices may be temporary. But consumer staple companies are facing the perfect storm of rising prices over and above the palm oil price gains, and any move lower in palm oil is unlikely to be followed by a similar move lower in consumer product prices.

Indonesia’s move has brought back a focus on food protectionism and de-globalisation. It will be no surprise if alternatives such as rice bran oil and cottonseed oil see more traction. Still, with ESG funds becoming more acceptable of palm oil products there is scope for higher investment in the sector.

Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.