IMPACTS AND STRATEGIES OF THE PALM OIL INDUSTRY IN THE FACING GLOBAL STAGFLATION AND UNCERTAINTY 2023

Abstract

The IMF predicts the global economy will be “dark” in 2022–2023 due to economic recession and high inflation (stagflation). This condition will affect the palm oil industry by increasing fertilizer prices (supply side) and decreasing global consumption (demand side). Therefore, a strategy is needed to overcome these conditions, which must be carried out simultaneously. This strategy is required to maintain productivity and prevent excessive increases in production costs (supply side) and to compensate for the decline in global palm oil consumption (demand side) to minimize decreasing in global palm oil prices significantly.

Introduction

The International Monetary Fund (IMF) released the World Economic Outlook (WEO) report for October 2022 with the title “World Economic Outlook: Countering the Cost-of-Living Crisis”. In that report, IMF recorrected their forecasts for global economic growth in 2022 and 2023, which were more pessimistic than in their previous report.

The prediction of global economic growth will be cut in half to 3.2 percent in 2022, down from 6.0 percent in 2021. The global economic growth in 2023, estimated by the WEO report in April 2022 to be around 3.6 percent, was recorrected to approximately 2.7 percent.

Meanwhile, the global inflation rate was still relatively higher than inflation in 2021. In 2021, global inflation was around 4.7 percent, expected to rise to about 8.8 percent in 2022 before dropping slightly to 6.5 percent in 2023. This shows the global economy is still in a worsening trend, at least until 2023. The global economic recession accompanied by high inflation or stagflation is also deepening.

As part of the global economy, the palm oil industry cannot be separated from the global recession and inflation. The palm oil industry is integrated with the global economy through the input and output markets. In terms of the input market, the palm oil industry is influenced by the dynamics of the global market for fertilizer raw materials such as gas, urea, rock phosphate, potassium, and others. Meanwhile, in terms of the output market, consumption of palm oil industry products, including food, oleochemicals, and biofuels, depends on the purchasing power (income) of the global community (Shigetomi et al., 2020; PASPI Monitor, 2021^a,b).

This paper will discuss the impact of global stagflation and uncertainty on the palm oil industry. Then will continue to discuss the strategy of the palm oil industry in the facing global stagflation and uncertainty.

THREE IMPACTS ON THE PALM OIL INDUSTRY

 The global palm oil industry, an integral part of the global economy, cannot be separated from stagflation condition. The global economy affects the palm oil industry regarding the output produced, the inputs used, and the policies that will be issued by each country in response to the stagflation condition.First, the palm oil industry, where most of its production is destined for the global market (exports), will face a decline in purchasing power internationally. The decline in the economic growth of palm oil-consumer (importer) countries (Figure 1 and Table 1) will impact on decreasing palm oil consumption and global palm oil imports.

Europe, India, and China have half the global population, which also acts as a traditional market or the main market for global palm oil. In 2022 and 2023, these regions will experience a weakening of purchasing power per capita due to economic recession and high inflation.

In 2021, the European Union (EU) enjoys 5.9 percent economic growth. It is estimated that their economy’s growth will experience a significant decline to 2.1 percent in 2022 and continue until 2023 with growth of only 0.6 percent. Although not as bad as the EU, India’s economy is also expected to decline in growth from around 8.7 percent in 2021 to 6.8 percent in 2022 and 6.1 percent in 2023. Similarly, the Chinese economy is expected to contract by 8.1 percent in 2021, 3.2 percent in 2022 and 4.4 percent in 2023.

The emerging market for palm products is Sub-Saharan Africa, the Middle East and North Africa, which are generally low-income countries and are also expected to experience a decline in purchasing power in 2023. Not only an economic recession, but this region is also estimated to experience a relatively high inflation rate, even the highest compared to other regions. This condition causes a significant reduction in purchasing power and has an impact on reducing palm oil consumption.

The decline in the purchasing power of palm oil importing countries will impact the reduction in global palm oil consumption. As a result, it will create excess supply in the global palm oil market and reducing global palm oil prices in 2022 and 2023. Palm oil prices are expected to decline lower level than the average price in 2021.

