Palm Oil Downstream Strategy: Enhancing Indonesia's Bargaining Position in International Palm Oil Trade

Abstract

Although Indonesia currently dominates 60% of global palm oil production, Malaysia holds a competitive advantage in certain downstream industries. Indonesia must focus on developing its palm oil industries to process crude palm oil (CPO) into higher-value products, serving both as exports and substitutes for imported goods. This research aimed to highlight the importance of Indonesia's development of downstream palm oil industries. This research employed quantitative methods such as Pearson correlation and Granger causality, as well as qualitative methods.

The result showed that the fluctuation of CPO prices in the international market is closely tied to the volume of CPO exports conducted by Indonesia. Achieving higher domestic CPO production by improving the productivity of independent palm oil farmers is crucial. By enhancing their productivity from 2-3 tons per hectare to 5-6 tons per hectare, CPO supply can increase by 8 million tons annually, equivalent to approximately 16% of the total production. Reducing export should be accompanied by increased domestic CPO utilization through downstream programs.

By capturing half of Malaysia's current market share of HS code 1516 (animal or vegetable fats and oil, hydrogenated, inter-esterified, re-esterified, or elaidinized, whether or not refined but not further prepared), Indonesia has the potential to earn approximately 1 billion USD per year in foreign exchange. The development of biodiesel, transitioning from B30 to B40, holds the potential to save approximately IDR 200 trillion in foreign exchange. This strategic focus on downstream industries would strengthen Indonesia's position in the international palm oil market.