Indonesia, Malaysia palm waste exports raises questions

Indonesian and Malaysian exports of palm oil wastes used as biofuels feedstocks rose sharply during January-February compared with previous years, particularly to China, raising market participants' concerns about alleged fraudulent practices.

Indonesian palm oil waste exports to China under HS codes starting 2306 and 3823 more than trebled from a year earlier to 730,000t during January-February, up from 225,000t during the same months in 2022. Shipments to other destinations remained more stable, pushing total exports up by 30pc to 2.19mn t.

Exports to China under 2306, which include palm oil mill effluent (Pome) and palm acid oil (PAO), rose by almost fivefold from a year earlier to 382,000t during January-February 2023. While China-bound exports under code 3823, including PAO and palm fatty acid distillate (Pfad), rose by 142pc to 348,000t.

Total Malaysian exports under 3823, which is used for Pome, PAO and Pfad from that country, rose by 13pc to 413,000t during January-February. Sharp year-on-year rises to China, the Netherlands and Singapore drove the increase, rising by 46pc, 48pc and 122pc to 81,000t, 75,000t and 52,000t respectively.

The rate of growth in these flows is of concern to market participants, as supply of these wastes is limited by palm oil production volumes that have remained relatively stagnant over the same period. Indonesian crude palm oil (CPO) output was flat from a year earlier at around 3.9mn t in January, the last month for which data is available from the country's palm oil association. Malaysian output rose by 3pc to 3.8mn t for January-March, according to the Malaysia Palm Oil Board.

Total potential output of Pome oil, defined by International Sustainability and Carbon Certification (ISCC) as the oil fraction from unavoidable wastewater produced at a palm oil mill, varies depending on technology but should be between 1-2pc of CPO production volume. PAO is defined by the Palm Oil Refiners Association of Malaysia as a by-product from chemical alkali CPO refining. Output should be negligible with most refining capacity in Malaysia and Indonesia using physical not chemical processes.

Recent export volumes under 2306 and 3823 seem more than what can reasonably be available because of these limitations, market participants said.

Paper trail concerns

The lack of distinct HS codes for Pome, PAO and Pfad and their differing uses between countries also make it difficult to track individual flows of these products to ensure volumes add up. The products are chemically similar but incentivised differently in the EU market, which may leave loopholes for mislabelling or fraud, some participants fear.

While Pome is classified as an advanced feedstock across the EU, meaning volumes are not capped and its use receives double-counting incentives in most markets, PAO is not recognised by the ISCC as a renewable feedstock. Pfad, a residue from physical palm oil refining, is only considered a waste in Finland but no other EU states.

The substantial increase in waste palm feedstock flows to China comes as the EU grapples with an influx of Chinese biodiesel which has severely pressured prices across the biofuels complex, as well as concerns that some of these volumes are being falsely labelled as "advanced".

The ISCC has responded by carry out unannounced integrity audits on companies suspected of fraud, it said in a stakeholder newsletter on 20 April. It added that it has already intensified certification requirements for collection points supplying Pome oil, requiring annual on-site mill audits and proof that Pome volumes fall within plausible limits since November 2022.

But some key participants see the recent surge in palm waste exports as evidence that even tighter traceability requirements are needed for these biofuels feedstocks.

"The current ISCC rules which only require Pome oil collectors to be ISCC certified is not good enough", an Indonesian integrated biofuels participant said. ISCC certification should be required for each palm oil mill producing Pome to ensure no one tries to sell volumes of the residue in excess of what can physically be produced, participants added.

By Lauren Moffitt