Indonesia’s ban on exports of crude palm oil (CPO) and cooking oil is expected to cause a fall in domestic prices due to a supply glut and drive prices up in other markets such as Malaysia, Fitch Ratings said in a note.
However, the ban is likely to be short-lived due to the impact it could have on Indonesian producers’ profitability and the livelihood of millions of workers, it said, adding that rated issuers in Indonesia have headroom to absorb the impact of a temporary ban, but credit risks will increase if restrictions extend to several months.
Indonesia banned the export of CPO, cooking oil, refined, bleached and deodorised (RBD) palm oil, and RBD palm olein from 28 April to improve availability and reduce prices of cooking oil in the local market. According to the published regulation, it is a temporary restriction and will be reviewed periodically.
The latest step follows the imposition of the Domestic Market Obligation (DMO) in January 2022, which required producers to supply a portion of their output to the local market to get export permits, and its replacement with higher export levies in March, which proved inadequate in improving domestic supply.
The ban is likely to widen the spread between Malaysian and Indonesian prices.
The Malaysian spot benchmark surged to over USD1,900 per tonne (t) in early March 2022 and has averaged around USD1,600/t since (2021 average: USD1,068/t). CPO prices for Indonesian producers, however, were significantly lower due to the export levy and tax of over USD500/t imposed by the government. Indonesia exported a total of 34 million t (mt) of palm oil, including 3mt of CPO, in 2021. Domestic cooking oil demand growth is likely to be less than 1mt in 2022.
“We think the export ban is unlikely to extend beyond a month or so. CPO prices are likely to fall sharply as the domestic market will be unable to absorb the increased supply, straining the country’s storage infrastructure,” Fitch analysts said in the note.
Tanks in Indonesia would be full within a month, forcing CPO mills to cut output, according to the secretary-general of GAPKI, Indonesia’s biggest palm oil association. This will hurt small farmers, numbering roughly 3 million as of end-2021, in addition to larger producers, which employ another 4.5 million workers.
“We think the government will aim to balance the need to cut cooking oil prices with the interests of small farmers and plantation workers,” they added.