Second, the global palm oil industry will face rising input prices for raw materials and fertilizer products (Table 2). The Russia-Ukrainian war that has been going on since February 2022 and the accompanying economic embargo is seen as the triggers for the food crisis, high inflation, and world economic recession (IMF, 2022; World Bank, 2022). Even Europe sees the Russia-Ukraine war as a future shock and broadly impact on the global community (European Parliament, 2022).

The role of Russia-Ukraine in energy, fertilizer, and food, especially for the European and Asian regions, is quite large (Aslund, 2020). In the global energy market, Russia is the world’s second-largest producer of natural gas (17 percent), holds of 20 percent of the global natural gas trade, and supply of 40 percent of the needs of European countries. Meanwhile, in oil production, Russia is the third largest producer, with a share of 12 percent. Russia’s role is also quite large in the world fertilizer industry. Russia’s share in nitrogen fertilizers reaches 15-20 percent, 17 percent in potassium fertilizers, and overall Russia’s share in global fertilizers reaches 13–16 percent.

Crude oil and natural gas prices (raw materials for urea fertilizer) are expected to rise by 33-147 percent in 2022, as are fertilizer prices (DAP, Phosphate Rock, Potassium Chloride, TSP, and Urea). Although it is estimated to decrease slightly in 2023 and 2024, the prices of these products are still above the 2021 price level.

Since that fertilizer is the largest component of production costs in oil palm plantation production, the increase in fertilizer prices will be transmitted to the increase in production costs per unit. The increase in production costs is estimated to be higher than the increase in palm oil prices, causing lower palm oil margins in 2023-2024.

The increase in fertilizer prices is expected to reduce the use of fertilizers in oil palm plantations. It will impact on lower oil productivity in the next 6–24 months. This will lead to a decline in world palm oil production in 2023 and 2024.

Third, the global economy is in a vortex of economic recession accompanied by high inflation rates or stagflation conditions. These conditions are not easy to overcome, so the right strategy is needed. The fiscal and monetary expansion policies needed to get out of a recession could trigger higher inflation rates. On the other hand, contractionary fiscal and monetary policies, which are usually effective in reducing inflation, can plunge the global economy into a deeper recession.

Central Banks, such as the Fed (USA) and the European Central Bank (EU), will usually implement a Tight Money Policy by raising their interest rate. This policy is expected to solve stagnation. On the other hand, this policy will encourage an increase in commercial credit interest rates from banks so that the cost of money and investment in the palm oil industry will also be more expensive. This will also contribute to an increase in the production costs of the palm oil industry.

THE PALM OIL INDUSTRY’S STRATEGIES

The impact of global economic stagflation on the palm oil industry requires different coping strategies. The impact in question is an increase in the cost of producing palm oil (supply-side effect) and the potential decline in global palm oil prices due to a decrease in palm oil consumption (demand-side effect). Both have a direct impact on the decline in the profitability of the palm oil industry. The increase in loan interest rates and the decrease in the profitability of the palm oil industry will impact on the feasibility of the palm oil industry’s stock value.

There are not many strategic options available to be taken to solve this condition. The available and potential strategies that are implemented are as follows. First, optimize global/regional markets still enjoying high economic growth. The ASEAN-5, including Indonesia, is the largest palm oil production and consumption region in the world. In contrast to other countries in 2022–2023, the ASEAN-5 is projected not to experience a recession but to enjoy higher economic growth (booming) accompanied by a relatively moderate inflation rate (Table 1).

ASEAN-5 economic growth is estimated to increase from 3.4 percent in 2021 to 5.3 percent in 2022 and 4.9 percent in 2023. Likewise, Indonesia’s economic growth will increase from around 3.7 percent in 2021 to 5.3 percent in 2022 and 5 percent in 2023. The

The increase in economic growth (boom) in the ASEAN-5 region allows for an increase in palm oil consumption in this region both for oleofood and through the expansion of domestic, both to substitute fossil fuels and petrochemicals, which are increasingly expensive globally.

