Global Business Guide Indonesia

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Agriculture | Opportunities in Palm Oil Derivatives

The government through the Ministry of Trade and Ministry of Agriculture is actively promoting the move up the value chain in palm oil by encouraging existing CPO producers to move downstream as well as incentivising new investors. Currently, approximately 65% of palm oil exports are in crude form which is planned to be decreased to 40% over the next decade. The progressive export tax placed on raw CPO exports (Government Regulation No. 223 /2008 and Ministry of Finance Decree No. 67/2010) that goes up to 25% according to the price on the global market is one such measure aimed at meeting the 40% target as it lowers the selling price for the domestic downstream industry. As part of the government’s efforts to boost CPO output alongside value added products, the economic corridors master plan to 2025 aims for optimal organisation in the industry. The plan will delineate plantations into industry clusters that will be integrated with downstream facilities be it for bio fuel, oleo chemicals, fertilisers or biodiesel. Such clusters are expected to start in 2014 in Riau province and will contribute to significantly improving output as well as attracting investment.

Oleo chemicals

As the world’s largest producer of CPO, Indonesia has ready available feedstock thus holding huge potential in the oleo chemical sector. Oleo chemicals based on palm, kernel and coconut oil are used in a wide variety of sectors as edible oils for foodstuffs. Glycerine, another derivative is used in consumer and industrial goods such as cosmetics and bio lubricants. South East Asian production mainly centres around fatty acids, fatty alcohols and refined glycerine. Following a slow down in 2008-2009, the demand for organic, vegetable based oils has been on the rise from 2010 as petrochemical derivative prices and other commodities have risen in line with spiking oil prices. Consumer demands for more environmentally friendly and natural ingredients in their products are also fuelling demand for companies to make the shift towards oleo chemicals and investors are taking notice.

To date, sector development is still below that of Malaysia which holds a greater global market share of the 6 million MET a year industry accounting for 18.6% compared with 12% for Indonesia in 2010. Of total Malay CPO exports, only around 20% is in CPO form compared to some 65% for Indonesia. Malaysia has advanced further in technology to offer innovations in new derivatives thus producing 120 varieties while Indonesia produces less than 20. Indonesia faces the need to catch up through extensive investment to further its oleo chemical industry which is resting on the private sector. New research into the uses of oleochemicals such as refined glycerine extracts that can be used for aromatic solvents and polymers needs to be taken up and put to use by private sector actors. The wheels are in motion for this to take place; demand from markets such as China and India is driving upstream players to enter into the sector such as Bakrie Sumatera Plantations that has acquired oleo chemical factories owned by Domba Mas Group. Sinar Mas has also earmarked 9 trillion RP for investment into oleo chemical production to 2015.

As further investment increases capacity, getting up to speed by effectively marketing and branding their downstream goods to the local and international markets will be the next challenge. In a market where over 60% of GDP is driven by domestic consumption, there is plenty of room for the growth in the range of consumer goods available. Local companies such as Cisadane Raya Chemicals, a supplier to some of the world’s largest consumer goods companies, plans on expanding the range of oleo chemicals they offer. The company already has a brand of biodegradable soap powder sold in Taiwan and China with plans to diversify its offerings in environmentally friendly cleaning products. This is a reflection of the future direction of the industry in Indonesia as it moves to secure its competitive edge against Malaysia and producers in Europe and America.

Under the economic corridor scheme to 2025, South Sumatra and Riau provinces are to be the sites for the oil palm processing industry with incentives planned for investors in those areas according to a statement from the Coordinating Minister of Economic Affairs, Hatta Rajasa. Industrial clusters are planned for the oleo chemical sector in Sei Mangke, North Sumatra, Kuala Enok and Dumai, Riau as well as Maloy, East Kalimantan. As part of the Government Regulation No. 62/2008, fiscal incentives in the form of a 30 percent reduction of income tax are granted for six years for new investments in the downstream palm oil industry. Lower customs tariffs on exports of finished goods are also expected to be announced as the incentive package is being finalised towards the end of 2011. As a result, foreign investors have been eyeing the sector with interest such as Procter and Gamble that announced plans in May 2011 for a $100 million USD oleo chemical plant in the country to meet long term supply of fatty alcohol. In addition, Singapore’s Wilmar International entered into a joint venture with American firm, Elevance Renewable Sciences for a 180,000 MET a year bio refinery facility in Surabaya scheduled to begin operations in 2011.

The outlook for the global oleochemical industry is looking positive with demand gradually firming since the beginning of 2010. Indonesia holds huge potential in oleochemicals considering the availability of feedstock at its disposal. Investment and partnership opportunities can be found within the sector in order to add further value and bring Indonesia on par with that of Malaysia in terms of technology and innovation that it can offer international export markets.

Extract of Negative Investment List 2010

Laws to Consider

Laws to Consider

  • Presidential Regulation No. 36/2010 Negative Investment List permits up to 95% foreign ownership in palm oil plantations and requires a recommendation from the Ministry of Agriculture and Directorate of Plantations.
  • Ministry of Agriculture Regulation No. 12/2007 Plantation regulation on technical assistance that can be provided to investors by the government.
  • Government Regulation No. 62/2008 provides a 30% net tax deduction for 6 years for investors in various sectors including the downstream CPO industry.

Global Business Guide Indonesia - 2012

icone share

Indonesia Agriculture Snapshot

Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.