Indonesia’s ban on palm oil export has hit the headlines and raised concerns about fuelling further inflation globally at a time when commodity and food prices across the world are already at their highest in years. The move by the Indonesian government has implications for India, too, given that Indonesia is the second-largest exporter of the commodity to India. Analysts and experts expect palm oil to become even more expensive in the months ahead, fuelling further inflation in India.
It is to be noted that palm oil prices have been climbing unabated for two years now, mostly on account of the global shortage of the commodity due to various reasons.
Here’s an explainer on why palm oil prices have been on a constant climb, why Indonesia has banned export of the commodity, and how it would impact various consumer-facing industries and hence, the end-consumers.
Why are palm oil prices rising?
Palm oil prices, according to brokerage firm Jefferies, have jumped 50 percent in the last 12 months and nearly tripled over two years. The rise in prices is the result of multiple factors.
The key price drivers, according to Jefferies, are weather conditions in top oil-producing nations, demand-supply balance of competing oils like soya bean, rapeseed, sunflower, etc., demand environment and mix of edible oils in consuming countries, and demand for palm-based bio-diesel, especially in Indonesia and Malaysia.
As per ICRA, palm oil accounts for about 40 percent of total edible oil consumption in India and 60 percent of imports. Almost all of India’s palm oil requirement is met by Indonesia and Malaysia. Indonesia though, was the largest exporter of palm oil to India historically, imports of the commodity from Malaysia increased in recent years. Currently, India imports less than 50 percent of its palm oil needs from Indonesia, which though lesser than Malaysia, is still substantial.
Production of palm oil in both the top exporter countries has been hit due to extreme weather conditions, followed by a chain of events that led to further shortage. A labour unrest in Malaysia also led to a shortage of the product last year. Indonesia and Malaysia also introduced the B30 and B20 biofuel mandates last year, which increased the number of vegetable oils mixed in fuel, leading to higher local consumption, leaving a lower exportable surplus.
As imports from the countries dwindled, the price of the commodity surged. A supply shortage of other edible commodities such as sunflower oil, and soyabean oil has also led to an increase in the prices of palm oil. Palm oil prices had started easing in January. However, with the Russia-Ukraine war, prices of the commodity climbed again. India imports 90 percent of its sunflower oil needs from Russia and Ukraine, and the ongoing war has led to a rise in demand for other edible oils, such as palm oil, and hence its price rise.
Indonesia’s ban on export of the commodity can now further tighten supplies of the product, leading to further price rise.
Why has Indonesia banned the export of palm oil?
Indonesia, much like most of the world, is grappling with inflation and a shortage of palm oil, given high exports of the commodity, which has further fuelled inflation in that country. Hence, in a bid to bring down the rising prices of food products and to plug the supply shortage, the country has banned the export of the commodity.
Rise in palm oil prices has been a cause of worry for the Indonesian government, which has made a series of interventions over the past few months, including capping local prices, providing higher subsidies, hiking export duty, and controlling exports through surveillance and documentation, etc, said a note by Jeffries.
Of late, there have been multiple protests in the country on rising food prices. According to reports, the country is also facing an acute shortage of edible oil including palm oil. To stem the rising prices of palm oil, the government banned its exports and removed retail price caps on the commodity, which are reported to have earlier led to the shortage of the commodity.
How will the development impact Indian consumers?
Indonesia’s palm oil export ban has huge implications for the Indian consumers, as it would lead to a further jump in prices of several daily-use items.
India is the second-largest consumer of vegetable oils globally, accounting for more than 10 percent of global demand. Palm oil is of importance, given it accounts for about 40 percent (normalised) share in India’s overall edible oil consumption basket, said Jefferies.
Furthermore, nearly two-thirds of India’s edible oil demand is met by imports, it added.
Palm oil is a key commodity for several products, such as soaps, shower gels, hand washes, shampoos, oral care products, and processed food products, such as noodles, biscuits, and frozen desserts. The commodity is cheaper compared to other edible oils, and hence, is used by the hotels, restaurants and caterers (HoReCa) industry too.“Palm oil is a key ingredient in the food processing industry. Rising prices of palm oil will impact costs and margins of several consumer companies,” said Amnish Aggarwal, director - research at Prabhudas Lilladher.
“We believe the impact would be seen most in categories, such as biscuits, noodles, cakes, potato chips, frozen desserts, etc,” he added.
A surge in palm oil prices means it would also become expensive to dine out. The restaurant industry is already grappling with a 10-12 percent increase in operational costs due to inflation. And now with prices of palm oil set to surge again, the industry might pass on the costs to the consumers.
How will this impact FMCG companies and QSRs?
The margins of FMCG companies and QSRs have been under stress for several quarters now, as they battle inflation across key commodities, while a tepid demand scenario makes it challenging to pass on the cost to consumers. A further price rise in palm oil, fuelled by the ban, can increase their troubles.
“FMCG staple majors such as Britannia, Hindustan Unilever, Nestle India and ITC would be amongst the key companies affected directly as a result of the ban and higher prices,” said Aggarwal.“QSRs like Westlife Development and Burger King can also feel the pinch, given the use of edible oil to cook/fry their patties/fries,” he added.