Indonesia’s biodiesel push poses risks to the palm oil supply chain

As the world’s largest producer of palm oil, Indonesia has sought to capitalize on using the commodity as an alternative source of renewable energy by adopting biodiesel, a blend of palm oil and fossil fuel-based diesel. The country’s biodiesel policy was first implemented in 2008starting with a 2.5 percent biodiesel blend (B2.5). Over the years, the share of palm oil in the biodiesel blend has gradually increased, with the current blend standing at 35 percent (B35).

Leveraging its vast palm oil reserves, the country plans to expand the mandate for biodiesel blends 40 percent from next year. In addition, President-elect Prabowo Subianto has also set an ambitious goal to introduce a B50 biodiesel blend within the next five years, with a target of implementation in 2029.

Indonesia’s biodiesel initiatives aim to reduce dependence on imported fossil fuels, boost domestic palm oil consumption and support the agricultural sector. These efforts are also part of the country’s broader strategy to reduce carbon emissions and transition to renewable energy, while advancing both economic and environmental goals. However, Indonesia’s plan to increase the blending ratio of biodiesel in the coming years has raised concerns about the global palm oil supply chain, given the country’s important role in the industry.

In 2023, Indonesia produced 46 million tons of palm oil, which amounts to 59 percent of the world market. This is reported by the Indonesian Palm Oil Association (GAPKI). 23.2 million tonnes of domestic consumption last year, 45.9 percent was used for biodiesel, followed by 44.4 percent for food and 9.7 percent for oleochemicals, such as cosmetics, household and industrial products. This was the first time that biodiesel consumption of palm oil took place surpassed its use for food, raising alarms about food safety, especially considering the cooking oil scarcity experienced in 2022.

GAPKI noted that the implementation of the B35 blend has increased palm oil consumption for biodiesel 17.68 percentfrom 9.048 million tons in 2022 to 10.65 million tons in 2023. With the B40 mandate starting next year, the Indonesian Biofuel Producer Association expects this to further drive crude palm oil (CPO) consumption to 14 million tons for biodiesel.

Despite guarantees from the Department of Agriculture that it will maintain adequate supply while dealing with the increase in the biodiesel mandate, concerns remain that the increase in production rates has not kept pace with growing consumption.

While the government has pushed to increase domestic consumption of crude palm oil through biodiesel blends in recent years, Statistics Indonesia (BPS) showed that the country’s palm oil production remained relatively stable. stagnates with only less than 1 percent annual growth since 2020. Last year’s manufacturing output was also still lower than 47.1 million tons produced in 2019, the last full year before the COVID-19 pandemic.

At the same time, according to a GAPKI reportthe compound annual growth rate of domestic palm oil consumption from 2019 to 2023 rose to 8.5 percent. Moreover, palm oil consumption for biodiesel increased significantly over the same period, by 17.5 percent per year, while food consumption grew by only 1 percent.

With the increase in domestic consumption, especially for biodiesel, and static production levels, the government may have two options to address the problem: tightening export quotas for CPO products and increasing domestic palm oil production.

Palm oil is, next to nickel and coal, one of Indonesia’s most important export commodities, the trade value of which is extensive $25 billion last year. However, the country has one decrease of palm oil exports, fell from 33.1 million tonnes in 2022, when the B35 mandate was fully implemented, to 32.2 million tons in 2023. Part of this also includes the delaying question from European countries concerned about the social and environmental impacts of Indonesian palm oil, especially the Netherlands, Spain and Italy, which are among the country’s top 10 palm oil export destinations.

Although there has been no official statement from the government yet, export quotas on palm oil and derivatives are expected to be tightened to meet domestic consumption needs if production yields remain low. This step is consistent with previous actions by the Indonesian government, such as the temporary palm oil ban prohibit in 2022, showing a preference for prioritizing domestic consumption over exports.

Indonesia’s three largest palm oil export destinations – India, China and Pakistan – rely on Indonesian palm products for their vegetable oil consumption. The three countries together formed a whole 46.7 percent of total Indonesian exports last year.

With the potential for stricter domestic policies in Indonesia, stricter export regulations could push countries to seek alternative raw materials from other palm oil producers such as Malaysia or other suppliers. This shift could lead to a potential shortage of palm oil in the global market, raising prices and affecting industries and consumers around the world.

Another possible measure for the Indonesian government is to increase domestic palm oil production while maintaining strict environmental standards. Despite the government’s 2018 moratorium regarding the establishment of new oil palm plantations in peat areas, data from BPS show that there is a increase in plantation areas, attributed to the expansion of “registered” large private plantations.

Although recorded data indicate a slight expansion of plantation areas, national palm oil productivity has declined. In 2019, 14.46 million hectares of plantations yielded 47.12 million tons of palm oil. However, not until 2023 46.9 million tons were produced over a larger area of ​​15.43 million hectares. This slowdown in productivity is also attributed to aging trees in the country’s palm oil plantations, resulting in declining yields.

While Indonesia’s push for biodiesel is commendable, the government must carefully manage the complexities of the palm oil supply chain and its overarching global impact. A strategic balance is essential to meet domestic demand and secure the global market while maintaining the economic stability of the palm oil sector. By doing this, Indonesia can achieve its ambitious energy goals through the adoption of biodiesel, without jeopardizing the broader economic and environmental impacts of its vital palm oil industry.