Indonesian palm oil export ban places pressure on global industry supply chains

Indonesia’s decision to place a temporary export ban on palm oil could significantly impact manufacturing operations, including major brands within the confectionery and snacks sector, according to market analysts, writes Neill Barston.

According to international reports, the unexpected move announced at the weekend, is being put forward in a bid to secure domestic supplies of oil amid broader pressure on food supply chains.

Consequently, key confectionery brands including Mondelez, Ferrero and Nestlé and Mars, which are known to source palm oils from the region, are set to potentially be impacted by the decision from Indonesian authorities. Industry observers have noted that this could negatively impact on consumer prices, with supermarkets in the UK already rationing edible oil supplies.

Moreover, the key ingredient of palm oil has been subject to global industry headlines in recent years surrounding concerns over sustainable sourcing. However, a majority of international confectionery groups operating in the region have committed to enhancing performance standards with regards to environmental protection measures, as well as enhancing best agricultural practices.

As market analysts have noted, the export ban from Indonesia comes at a notably sensitive moment in wider supply chains – with major edible oils in short supply, leading to reported price rises of more than 50% in the past six months. Other additional issues have compounded the situation with a lack of available labour in Argentina, as well as drought conditions in Argentina.

Furthermore, the ongoing conflict in Ukraine has placed additional pressure on traditional supply chains of sunflower oil, yet Russia’s invasion of the country has deeply impacted on the sector’s ability to operate.

Speaking about the Indonesian export ban, Ramsey Baghdadi, Consumer Analyst at GlobalData, commented: “As alternative vegetable oils tend to be higher in price, Indonesia’s palm oil export ban will add further obstacles for global manufacturers such as Mondelez and Unilever to keep product prices low.

“Consumers continue to be sensitive towards prices, as economic uncertainty proves to be a key influence on their decision making. According to GlobalData’s survey, the majority (*60%) of people globally claim to be extremely or quite concerned about their personal finances. Manufacturers will need to focus on price promotion strategies to keep prices down and maintain a good relationship with customers.

“As manufacturers such as Mondelez have established a long-term relationship with the Indonesian government to source palm oil responsibly, this ban puts them back to square one. There will be a need to find suitable alternatives, however, these each come with their own challenges – rapeseed oil, for instance, has limited supply which has led prices to skyrocket.

“Going forward, fast-moving consumer goods (FMCG) companies need to be careful in choosing suitable alternatives. Due to a shortage of sunflower oil as a result of the Russia-Ukraine conflict, a lot of companies were returning to palm oil, so Indonesia’s ban is another setback. When choosing the next potential ingredient supplier, transparency will be very important. Using innovative methods such as blockchain to track the supply of raw materials in real-time will help consumers understand where the vegetable oil is sourced and whether it is sustainable.

“Ultimately, the ban will severely impact affordability and sustainability for FMCGs manufacturers, and they will have to adapt supply chain strategies quickly to avert risk from declining sales.” Confectionery Production has approached Mondelez for further comment on the story.

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