Indonesia’s Flip-Flops Provide Malaysia an Advantage in Leading Palm Oil Market

By Rajendra Jadhav and Mei Mei Chu

MUMBAI/KUALA LUMPUR (Reuters) – Indonesia’s inconsistent palm oil export policies may allow Malaysia to become the leading supplier to India, the largest buyer of the edible oil, according to industry sources.

As the world’s largest palm oil producer, Indonesia’s erratic export strategies, including a recent ban announced on April 22, have led Indian consumers to lean more on Malaysia, the second-largest producer, which produces less than half of Indonesia’s output.

In response to Indonesia’s ban, Malaysia is strategically positioning itself by reducing palm oil export taxes by up to 50%, according to Malaysia’s Commodities Minister Zuraida Kamaruddin.

The combination of these lowered export taxes and Indonesia’s ban may cause Indonesia’s share of palm oil exports to India to drop to 35% in the current marketing year, which concludes on October 31, down from over 75% a decade ago, as estimated by the Solvent Extractors’ Association of India (SEA), a vegetable oil trade organization.

"Malaysia is the biggest beneficiary from Indonesia’s unpredictable policies," stated B.V. Mehta, executive director of SEA.

"As Indonesia is absent from the market, Malaysia is selling more at nearly record-high prices."

In the first five months of the 2021/22 marketing year, India imported 1.47 million tonnes of palm oil from Malaysia, compared to 982,123 tonnes from Indonesia, according to SEA data. Estimates for May indicate that India imported around 570,000 tonnes of palm oil, with 290,000 tonnes from Malaysia and 240,000 tonnes from Indonesia.

If Indonesia’s export ban is maintained for another two weeks, India’s palm oil imports in June could drop to 350,000 tonnes, predominantly sourced from Malaysia.

A SHIFT IN SUPPLY

This change in Indian palm oil imports could disrupt an established trend of Indonesian supply dominance in South Asia. Indian oil refiners are now cautious and aim to safeguard their supply chains from policy fluctuations, especially after Indonesia’s interventions in the market since 2021.

"You can’t solely depend on Indonesia to run a business. Even if Indonesia offers discounts compared to Malaysia, it is important to secure supplies from Malaysia to mitigate the risks of Indonesia’s unpredictable policies," explained a Mumbai-based refiner.

"Refiners often commit to sales of finished products in advance and can’t back out just because raw materials are unavailable," he added.

However, Malaysia’s tight palm oil inventories remain a concern, especially due to a persistent labor shortage that has impacted plantation yields.

“Malaysia has limited stocks. Many producers have already sold their product in the near term," mentioned an official from a Malaysian planter with operations in both Indonesia and Malaysia. Given that Malaysia produces about 40% of Indonesia’s output, it cannot fully replace Indonesian supplies.

Nonetheless, Indian oil consumers are eager to boost their deals with Malaysia and lower their dependence on Indonesia.

"Although Indonesia might lift the export ban sometime this month, there’s no assurance it won’t impose restrictions again. Malaysia’s export policy is much more stable, which is what we prefer," said an anonymous Indian buyer.