Fertile land, a favourable climate and low labour costs have made Indonesia the leading producer of crude palm oil (CPO) worldwide at a time when global demand for use in foodstuffs and bio energy is on the rise. The sector is a major contributor to GDP at 4.5% and nearly 7% of total export value for 2010. This figure is set to increase in 2011 considering high CPO prices in the global market, government targets of a 16% rise in exports for 2011 and more ambitious goals to 2020 which would double output. While demand for the commodity is continuing to grow, Indonesia faces the challenge of bringing its industry into line with global environmental standards in sustainability and repairing its image following international condemnation of irresponsible practices.
Indonesia overtook Malaysia as the largest palm oil exporter in 2008 and currently holds over 50% of global market share. The industry is broadly split among private enterprises accounting for an estimated 48% of production, small hold farmers at 40% and state owned plantations at 12%. Some of the largest companies in the sector are Sinar Mas, Wilmar Group, Astra Agro Lestari and Indofood Agri Resources. Sumatra is the main production base with 70% of cultivation taking place on the island while other plantations are found in East and West Kalimantan. CPO output has been rising steeply from 10 million MET in 2005 to 20 million MET in 2010 and is targeted to reach 23 million MET in 2011 according to the Ministry of Agriculture.
Exports have been growing in line with such figures with an average of over 70% of total production reaching international markets, the main destinations being India and China followed by the Netherlands and Singapore. In order to meet future production targets of 40 million MET by 2020, the government plans to double the land currently under cultivation over the next 10 years from around 8 million hectares at the end of 2010. The government also plans to promote the differentiation of purpose for new production areas to delineate between CPO for foodstuffs and that for industry and energy. The plan also aims to consolidate smaller landholdings to improve efficiency among producers thereby increasing the production rate of existing land which currently stands at 3.89 tons/hectare compared to 4.37 tons/hectare in Malaysia (Oil World).
Source: Oil Palm Business Association
CPO prices have been rising from $422 USD per MET in 2005 to an average of $690 USD per MET throughout 2010. At the end of Q1 2011, the price was up to $1,303 per MET off the back of high crude oil prices which pushes up demand for biofuel, as well as uncertainty over the weather in the futures market. The price has fluctuated since its peak in March 2011 to $1,075 USD in June 2011 but began to rebound again the following month as speculation over the supply of soybean oil saw the price climb. Demand for exports is being driven by China and India’s rapid growth for use as edible oils in foodstuffs and for biofuel production. In the European Union, the 2007 directive that makes it mandatory for EU members to use at least 10% of biofuel in transportation by 2020 is also contributing to the growing demand.
The high prices of CPO on the global market are actually making Indonesia’s CPO less competitive. A progressive tax based on global prices was introduced by the government in February 2008 in the form of Government Regulation No. 223 /2008 on commodity export duties, in an effort to stabilise domestic cooking oil prices and stimulate downstream production. Finance Ministry Decree No.67 /2010 sets the CPO export tax at a maximum of 25%, up from 10% prior to the regulation. The rate is dependent on a reference price calculated from spot prices at Rotterdam from 30 days prior, as opposed to being set by the Ministry of Trade. The tax is hiked to 20% when the price reaches $1,200 - $1, 299 per MET and up to 25% when it reaches over $1,300. Industry players and the Indonesian Palm Oil Producers Association, GAPKI, have voiced their discontent over the measures that raise the price of the CPO and make it uncompetitive in the export market. Malaysian producers of CPO have been reaping the benefits with exports up as the export levy reached 25% in February 2011 although Indonesian exports were also still strong at 3.2 million MET in Q1. In response to protests from producers, particularly that of small hold farmers, the Ministry of Trade announced in June 2011 that it plans to make changes to the regulation to take into account a wider range of references for the pricing, however producers remain sceptical over the impact this will have.
Indonesia’s palm oil industry has faced far reaching international criticism from environmental groups for its role in widespread deforestation, climate change and destruction of wildlife habitat. A boycott of Nestlé products following a campaign by Greenpeace in 2009 against Sinar Mas has seen the company shift suppliers in response. Other companies such as Unilever followed suit illustrating the strength of public sentiment on the issue. The European Union has also passed the EU Directive on Renewable Energy Resources and Fuel Quality which came into effect in December 2010. The regulations place a demand for environmentally friendly practices from sources of biofuel such as prohibition of plantations in areas of biodiversity and high carbon stock. The many small hold farmers that make up the sector will find such criteria difficult to meet and the certification process too costly to undertake. Within the voluntary Roundtable for Sustainable Palm Oil (RSPO), Indonesia has 79 members which accounts for only 21% of the total members of GAPKI. In response to the growing demand from importers for greater transparency, the government formulated the Indonesian Sustainable Palm Oil certification under the Ministry of Agriculture Decree No. 19/2011. The certification would be mandatory and less expensive than that of the RSPO as well as have the power to apply sanctions and penalise violators of the rules with nationwide implementation scheduled by 2012.
The outlook for Indonesia’s CPO industry is positive considering the unstoppable global demand for the product and the country’s increasing capacity. Addressing issues regarding sustainability in production and the introduction of a certification is vital to the long term dominance of Indonesian exports over rival Malaysia as importing countries from around the world become more stringent in their regulations on producers. The challenge that lays ahead for the industry is a common theme for the country, that of moving up the value added chain through expansion of the downstream industry which will require significant investment as well as improving productivity.
Global Business Guide Indonesia - 2012
Contribution to GDP: 12.27% (2013 including Fisheries & Livestock)
Number Employed in the Sector: 45 million (2013)
Main Products: Palm Oil, Rubber, Cocoa, Cassava, Coffee, Tea, Tobacco, Rice.
Main Export Markets: China, USA, Japan, Singapore, Korea, EU.
Relevant Law: Negative Investment List Presidential Regulation No. 39 of 2014 limits foreign ownership in plantations to 95% and Government Regulation No. 98 of 2013 which limits private plantations to 100,000 hectares.