A palm oil factory in Sumatra, Indonesia, one of the main industries on the island. Photo: iStock

All roads lead to Indonesia’s April 17 presidential and legislative elections – even through the vast plantation country of Sumatra where President Joko Widodo and his government unfairly get the blame for the low world market prices of palm oil and rubber.

With Sumatra again looking to be the only one of the eight main islands to give presidential challenger Prabowo Subianto a win, Maritime Coordinating Minister Luhut Panjaitan’s recent outburst against pending European Union (EU) restrictions on the use of palm oil for biofuel was perhaps understandable.

So too is the decision by Indonesia and the two other members of the Tripartite Rubber Council  (ITRC) – Malaysia and Thailand – to cut natural rubber exports in an effort to stabilize the commodity’s global price, which has now steadied after plunging to as low as US$1.2 a kilogram late last year.

According to one recent survey, Prabowo leads Jokowi 50.5% to 37% across Sumatra’s 10 provinces, with 12.5% undecided. That’s wider than the margin the retired general enjoyed in 2014 when only 129,000 votes separated the two candidates.

Back then, Aceh and West Sumatra made the difference, with little between them in the three big provinces of North Sumatra, South Sumatra and Lampung, the latter home to five million mostly pro-Jokowi Javanese trans-migrants.

Indonesian palm oil is a controversial industry, but palm oil plantations are one of the major contributors to the economy. Photo: iStock

Panjaitan, a native Sumatran and close presidential adviser, last month threatened to ban selected EU imports if the bloc seeks to place stricter limits on how palm oil is used in biofuel as part of a revised Renewable Energy Package (RED II) adopted by the European Parliament last December.

He later also warned Indonesia may pull out of the landmark 2015 Paris  Climate Change Agreement. “If the United States and Brazil can exit from the climate deal, we will consider it as well because it is linked with the interests of the people,” he said.

It hasn’t helped that world crude palm oil prices have been on a downward trend over the past year, sliding from US$700 a tonne in March 2018 to $539 in November, before recovering slightly to the current level of $570.

Rubber prices have stayed stubbornly low as well, affecting estates in South and North Sumatra, Riau and Jambi. Earlier this month, the ITRC agreed to cut exports by 240,000 tonnes over a period of four months in an effort to push prices back over the $1.6 a kilogram mark.

More than 20 million Indonesians, in Sumatra and Kalimantan, rely on palm oil for their livelihood. But plantation companies are under fire in conservation-conscious Europe for causing rampant deforestation and endangering the habitats of the orangutan and other rare wildlife.

In Indonesia’s defense, officials point to a moratorium on new licenses for oil palm plantations, which Widodo finally signed last year, three years after he pledged to do so in the wake of the 2015 fire and haze crisis that affected Southeast Asia.

Producers complain that in many cases, the illegal logging that continues to go on in their concessions is the work of the military, the police and other local power-holders. “We’re getting the blame,” said a Sumatra executive, “but a lot of the time the land is not being used for palm oil.”

“We suspect that this is all about business interests (of European vegetable oil producers), rather than environmental issues,” said one Maritime Coordinating Ministry official, extolling the virtues of palm oil with its far higher yields than any other crop. After all, palm oil is cheaper than sunflower oil.”

President Widodo and Malaysian Prime Minister Mahathir Mohamad sent a joint letter to the European Commission and Parliament on April 5, protesting the actions being taken against Southeast Asia’s largest agricultural export and threatening trade sanctions.

“Both our governments’ view this as a deliberate, calculated and adverse economic and political strategy to remove palm oil from the EU marketplace,” they said. “Should this delegated regulation enter into force, our governments shall review our relationship with the EU as a whole, as well as its member states.”

Comeback kid: Former Malaysian prime minister Mahathir Mohamad, 92, speaks during an interview with Reuters in Putrajaya, Malaysia, March 30, 2017. Photo: Reuters/Lai Seng Sin
Malaysian prime minister Mahathir Mohamad has taken a joint approach with Indonesia to EU proposals about palm oil. Photo: Reuters/Lai Seng Sin

wants the two countries to mount an aggressive diplomatic campaign, including taking their case to the Geneva-based World Trade Organization (WTO). “We have told the EU that we will have to retaliate if they continue with this unfair discrimination against palm oil,” he said.

RED II does not explicitly prohibit the use of palm oil as biofuel, or even restrict trade. But it does vow to limit consumption by the transportation sector of biofuel produced from food and feed crops to 7% by 2021 and to phase it out entirely by 2030.

On top of that, palm oil-based biodiesel will also no longer be considered part of the renewable energy mix and therefore eligible for existing subsidies.

The restrictions stem from the passage through the European Parliament of Resolution 2016/2222, urging member states to take actions aimed at protecting disappearing rainforests and the use of sustainable palm oil, already more regulated than any of the other vegetable oils.

Former Council of Palm Oil Producing Countries (CPOPC) chairman Mahendra Siregar has called for cooler heads, noting how Indonesian palm oil exports to Europe have fallen from 77% to only 16% of total production since 1990. “I don’t think the European palm oil market is very significant to Indonesia at the moment, and this is the mindset we must have,” he said recently.

The value of the EU’s 2018 palm oil imports from Indonesia dropped by 22% compared with 2017, but with Indonesian-refined biodiesel tallied in, the total figure was actually down only 2% compared with the previous year, despite the collapse in global prices.

Indonesian exports last year rose 8% to 34.5 million tonnes, valued at $20.3 billion, with India (24.5%), the European Union (16.1%) and China (12.01%) the three leading markets. Exports to Europe have been relatively stable at an average of 3.5 million tonnes, or €2.2 billion a year.

Analysts say while Panjaitan’s tough talk will be well received domestically, and show voters the government is concerned about the welfare of its plantation workers, it is unlikely to persuade the EU to change course and may even have a reverse effect.

The threats may also be empty. The minister indicated that aircraft produced by European companies could be a target of any boycott, but with the national carrier Garuda seeking to cancel an order for 49 of the troubled Boeing 737 MAX jetliners, its options are now limited.

Garuda already has 22 European Airbus A330s and 16 Franco-Italian ATR 72 turboprops, in addition to 43 A-320s and eight new A320neos flown by budget subsidiary Citilink – along with 27 of the planes already on order.

Crude palm oil (CPO) exports for food and beverages remain undisturbed, but limiting CPO-based fuel will put a dent in overall demand and deny growers the revenue they were expecting after expanding production from 20.5 million tonnes in 2008 to a then-record of 46 million tonnes in 2018.

Almost half of the EU’s imported palm oil is now used for biofuel, but with the bloc seemingly changing its policy, Indonesian producers are hoping that domestic consumption and increased shipments to India and China will help pick up the slack.

Spurred on by the government’s decision to use biofuel to reduce costly petroleum imports, domestic use of palm oil jumped to 13.4 million tonnes in 2018, with 4.3 million tonnes of that turned into biodiesel. Local consumption of so-called B20 fuel, or 20% palm oil, rose 72% compared with the previous year, or 3.8% of the total energy mix.

The government wants state oil company PT Pertamina to modify its two Sumatra refineries, Plaju and Dumai, which have a combined daily capacity of 300,000 barrels a day, to produce biodiesel in an effort to save as much as 23,000 barrels of imported crude oil a day.

Indonesia plans to increase its use of renewable energy from the current 13% to 23% of the energy mix by 2025, with biodiesel eventually absorbing about 30% of current total palm oil production. One palm oil company executive said: “There will be marginal increases in overall production over the next few years, but the moratorium will eventually cap it.”

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