Global Business Guide Indonesia

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Agriculture | Opportunities in Indonesia’s Downstream Sugar Industry

Once the world’s second largest exporter of sugar; Indonesia is now a top importer of raw sugar as domestic supply has fallen far behind demand from consumers and industries. While the country is blessed with an ideal climate for growing sugar, the sector has seen too little investment over the past decades. As a result, sugarcane cultivation and milling suffer from a lack of competitiveness. The growth of refining capacity in recent years has outpaced sugarcane cultivation, resulting in increased demand for raw sugar imports.

Opportunities in Indonesia’s Downstream Sugar Industry
Like many countries, Indonesia has a policy in place to blend an increasing proportion of bioethanol into petrol

The government has proclaimed measures to increase plantation output, though its proclaimed goal of self-sufficiency in sugar production looks unrealistic in the near future. The government is also keen to spur the development of downstream industries. This presents a favourable environment for investment in the face of rising demand from the fast-growing food and beverage sector as well as an emerging biofuels industry. However, the sugar sector is characterized by some constraints on foreign direct investment and regulations that stand in the way of open markets.

Sugarcane is cultivated mainly in Java, followed by Sumatra and, to a much smaller extent, Sulawesi. Java’s high population density and sprawling residential and industrial zones mean most of the sugarcane growth potential now lies outside the traditional growing area. National production of plantation white sugar (bleached, unrefined cane sugar that is suitable for table consumption but requires refining for use in processed foods) made no progress in recent years and amounted to 1.83 million MET in marketing year (MY) 2011/2012, according to figures from the U.S. Department of Agriculture (USDA). A slight improvement to just below 2 million MET was forecast for MY 2012/2013.

Sugar consumption, meanwhile, is on the increase amid rising industry demand and population growth. After increasing by more than 50% in a decade, consumption came in at 5.1 million MET in 2012 (USDA). To fill the widening gap, imports of raw sugar rose to 2.89 million MET in MY 2011/2012, almost doubling within three years. Imports for MY 2012/2013 were expected to exceed 3 million MET. Most shipments come from Thailand, Brazil and Australia.

Indonesia’s domestic sugar industry lacks overall competitiveness and the country would be flooded with cheap foreign sugar if not for legal restrictions. A permit policy involving registered importers is designed to allow just enough imports to fill the gap between domestic production and demand. The Trade Ministry mostly grants permits for raw sugar to ensure sufficient supply for domestic refiners, who then sell their product on to industrial processors such as the food and beverage and pharmaceutical sector. Meanwhile, regulations are aimed at limiting imports of plantation white and refined sugar to the necessary minimum. Incoming shipments of refined sugar have fallen amid increasing domestic refining capacity. In line with these policies, sugar imports are prohibited over the milling season and refined sugar is subject to a higher import duty than raw cane sugar.

The import policy aims to reserve the retail market for locally made white sugar, effectively protecting Indonesian sugarcane producers (many of whom are smallholders) and mills against foreign competition. This puts local refiners at a disadvantage vis-à-vis mills, even though farmers have raised concerns about refined sugar finding its way onto the retail market. Refiners, meanwhile, enjoy protection through restrictions on the importation of refined sugar.

As a result, Indonesian retail sugar prices are among the highest in Asia. The situation is exacerbated by the government-mandated base price for sugar at mill auctions. There have also been reports of collusion among a select group of traders who have allegedly received preferential auction rights and control much of the distribution network. However, mounting inflation in 2013 and possible refining overcapacities is putting pressure on the government to open the retail market for refiners. Such a move is staunchly resisted by the Sugarcane Farmers Association but could gain traction following the 2014 general elections.

To boost cane harvests and raw sugar supply, the government is banking on state-owned enterprises (SOEs). In July 2013, three state-owned plantation companies announced a joint venture to build the country’s largest sugar mill with support from state-owned banks. The government has also designated vast swathes of land in Papua for sugarcane cultivation as part of a large scale project known as the Merauke Integrated Food and Energy Estate (MIFEE). However, MIFEE, which was initially projected to produce 2.5 million MT of sugar, will likely end up much smaller than planned amid criticism over its environmental impact and difficulties with land acquisition. The government offers financial incentives for producers to increase per-hectare yields with the help of new machinery. Upgrading outdated equipment and plantation methods, particularly at smallholder farms, offers some potential to increase production before new plantations come on-stream.

Providing output can be increased, new opportunities await investors downstream. The biofuels sector is particularly interesting, as Jakarta seeks to reduce dependence on fuel imports. Like many countries, Indonesia has a policy in place to blend an increasing proportion of bioethanol into petrol. Ministerial Regulation No. 32/2008 foresees at least 15% bioethanol in the energy mix for transportation and industrial purposes by 2025 (See Opportunities in Energy: Beyond Fossil Fuels). Along with the commitment Indonesia made in the Kyoto framework to cut carbon emissions, Indonesia’s biofuels policy aims to support rural employment and development.

Sugarcane molasses, a bi-product from de-juicing sugarcane, is a prime feedstock for bioethanol. While sugarcane stands in competition with cassava as a source of bioethanol, the expected increase in demand should suffice to add value to both industries. In addition, export demand is set to increase, though much of this hinges on EU import policies, which are hard to predict amid a debate in Europe over environmental concerns and trade policies. Ethanol is also used in the chemical, pharmaceutical and food and beverage industries, which have seen rapid growth in Indonesia.

State-owned sugar plantation firm PT Perkebunan Nusantara (PTPN) X announced at the beginning of 2012 that it plans to move into bioethanol production with the establishment of Indonesia’s first fully integrated downstream sugar plantation on Madura Island. The company is cooperating with NEDO of Japan for this $102 million USD project and will also conduct a corporate bonds issue on the IDX to raise funds from investors.

As more sugar refining takes place in Indonesia, this guarantees an increasing supply of molasses (approximately 1 MET of molasses is produced for every 2 MET of sugar). An increase in scale is necessary to bring down bioethanol production costs and make sugarcane a viable source of energy. Global research and development is expected to bring forth more efficient ways to make bioethanol, including through genetic modification. For Indonesia, this harbours the potential for bagasse, the residual woody fiber of the sugarcane, to be processed into cellulosic ethanol at a feasible cost in the future.

Assuming sugarcane production increases with the expansion of plantations and the modernization of equipment and farming methods, Indonesia’s downstream sugar market offers business opportunities particularly in biofuels production. Questions remain as to the size of the export market, but there can be little doubt about rising domestic demand. Global political pressure could initiate some market liberalization and make Indonesia’s sugar industry more competitive in the medium term. Foreign knowhow should be welcome to spur progress in bioethanol production and utilization. This offers potential investment opportunities, particularly if the strategic importance of food and energy security prompts the government to open the sector to more foreign engagement in a revision of the negative investment list (See Understanding the Negative Investment List).

Global Business Guide Indonesia - 2013

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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.