A Closer Look
The Used Cooking Oil (UCO) recycling industry in Indonesia has been growing steadily, driven by increasing demand for biodiesel and the global push for renewable energy. However, like any commodity-based business, the UCO market is highly influenced by external factors such as currency fluctuations. In this blog, we will explore how the fluctuation of the rupiah exchange rate has impacted the UCO business, particularly in terms of pricing for UCO sold in 18L jerrycans, and what it means for restaurants and collectors in Indonesia.
Exchange Rate Fluctuations in 2024: From July to September
In 2024, the rupiah experienced significant volatility, peaking at IDR 16,450 to the U.S. dollar in July before strengthening to IDR 15,100 as of September 26, 2024. This rapid change in the exchange rate has had a ripple effect across various industries, including the UCO market.
During the peak in July, when the rupiah was at its weakest, restaurants were willing to bid up to IDR 210,000 per 18-liter jerrycan of UCO. By late September, with the rupiah strengthening, the price had dropped to around IDR 170,000 per jerrycan. This 19% decrease in the price highlights the significant influence that exchange rates have on the local UCO market.
Why Does the Exchange Rate Impact UCO Prices?
The UCO market in Indonesia is deeply connected to international biodiesel markets, where UCO is exported as feedstock. Since UCO pricing is often tied to global markets—usually denominated in U.S. dollars—a weaker rupiah makes it more expensive for Indonesian companies to sell UCO locally, as the value of their UCO exports becomes more lucrative in foreign currency terms.
When the rupiah weakens, exporters can earn more in rupiah terms by selling their UCO abroad. As a result, domestic buyers, such as restaurants and collectors, are forced to offer higher prices to compete with export buyers. Conversely, when the rupiah strengthens, the opposite occurs: UCO exporters receive fewer rupiah for the same amount of UCO sold abroad, which leads to lower domestic demand and lower prices.
The Impact on UCO Sellers: Restaurants and Collectors
For restaurants and collectors, the exchange rate has a direct effect on their ability to sell UCO at competitive prices. During the peak of the exchange rate in July, they were able to sell UCO at a higher price—IDR 210,000 per jerrycan—because the weaker rupiah meant exporters and larger UCO buyers were willing to pay a premium. However, as the rupiah strengthened in September, the demand for UCO in the local market softened, leading to a price drop to IDR 170,000 per jerrycan.
For smaller restaurants and sellers, this price drop means reduced income from their UCO sales. Those who rely on selling UCO as a supplementary revenue stream will feel the pinch as the exchange rate normalizes, and they may need to adjust their selling strategies accordingly.
The Effect on Exporters and Large Buyers
For UCO exporters, the strengthening of the rupiah creates challenges in terms of profitability. When the rupiah is stronger, the amount of revenue they receive in rupiah terms from UCO exports decreases, as payments are typically made in U.S. dollars or euros. This puts pressure on exporters to negotiate better deals or focus on reducing operational costs to maintain profit margins.
However, larger buyers of UCO, including biodiesel producers and refineries, may view this price drop as an opportunity. With UCO prices lower, they can acquire feedstock at a reduced cost, improving their margins in the biodiesel production process. This could lead to increased domestic demand for UCO, partially offsetting the price decline caused by the exchange rate fluctuations.
What Does This Mean for the UCO Market in Indonesia?
The strengthening of the rupiah is likely to have both short-term and long-term effects on the UCO market:
- Short-term Impact on Prices: The immediate effect is a decline in UCO prices, which benefits large buyers but negatively affects smaller sellers, such as restaurants. As the rupiah stabilizes, we may see UCO prices level off, though they are unlikely to return to the July peak levels unless the rupiah weakens again.
- Pressure on Margins for Exporters: Exporters will need to focus on improving efficiency to cope with reduced revenue in rupiah terms. This may involve finding new international buyers or exploring ways to reduce costs in their supply chain.
- Market Volatility: Given the fluctuating nature of currency exchange rates, the UCO market in Indonesia will likely continue to experience volatility. Sellers and buyers alike will need to stay informed about currency trends and adjust their pricing strategies accordingly.
- Opportunities for Strategic Planning: For companies in the UCO recycling business, understanding the macroeconomic trends that influence pricing will be key to long-term success. This could involve entering into forward contracts, hedging currency risk, or diversifying revenue streams to buffer against future exchange rate fluctuations.
Conclusion
The recent fluctuations in the rupiah exchange rate have significantly impacted the UCO market in Indonesia. From July’s peak to September’s strengthening, prices for UCO sold in 18-liter jerrycans have dropped by approximately 19%, illustrating how currency movements can directly affect pricing. For restaurants, collectors, exporters, and large buyers, staying informed and agile in response to these changes is crucial for navigating the UCO business landscape. As the rupiah continues to fluctuate, the UCO industry must be prepared to adapt to the evolving economic environment, taking both challenges and opportunities into account.
Contact Tuang Bio Energi
Website: https://www.tuang.co.id
Phone: 021-30620136
Email: [email protected]
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