A Case Study for the EU: The Double Bind of Biodiesel Expansion and Food Security Crisis

Introduction

Q1 2022 Export Performance of Malaysian Palm Oil

Malaysia recorded a promising export performance for Q1 of 2022. The export volume of Malaysian palm oil products reached 3.5 million MT, with an export value of RM19.74 billion. As for the total export of Malaysian palm oil as well as its derivatives, the export volume for Q1 2022 reached 5.6 million MT, with an export value of RM30.3 billion. The export of Malaysian palm oil and its derivatives increased 13.9 % Y-O-Y. Its export value increased 65.7% Y-O-Y with an increase of RM12 billion[1].

This stellar export performance is driven by a multitude of factors. Shortage of sunflower oil due to a barrage of geopolitical conflicts between Russia and Ukraine contributes to the principal demand driver. The Black Sea region accounts for 60% of world sunflower oil output and 77% of exports[2]. With its production halted, the shortage of sunflower oil has sent the edible oils market into turmoil, particularly in the European market that is predominantly sunflower oil users. Following this, the shipments of goods via the Black Sea have also been halted due to its extremely high risk.

Indonesia, the biggest producer of palm oil started curbing its export of the commodity following a strong surge in the pricing since November 2021. There had been serious concerns about the shortage of cooking oil for its citizens, despite the country being the top palm oil producer in the world. With the grave concern to meet its domestic demand, its government announced a Domestic Market Obligation (DMO). The Indonesian palm oil producers were required to sell 20% of the planned exports to the domestic market ts government. This became effective on the 27th of January 2022.

Just two months later, Indonesia increased its DMO from 20% to 30%[3]. However, this restriction was short-lived as the Indonesian government removed the restriction, in the following week and instead raised its export levy from US$375/tonne to US$575-675/tonne.[4]

However, the strongest measure from Indonesia in controlling its domestic supply and prices of cooking oil was delivered in April 2022. Its government announced an export ban on all palm oil products which came into effect on the 28th of April 2022. This came following a persistent scarcity of cooking oil despite the various policy changes that have been implemented in the months prior.  The supply shortage for its domestic use drove the prices of cooking oil in Indonesia to an all-time high of 22,000 rupiahs per liter (US$1.52)[5].  This export ban sent shockwaves to the global edible oils market as it further compounded the shortage of global palm oil supply. However, the ban was been lifted on May 23rd, 2022, despite the prices of cooking oil have not gone down to its ceiling price of 14,000[6] rupiahs per liter (US$0.96).

Interestingly, in the latest update on palm oil export from Indonesia, its Trade Minister has announced on the 8th of June, 2022 that the palm oil export tax and levy will be capped to USD$488/tonne[7]. Although this news is welcomed by the palm oil exporters in Indonesia, (as of the publication date of this article) no timeline has been given for the implementation of the revised export tax and levy.

Biodiesel and its demand from the EU

The demand driver for biodiesel in the EU has been its application in the transport sector. Transitioning away from fossil fuels into biodiesels is essential to the bloc’s aspiration in reducing Greenhouse Gas (GHG) emissions.

As for the 27 nations in its bloc, three nations have the strongest foothold in the import of Malaysian palm-based biodiesel. Spain, Netherlands, and Belgium show a consistent trend in importing a substantial volume of palm-based biodiesels.

Figure 1: Global Import of Biodiesel from Malaysia- January to April 2022[8]

As shown in Figure 1, from January to April 2022, three European nations commanded 83.5% of the total biodiesel imported from Malaysia. Spain, Netherlands, and Belgium imported a total of 95,342 MT of Malaysian palm-based biodiesel. The import value of biodiesels by these nations is RM618 million (€133.1), confirming their status as global powerhouses in the biodiesel market.

Another Malaysian palm oil product that is closely associated with Malaysian palm-based biodiesel is the Used Cooking Oil (UCO). UCO is of reasonable value in the EU due to the bloc’s commitment to the Renewable Energy Directive (RED). As the UCO is deemed as waste and no longer fit for human consumption, it is included for ‘double counting’ towards the RED, incentivizing the industrial users to source the waste as its biodiesel feedstock.

The use of UCO as a biofuel feedstock rose from 0.67 million MT to 2.44 MT from 2011-to 2016[9]. The Netherlands has been spearheading the increase in the import of UCO from Malaysia. The nation imported 22,356 MT of Used cooking oil (UCO) for the first four months of 2022. This is a stark increment of 273% Y-O-Y, indicating a promising potential for further market development. The import value of this product category for January to April 2022 is RM132 million, an increment of almost sixfold from a mere RM24 million in the same period in 2021.

Figure 2: The export trend of palm-based waste products to the Netherlands[10]

The Netherlands has also been spearheading the increase in the import of palm-based waste products from Malaysia. Apart from the UCO, the Netherlands imported palm-based waste products from Malaysian such as the Palm Oil Mill Effluent (POME) and Spent Bleaching Earth.

The import of POME by the Netherlands has also increased exponentially, with 398% Y-O-Y. POME is also a valuable feedstock in biodiesel in Europe, though certain EU nations like Germany have begun to exclude POME in its ‘double counting’ mechanism[11].

