EU

SCMP Interview: Indonesia’s triumph over palm oil ‘win’ over EU before the WTO but demand and market access issues could sour hopes

Segi Enam Advisors principal Khor Yu Leng was cited by South China Morning Post (25 Jan), for her views on Indonesia’s palm-oil biofuel ambitions following the WTO’s decision. The decision, issued on 10 January 2025, ultimately upheld the EU’s ability to take environmental and climate-based action under its Renewable Energy Directive and affirmed the EU’s classification of palm-oil based biofuel as ‘high risk’ due to its links with deforestation. Notwithstanding, the organisation also criticised the EU’s procedures for lacking transparency and for insufficiently reviewing data to justify its ‘high risk’ designation, rendering them inconsistent with WTO rules. Indonesia, the world’s leading palm oil producer, has since framed the WTO’s criticism of the bloc’s procedures as a “win” in its ongoing battle against EU restrictions on its palm-oil biofuel ambitions. The EU has since stated that it will ‘take the necessary steps to respect its WTO obligations’

Yu Leng’s comments, as quoted by South China Morning Post, are as below. She referenced Malaysia’s 2021 dispute, in which Malaysia brought a WTO claim against the EU over the latter’s classification of palm oil and palm crop-based biofuels as being at ‘high risk’ of indirect land-use change and argued the measures were discriminatory. In 2024, the WTO upheld the measures taken by the EU, as well as affirming certain related French measures. 

Khor Yu Leng, a political economist at Singapore-based Segi Enam Advisors, noted that the ruling echoed Malaysia’s earlier dispute with the EU. “The EU broad policy was upheld, again, but its procedures were faulted,” she said, describing it as “deja vu”....

… Indonesia and Malaysia together produce more than 85 per cent of the world’s palm oil and have been at the forefront of the push for palm oil-based biofuel. Both have sought to leverage their palm oil reserves as a renewable energy source by blending the commodity with ordinary fossil-fuel diesel.

But palm oil biofuel faces an uphill battle. Despite ambitious targets – Indonesia plans to increase its biodiesel blend to 40 per cent this year and up to 50 per cent by 2029 – the global market for palm oil-based biodiesel remains thin, Khor said.

“For a thinly traded palm product, there has been a surprising amount of ink and political capital spent on it,” she said, noting that even neighbouring Southeast Asian countries are prioritising electrification over biodiesel.

“Despite giddy hopes over 10 years ago, there’s just not much trade in this product. Both Malaysia and Indonesia cannot even get neighbouring countries to provide policy support for this.”

Catch up on interviews with BFM

By Claudia Nyon, Research Associate, research@segi-enam.com 

Here’s a belated update on two BFM interviews back in August.

Yu Leng was on BFM’s Morning Run on 26 August 2024 to provide her insights on the increase of rubber prices against the impending implementation of the European Union’s Deforestation Regulation (EUDR). Yu Leng also considered the present challenges of smallholder producers of palm oil and rubber. The full podcast may be found here

Key points included: 

  • Malaysia’s rubber yield may sound low but specialists think that trees are overcounted. Thailand has faced challenging wet weather conditions and output is down but on the other hand Malaysia’s output is up. Malaysia’s ranking in global production is below.

  • Commodities are handled by different government agencies or statutory boards in Malaysia. There is one for palm oil, rubber, pepper and so forth. (Agronomists seem to complain about these as “silos”). Another complexity in rubber is that different zones have different farmer income models, notably for profit sharing or share cropping. 

  • Rubber is largely produced in the northern states, where palm oil has not taken over these dryer regions. Smallholder experts think that (the true) rubber farmers needing help are individuals in remote areas. But domestically, there has been an understandable push for group farming (with hired/migrant labour) near towns. Perhaps a majority of rubber is produced under profit sharing, and this may need more consideration in current policy. 

A few extra points that didn’t make it, owing to time constraints:

  • A near geographical monopoly concept exists and persists in Malaysian regulations. The ideal is a farmer having multiple mills to sell for then will there be better prices for a standard product. But mills have a clear incentive to partner with their smallholders for product quality and international ESG standards. 

  • A lot can be gained from having information on the location of ultra low-yielding oil palms (“dura contamination” in industry parlance, where yields are -56% of normal yield). The Malaysian Palm Oil Board (MPOB) has invested a lot in detecting via genomic testing. Seeds can be verified for normal yield. There is a marginal cost increase for a major gain in production. One in eight oil palms in Malaysia are ultra low-yield, i.e., financially impaired. This is pretty surprising. 

  • However, the industry needs to reconsider how they can expand these good practices from planting material all the way to harvesting and field logistics, and fairer prices. 

Yu Leng was also invited to give her take on Malaysia’s latest pledge to halt new palm oil plantations in forested areas on BFM’s Top 5 at 5, on 19 August 2024. Deforestation regulations such as the EUDR were raised and how its shaking up global commodity supply chains with origins competing against each other to sell high value add products, however limiting land might cause liberal state development policies to clash against federal powers over exporting and licensing via the MPOB. The full podcast may be found here

Editor’s Note: this clash between state and federal powers over the ban on new palm oil plantations in forested areas has recently materialised in the Kuala Nerus district, Terengganu. As reported by Malaysiakini in September (paywalled), Pure Green Development Sdn Bhd submitted an environmental impact assessment (EIA) to clear a state-owned peat swamp forest to develop a palm oil plantation. Following reports, the Department of Environment rejected Pure Green’s EIA (paywalled) and the Plantation and Commodities Minister, Johari Abdul Ghani, issued a statement (Bahasa Malaysia only) that the government’s bar against new palm oil plantations in forested areas still remains in force and referred to the Malaysian Sustainable Palm Oil (MSPO) certification policy.