Second, increasing and expanding the ASEAN-5 region’s import substitution policy for fossil fuel with biofuel and petrochemical with palm oil-based oleochemicals. The increase in crude oil prices in 2022–2024 caused derivative products such as fossil fuels and petrochemicals to become more expensive. Therefore, the effort to substitute fossil fuel with palm biodiesel (and green fuel) and petrochemical with palm-based oleochemicals is a strategy that will make the palm oil industry more feasible amid a crisis.

Until 2022, Indonesia is still implementing B30. With the increase in crude oil prices, it is becoming increasingly feasible for Indonesia to move to B35 or B40-50 (stationary). In addition, the substitution of imports of fossil petrochemicals with palm oleochemicals also has the opportunity to be accelerated and expanded.

The opportunity to increase and expand the substitute of fossil fuel and petrochemical in the Asean region is very potential considering the existence of CPOPC (CPO Producer Countries) consisting of Indonesia and Malaysia, where the two countries are the influencers in this region. ASEAN-5 also has ASEAN Free Trade Area (AFTA) and ASEAN. Through the cooperation of ASEAN, AFTA, and CPOPC, the ASEAN-5 region can become a major center for the world’s biofuel and oleochemical production to serve the global market.

The increase in palm oil consumption in the ASEAN-5 region is carried out to compensate for the potential decline in palm oil consumption in the world’s palm oil-consuming countries, both in traditional markets and emerging markets. This is a strategy to minimize decreasing in global palm oil prices.

Third, to overcome the increase in palm oil production costs triggered by the increase in fertilizer and energy prices, the strategy that can be applied is by substituting some inorganic fertilizers with organic fertilizers and biofertilizers. Organic materials such as empty fruit bunches and POME (Palm Oil Mill Effluents) are abundantly available on the plantation and can be used as a substitute for some inorganic fertilizers. Utilizing the microbes in oil palm plantations also produced a quality biofertilizer that can be obtained to replace some inorganic fertilizers. The technology, both in process and product technology (embodied technology), has been available and has long been known to plantation actors.

Substitution of some inorganic fertilizers with organic fertilizers and/or biofertilizers is a strategy to reduce production costs significantly due to the increase in global fertilizer prices. In addition, it is also intended to prevent decreasing oil productivity.

In addition to the B35/B50, optimizing the use of biomass to generate electricity is a strategy to substitute energy or fossil fuel at the plantation and mill. This technology is well-known and has long been used in oil palm plantations.

Finally, to adapt quickly, precisely, and efficiently in facing of VUCA (volatility, uncertainty, complexity, and ambiguity) conditions needed flexibility of policies, managerial and technological innovations at all levels. The ability to adapt changes of economic, geopolitical, and ecological is part of a sustainable palm oil industry.

Conclusion

The global economy in 2022–2023 is expected to fall into stagflation, namely an economic recession accompanied by inflation. Global economic growth in 2021 reached 6.0 percent and is estimated to fall to 3.2 percent in 2022 and 2.7 percent in 2023. Meanwhile, global inflation in 2021 is still around 4.7 percent and is estimated to increase to around 8.8 percent in 2022 and slightly decline to 6.5 percent in 2023.

The deteriorating global economic conditions will affect all sectors. The global palm oil industry is also affected by stagflation. It is estimated that three impacts of global stagflation on the palm oil industry are consumption decrease, production costs increase and reducing profitability and feasibility.

Strategies are needed from both the supply and demand and must be implemented simultaneously to overcome this condition. From the supply side, the substitution of inorganic fertilizers with organic fertilizers and/or biofertilizers as well as the use of palm-based biofuels (B30/B40 and biomass-based bioelectricity) are expected to prevent excessive increases in production costs and maintain productivity. From the demand side, optimizing the ASEAN-5 market by the expansion of the use of palm oil for fossil fuel and petrochemical substitution is expected to compensate for the decline in global palm oil consumption. This is a strategy to minimize decreasing in global palm oil prices.

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