Demand/Supply

Region/Sector

2019

Potential for 2030

Mton/yr

Mton/yr

Demand

EU & UK

2.8

6.1-6.4

Global

5.12

Data unavailable

Potential global demand as a transport fuel

Data unavailable

27-37

Supply

EU & UK (excluding imports)

0.7-1.2

1.7

Imports to EU & UK

1.4

1.4

Total supply EU & UK

2.1-2.6

3.1-3.3

Table 1: The Demand and Supply of UCO in 2019 and its potential demand in 2030[12]

Food or Fuel Conundrum

Other than palm oil, rapeseed, soybean, and sunflower oils also accounted for some of the largest consumed oils in the EU-27, with consumption going into both food and non-food applications including biodiesel, all of which facing supply shortages. The Russia-Ukraine conflict had created a significant supply vacuum of approximately 1.5 million MT of Ukrainian sunflower oil in the EU (88% of the EU total sunflower oil imports) annually, affecting the food sector and contributing to the soaring edible oils prices. Cooking oil shortages have been reported throughout the European region. Supermarket chains in the region have reportedly been limiting cooking oil purchases. A major supermarket chain in the UK had also reversed their ‘No Palm Oil’ stance and allowed products containing sustainably sourced palm oil at their supermarkets.

The war in Ukraine had reignited the age-old debate on biofuels’ impact on food security. It has long been argued that 1st generation of biofuel feedstocks could potentially affect food security, considering that grains and edible oils account for the major feedstocks used in the production of biofuels. It is also argued that the biofuels industry contributes to the stability of both food and animal feed through oilseed crushing. Nevertheless, the current situation had made one aspect clear, that current food demand outweighs fuel demand.

Palm Oil Supply Situation in Malaysia and Indonesia

Malaysia has been struggling with its CPO production since the start of Covid-19. In 2021, Malaysian production of CPO amounted to 18.1 million MT, a drop in production by one million MT compared to the previous year. Although, production had slightly recovered from January to April 2022, with Malaysia producing 5.2 million MT in contrast to the same period of the previous year at 5.1 million MT.

Production in Indonesia however, recovered in 2021, producing 44.7 million MT in the same year, an increase of 3.3% compared to 2020 according to Oil World. Even though production recovered, palm oil export policies from Indonesia had created uncertainties of supply in the market, exacerbating the commodity price throughout the world.

However, there are still uncertainties about whether Malaysia could recover its CPO production. Labour shortages have been plaguing the Malaysian palm oil industry. “The onus now is for the plantation companies to start sourcing for their estate workers,” according to Mr. Nageeb Wahab, CEO of Malaysian Palm Oil Association (MPOA) said in a statement, adding that most plantation companies are at risk of losing between 15 and 25 percent of production this year, and are likely to fall to last year’s production shortfall.

Resumption of the Indonesian palm oil trade would mean higher palm oil stocks for Malaysia as readily available stocks from Indonesia are under pressure to be cleared, and would undercut Malaysian suppliers to reduce their stocks. In this regard, Malaysian CPO stocks would likely increase in the coming months, and with it, the price is likely to stabilize.

Conclusions

The demand for palm-based biodiesel from Europe is a result of its commitment to reducing its Greenhouse Gas (GHG) emission. The strong uptake of biodiesel and its feedstocks such as UCO and POME from Malaysia also indicate that there are strong opportunities to meet the needs of this market. However, this golden opportunity is clouded by an ever more pressing need for food security. The Indonesian export ban, albeit temporary, as well as severe sunflower oil shortage following the myriad of complications from the Russian-Ukraine war, have contributed to an even more volatile market. With the supply chain yet to fully recover following the Covid-19 pandemic, most global nations are on the brink of collapse in their respective food security[13]. With the double bind of food and fuel conundrum, one can expect history to repeat itself, that the need for food will triumph.

Prepared by:Hajar Shamsudin and Mohd Fazari Radzi


[1] Export Statistics, Malaysian Palm Oil Board (MPOB)

[2] https://www.reuters.com/business/energy/ukraine-crisis-threatens-sunoil-supply-fuels-vegoils-rally-2022-02-23/

[3] https://www.icis.com/explore/resources/news/2022/03/09/10741687/indonesia-tightens-export-curbs-on-palm-oil-derivatives-via-30-dmo/

[4] https://www.thestar.com.my/business/business-news/2022/03/17/indonesia-makes-u-turn-to-replace-palm-oil-export-curbs-with-levy

[5] https://www.aseanbriefing.com/news/indonesia-bans-the-export-of-palm-oil-impacting-global-food-prices/

[6] https://www.thestar.com.my/aseanplus/aseanplus-news/2022/06/09/call-for-indonesian-govt-to-leave-cooking-oil-price-to-market-forces

[7] https://www.reuters.com/markets/commodities/indonesia-cut-maximum-palm-oil-export-tax-levy-combined-488t-trade-minister-2022-06-07/

[8] Export Statistics, Malaysian Palm Oil Board (MPOB)

[9] OFI Magazine (Sept/Oct 2019)

[10] Export Statistics, Malaysian Palm Oil Board (MPOB)

[11] https://www.argusmedia.com/en/news/2218296-se-asian-pome-sellers-seek-support-from-eu-legislators

[12] https://www.transportenvironment.org/wp-content/uploads/2021/07/CE_Delft__200247_UCO_as_biofuel_feedstock_in_EU_FINAL%20-%20v5_0.pdf

[13] https://www.worldbank.org/en/news/statement/2022/04/13/joint-statement-the-heads-of-the-world-bank-group-imf-wfp-and-wto-call-for-urgent-coordinated-action-on-food-security

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