Indonesia Considers Stopping Palm Oil Exports to the EU

Indonesia is preparing for a worst-case scenario should the European Parliament's draft of a ban on the use of palm oil in biofuels get approved by the European Commission and European Council.(Antara Photo/Reno Esnir)

By : Adinda Normala | on 5:31 AM May 26, 2018
Category : Business, Featured, Trade

Jakarta. Indonesia is preparing for a worst-case scenario should the European Parliament's draft of a ban on the use of palm oil in biofuels get approved by the European Commission and European Council.

In January, members of the European Parliament voted in favor to phase out the use of biofuels made from palm oil by 2021 to fulfill the EU’s Renewable Energy Directive, which aims to reach a renewable energy target of 27 percent by 2030, including in transport fuels.

A decision on whether the ban will be legally imposed in all EU country members will be made in 2019. If approved, Indonesia and Malaysia, who together produce nearly 90 percent of the world’s palm oil, will suffer a hard blow.

"There’s an [ongoing] study about stopping exports to the European Union altogether. When it’s done, Indonesia can see that palm oil trade with them is risky. The study is to eradicate that risk once and for all," Mahendra Siregar, executive director of the Council of Palm Oil Producing Countries, said in a discussion hosted by the Jakarta Foreign Correspondents Club (JFCC) on Friday (25/05).

The council has commissioned several research institutions and universities to help produce its research, which is expected to be completed by the end of the year at the latest.

Palm oil is a key source of revenue for Indonesia — the world’s biggest palm oil producer — accounting for about 14 percent of the country's total exports.

The EU is the second largest export market for Indonesian palm oil, importing around 5 million tons of the key Nutella ingredient each year. According to Ministry of Trade data, the EU has always been in the top two destinations for palm oil, along with India, since the 1990s.

Purbaya Yudhi Sadewa, deputy minister of coordinating maritime sovereignty at the Coordinating Ministry of Maritime Affairs, said the EU must address trade barriers that discriminate against palm oil for the matter to be solved quickly.

"Our goal is not to force the European Union to use palm oil, but we demand fair treatment for palm oil with other vegetable oils," Purbaya said, adding that the EU now seems to solely target palm oil.

"If the European Union has shown that they are not discriminatory towards palm oil, then we will gladly comply to their policy," he said.

The EU has insisted that it has no intention of building trade barriers against Indonesian palm oil and will address all drivers of deforestation, including soy, cocoa and coffee, but it has so far only proposed to ban palm oil imports.

"The way I see it there is a [business] competition as they [EU country members] produce rapeseed oil which is expensive, while our palm oil is cheaper," Trade Minister Enggartiasto Lukita told reporters last month.

According to a study by the Malaysia Palm Oil Council, oil palms occupy 9.2 million hectares of agricultural land and produces 31.8 percent of global oils, while soybean and rapeseed crops require 10 times this amount of land to produce similar yields.

"This is an unhealthy competition … If it [palm oil] is disturbed, then we will also disturb the EU," Enggartiasto said, adding that the ministry plans to ban fisheries from the EU if the draft is approved.

Deforestation

Vincent Guerend, EU Ambassador to Indonesia and Brunei Darussalam, however, said the union is considering to progressively replace food-based biofuels by more advanced ones, such as electricity, to prevent land-use changes affecting peatlands and tree cover.

"The EU was the one to promote biofuel as renewable over 10 years ago. But because EU is such a big market, it has some very strong pull effects—negative effects to be exact," Vincent said.

According to Vincent, food prices are rising due to increasing land use for palm plantation that reduces available land for food crops. The expansion also contributes to deforestation, threatening species including elephants and orangutans.

Data from the Central Statistics Agency (BPS) shows that land used for palm plantation rose from only 4 million hectares in 2000 to 11.9 million hectares in 2017. That figure is predicted to increase to 13 million hectares by 2020.

A research study by the European Commission also shows that greenhouse gas emissions from biodiesel are more than three times higher than those from conventional diesel engines, when indirect effects are considered.

New Markets

Indonesia shipped out the highest value of palm oil ever in 2017, contributing to the year’s $12 billion trade surplus.

According to BPS, palm oil exports and its derivative products reached $23 billion, up 26 percent from $18 billion in the previous year. The increase was in line with higher sales in non-traditional markets, according to a report by the Indonesian Palm Oil Association (Gapki) released in January.

The export volume of palm oil to Africa countries jumped nearly 50 percent to 2.3 million tons in 2017 from 1.5 million, while exports to Middle Eastern countries also increased by 7 percent to 2.1 million tons from 1.9 million, the report showed.

China — facing a threat of declining edible oil supply in trade wars with the United States — has also promised to increase palm oil imports from Indonesia by up to 500,000 tons per year. China bought 3.73 million tons of Indonesian CPO last year, from 3.23 million tons in 2016.

"When we talk about the importance and significance of the EU on palm oil, this is the reality, which means the worst scenario can lead to a situation that palm oil can live without the EU. The question is of course whether the EU can live without palm oil," Mahendra said.

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