The potential increase in the export levy on Crude Palm Oil (CPO) to 10 percent in Indonesia, as highlighted by the Indonesian Palm Oil Association (GAPKI), could have significant ramifications on the competitiveness of Indonesian palm oil in the global market. Here's an analysis of the key implications:

1. Competitive Disadvantage

• Reduced Global Competitiveness: Currently, Indonesia imposes a 7.5 percent levy on CPO exports. An increase to 10 percent would make Indonesian palm oil more expensive on the global market, reducing its attractiveness to buyers compared to palm oil from other major exporters like Malaysia and Thailand. These countries have lower export levies or more favorable terms for buyers, and the added cost in Indonesia could incentivize buyers to source palm oil from these alternative suppliers.
• Shift in Trade Flows: As the export levy increases, foreign buyers may opt to import more palm oil from Malaysia and Thailand, which could lead to a reduction in Indonesia's market share in key export destinations. This would affect Indonesian producers and exporters, making it more difficult for them to maintain or grow their businesses in the face of rising costs.

2. Impact on Local Producers and Exporters

• Economic Strain: Indonesian palm oil producers, particularly smallholder farmers, may face economic pressure if the increased levy leads to a slowdown in export demand. Reduced exports could lead to lower production prices for local farmers and palm oil producers, affecting their profitability and sustainability. In a market where price sensitivity is high, even a small increase in export costs can be a significant challenge.
• Increased Operational Costs: Exporters will also experience higher operational costs due to the levy increase, and some may be forced to absorb these costs rather than passing them on to buyers. This could undermine their profitability and their ability to compete with exporters from neighboring countries.

3. Strategic Intent Behind the Levy Increase

• Supporting the B40 Biodiesel Program: One of the main reasons cited for the proposed levy increase is to support Indonesia's B40 biodiesel program, which aims to require biodiesel manufacturers to use at least 40 percent palm oil in their production. The program, effective from January 1, 2025, is part of Indonesia's broader strategy to reduce reliance on imported fuel, boost domestic consumption of palm oil, and promote sustainable energy solutions.
• Encouraging Domestic Use of Palm Oil: By discouraging exports, the government aims to ensure a sufficient domestic supply of CPO for the biodiesel industry. The intention is to create a steady domestic demand for palm oil, which could help stabilize prices and ensure a reliable supply for the energy sector. However, this strategy could lead to tensions in the global market, as other palm oil-producing countries may not follow suit, thereby reducing Indonesia's market share.

4. Timing and Implementation

• Uncertainty Around Details: While the proposal for a 10 percent levy increase has been mentioned, the specific terms and conditions of the policy are still pending. This uncertainty adds complexity to the situation for exporters and investors, who may hesitate to make long-term commitments or investments in Indonesia's palm oil sector until the details of the levy increase are fully outlined.
• Potential Market Volatility: The proposed changes could create volatility in the global palm oil market, particularly if other countries follow similar policies or if Indonesia's exporters face unforeseen challenges due to the higher levy.

Conclusion

The proposed 10 percent levy increase on CPO exports from Indonesia could have mixed effects. On one hand, it would support the domestic biodiesel industry and could help achieve energy security goals. On the other hand, it risks reducing Indonesia's competitiveness in the global palm oil market, potentially leading to a shift in trade flows to neighboring countries with lower export costs. As the implementation date for the B40 program approaches, both the palm oil industry and the government will need to carefully balance domestic policy objectives with the realities of global market dynamics to ensure the long-term viability of the sector.