Global palm oil prices will not ease quickly due to domestic supply requirements for Indonesian palm oil exporters
Restrictive policies by the Indonesian government suggest that elevated global prices of palm oil will persist through Q3 2022. Since it is used as an input in a wide variety of daily consumer products such as chocolate, shampoo, and cosmetics, B2C firms that manufacture non-durable goods should expect elevated input costs in the coming months. High prices of palm oil will feed into inflation levels in importing countries, with low- and middle-income consumers being more severely impacted. Firms should expect pricing pressures to be more acute in India, Pakistan, and China since they are the largest importers of Indonesian palm oil.
The war in Ukraine created a global shortage of sunflower oil, resulting in a surge in demand for its closest substitute, palm oil. Indonesia plays a major role in fulfilling this demand since it accounts for over half of the global supply. The government placed a temporary export ban on April 28 to keep domestic inflation under control. The Indonesian government lifted the ban on May 23 but replaced it with a domestic market obligation (DMO) for Indonesian palm oil exporters. As per the DMO, companies must provide 30% of their supply to the local market. Only companies that can meet the DMO will be granted an export permit.
Indonesia’s palm oil export policy has had the desired effect on domestic inflation which has remained under control. However, global prices—which have risen sharply after the war—will remain elevated in Q3 due to uncertainty surrounding Indonesia’s palm oil export policy and Malaysia’s (second-largest producer) palm oil export tax. These pricing pressures will ease towards the end of Q3 as Indonesia will slowly open up its supply over the next couple of months after stabilizing domestic prices. Loosening restrictions by the Indonesian government and increasing supply by Malaysia will help to fill the global supply gap of palm oil.
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