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Current Affairs

Indonesia’s palm oil crisis

Date: 09 April 2022 Tags: Miscellaneous

Issue

The Indonesian government has put restrictions on export of palm oil in order to handle shortages in the country.

 

Background

Indonesia is the largest producer of palm oil in the world. About 60 percent of all palm oil in the world comes from Indonesia.

 

Details

It is for the first time that Indonesia has been forced to impose price control and export regulations on a product of which it is the largest producer.

 

Reasons for controls

  • The domestic prices of packed palm oil have grown faster in the period between March 2021 and March 2022. 

  • The government imposed price caps, which resulted in the product disappearing from stores amid report of hoarding.

  • Exporters were required to sell 20 percent of their planned shipments in the domestic market compulsorily for a fixed price. It has now been raised to 30%.

 

Reasons for shortages

  • The most possible reason looks to be shortage of cooking oil in international market. The war in Ukraine has closed down sunflower oil exports from the region.

  • The trade of sunflower oil from Russia has been curtailed owing to sanctions imposed by western nations.

  • Dry weather in South America has caused reduced production of soybean oil, especially in countries such as Argentina and Brazil.

  • The shortage in production and supply chain tightness has translated in higher demand for palm oil, which is majorly produced in Indonesia and Malaysia.

 

The bio-fuel rule

  • Indonesia has made it compulsory to blend 30% palm oil with diesel in order to reduce its import bills.

  • As cost of fossil fuels is increasing, the demand for palm oil for blending purpose is also growing in the country as well as outside.

 

Impact on India

  • India is the largest importer of vegetable oil, of which palm oil is 8-9 mt, followed by soybean (3-3.5 mt) and sunflower (2.5). 

  • The export control and blending rule will result in lower palm oil imports from Indonesia in the coming days.