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Indonesia imposes mandatory domestic sales on palm oil

Reuters - January 28, 2022

Bernadette Christina Munthe and Fransiska Nangoy, Jakarta – Indonesia has imposed a rule starting Thursday for a mandatory portion of palm oil to be sold domestically at a maximum price of Rp 9,300 (US$0.6465) per kilogram for crude palm oil (CPO) and 10,300 rupiah per kg for olein.

The requirement comes as the world's top producer and exporter of palm oil tries to curtail a rise in domestic cooking oil prices that have climbed about 40 percent from a year earlier, in line with high global CPO prices.

A so-called domestic market obligation (DMO) will be applied to all cooking oil producers, which must sell 20 percent of their planned exports to the domestic market, Trade Minister M. Lutfi told a virtual briefing on Thursday.

"With this policy, we hope cooking oil prices will be more stable and affordable for the people while remaining profitable for sellers, distributors and producers," Lutfi said.

Benchmark Malaysian palm oil futures surged to all-time highs this week, in part due to a threat by Indonesia to control shipments.

Lutfi said the national cooking oil demand is estimated at 5.7 million kiloliters in 2022.

Trade Ministry Foreign Trade Director General Indrasari Wisnu Wardhana added that the government was considering setting a similar requirement on other palm oil-related products, besides CPO, olein, used cooking oil and oil residues.

"We want to make sure that the raw materials for the domestic industries will remain here," he told the briefing, adding that amid high commodity prices, producers tended to prefer exports.

The situation was similar with thermal coal shipments, which Indonesia suspended for a month over firms' failures to meet a coal DMO, worrying major coal importers, as the country took drastic measures to ensure domestic supply to keep power plants running.

Stabilizing measure

The maximum domestic price policy for palm oil was also needed due to high global prices, which local producers referred to when selling their products.

Asked how long the DMO will be imposed on palm oil, Wisnu said "until prices return to a stable condition like before."

Togar Sitanggang, deputy chairman of Indonesian Palm Oil Association (Gapki), said the policy may result in a drop in February exports.

"January exports should be okay, but maybe impacts will be seen in February because there could be exports commitments that couldn't be met due to the domestic obligation requirement," he said.

The government had earlier imposed an export permit requirement for international palm oil shipments, which could be obtained after companies declared their domestic distribution plan for six months.

Wisnu said there had been no exports in recent days as the government was verifying the companies' distribution plans as part of the permitting process.

The ministry also announced on Thursday that it will impose a set of maximum retail prices for cooking oil starting from Feb. 1.

Palm oil prices surge

Malaysian palm oil futures extended gains to a third session on Thursday after Indonesia imposed the DMO.

The benchmark palm oil contract for April delivery on the Bursa Malaysia Derivatives Exchange gained 2.10 percent to 5,441 ringgit per ton by closing time.

The contract rose as much as 3.17 percent during the session to hit an all-time high of 5,500 ringgit a ton before cooling towards the closing level.

The Malaysian palm contract rose on the announcement, but came off the highs as the portion set for the domestic market was smaller than the anticipated 25 percent, a palm oil trader said.

Prior to the Indonesian policy announcement, palm oil was also supported by rising tension between Russia and Ukraine, which had pulled crude oil, and in turn edible oil, prices up.

On the Dalian Commodity Exchange (DCE) in China, palm oil contracts gained 2.87 percent and its most-active soyoil contract rose 2.23 percent. On the Chicago Board of Trade, soyoil prices were up 0.36 percent.

Palm oil is affected by price movements in related oils as they compete for a share in the global vegetable oils market.

In the energy market, oil prices fell as investors cashed in profits from the 2 percent gains in the previous session after the United States (US) Federal Reserve indicated an interest rate hike in March, leading to correction in surging energy markets.

Crude oil prices affect palm oil, as it is an option for biodiesel feedstock.

The Fed's signal also weakened emerging market currencies, including the Malaysian ringgit, which helped palm prices go higher. Weaker ringgit makes palm more attractive for foreign buyers.

Source: https://www.thejakartapost.com/business/2022/01/28/indonesia-imposes-mandatory-domestic-sales-on-palm-oil.htm