The authorities and local trade organizations in major palm oil-producing countries have voiced opposition to the EU Parliament’s newly proposed due-diligence requirements to ensure deforestation-free commodity supply chains. The stringent sustainability credentials law will have a debilitating impact on palm oil exporters, particularly in Indonesia and Malaysia.
Palm oil is one of the most popular and least expensive plant-based oils in the world. It is used across the globe for a wide range of packaged food products, ranging from cooking oil and baked goods to confectionary, sweets and snacks. Palm oil also finds use globally in the production of animal feed, soaps, detergents, cosmetics and biofuels. Indonesia and Malaysia are the leading global producers of palm oil, contributing more than 80% of global output. Nigeria, Thailand, Colombia, Côte d’Ivoire, Cameroon, Guatemala, Honduras and Papua New Guinea contribute to the remaining share.
Since the first quarter of 2022, palm oil prices have spiked due to the resurgence in domestic demand in Indonesia, the single-largest global producer. As a locally produced and economical cooking oil, Indonesians also widely utilize palm oil. Following the ease of Covid-19 restrictions, domestic on-premise and retail demand for cooking oil surged. Moreover, biofuel production using palm oil has surged in recent years, spurred by government subsidies.
Concurrently, the confluence of climate change, Covid-19 and the Russia–Ukraine conflict disrupted the global supply of edible oils, such as sunflower oil, soybean oil and rapeseed oil. This catalyzed international demand for alternatives, including palm oil, thereby escalating the international prices of the commodity. Though the Indonesian Government restricted exports to keep domestic palm oil prices at bay, the bans were soon recalled as domestic inventories piled up and global food inflation skyrocketed in 2022.
However, the palm oil industry in these countries has been under fire due to reports that palm plantations encroach into forest land, which is the habitat of endangered wildlife species. In January 2023, the EU Parliament proposed to hold individual businesses responsible for ensuring that products shipped to the EU are not linked to deforestation. The law applies to all overseas commodity exporters, ranging from cocoa suppliers in West Africa to palm oil suppliers in Southeast Asia.
The EU bloc is one of the biggest consumers of palm oil products. Consequently, the EU Parliament’s new traceability and due diligence norms will translate into widespread labor loss and cost escalation for palm oil farmers and traders, particularly in Indonesia and Malaysia. Small-scale farmers will struggle to comply with the sustainability law and obtain certifications. Large palm oil exporters and traders also face procurement challenges due to the varying harvesting standards and farming methods across regions. The added costs of compliance and certification will eventually be passed on to the end consumers in the EU, thereby sapping the price advantage of palm oil over other vegetable oils.
While the US and UK Governments also passed similar regulations in 2021 to curb the cultivation of commodities that catalyze illegal deforestation, the EU’s law is more hard-hitting. Food applications of palm oil and soybean oil in the EU bloc are thereby expected to decrease through the decade, thereby generating opportunities for other vegetable oils, such as rapeseed oil and sunflower oil. Consequently, GlobalData projects that the global edible oil market will expand by about 9% value CAGR over 2022-2026, outpaced by the value sales growth of the sunflower oil segment. Over and above this, the EU’s Renewable Energy Directive II of 2022 proposed to gradually phase out palm and soybean oil-based biofuels by the year 2030 due to their link to forest degradation.
Unsurprisingly, the EU Parliament’s proposal for deforestation-free palm oil has attracted strong protests from the Indonesian Government and the local trade organisation, the Indonesian Palm Oil Association (GAPKI), who perceive it as discrimination of Western economies against key trade partners in The Association of Southeast Asian Nations (ASEAN). Late last year, the Council of Palm Oil Producing Countries (CPOPC) also called for an international standard for deforestation and the international acceptance of the Malaysian Sustainable Palm Oil certification scheme to help suppliers comply with the new sustainability laws. In the long term, producers are expected to conform to the new sustainability regulations and focus on premium-certified palm oil.
Notably, the CPOPC anticipates the implementation of the EU Parliament’s proposal to be postponed in light of the global cost of living crisis. (*)
Source: retail-insight-network.com