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Agriculture | Indonesia's Sugar Industry Overview: Still a Long Way from Self-Sufficiency

Although it has existed since the Dutch colonial period, the fate of the Indonesian sugar industry is not as sweet as its product. Many issues continue to plague the national sugar industry, ranging from aging factories, reduced sugarcane fields, farm inefficiency and low productivity to a flood of cheap imported sugar due to poor market regulation. The challenge of cheaply imported sugar into Indonesia serves to highlight the scale of demand for the commodity which places Indonesia among the world’s largest buyers by volume, particularly from the country’s food and beverage manufacturing sector. This is in addition to the anticipated demand from biofuel producers due to regulations regarding mandatory biofuel requirements as Indonesia seeks to reduce its reliance on fossil fuels.

Indonesia's Sugar Industry Overview: Still a Long Way from Self-Sufficiency
Indonesia’s growing middle class' increasing appetite for processed foods is seeing a large scale expansion by the country’s processed food producers which require industrial sugar for production

Aging factories, low productivity

In general, Indonesia’s sugar industry plays an important role in the country’s economy. With production ranging from 2.5 to 2.7 million tonnes per year, the economic value of the national sugar industry is estimated at 25 trillion IDR. The country’s sugar industry is split into two distinct segments namely for industrial and consumer sugar with the latter being reserved for domestic producers. The sector is highly politicised and contentious with the local sugar lobbies keen to protect their segment of the market from imports in addition to sugar being one of the commodities that the government has regularly strived towards achieving self-sufficiency in (See Indonesia’s Latest Move on Beef Supply).

Indonesia currently has 63 sugar mills owned by 18 companies yet, the majority of these factories are old and due to underinvestment have low rates of productivity. The country’s sugar factories have a total capacity of 245,000 TCD or an average of 3,900 TCD per factory with rendement of 7.1%. This figure is low compared to Thailand which only has 50 sugar mills but has a capacity of 940,000 TCD with rendement of 11.82%. The result is that Indonesia’s sugar output is a quarter of that of Thailand’s which stands at 10.61 million tonnes per year, of which 8 million tonnes is exported.

Rapid land conversion

A further problem that hampers Indonesia’s sugar industry is the continued decline in sugarcane fields. The majority of sugarcane fields in Indonesia are owned by individual, smallhold farmers with 95% of sugar fields in Java falling into this category. The high fractured nature of ownership across the sector makes it highly susceptible to land conversion as farmers seek out higher earning crops, particularly as land prices continue on an upward trajectory. Moreover, regional development across Java, the epicentre of sugarcane production in Indonesia given its land suitability, has served to transform swathes of agricultural land into industrial and residential areas.

The fall in the government reference purchase price of sugarcane for farmers (HPP) in recent years has made the impact of the aforementioned issues more acute. In 2015, for instance, the government set the HPP at 8,900 IDR per kg. This is far below the HPP in 2012 and 2013 that reached 11,800 IDR and 10,250 IDR per kg, respectively. Therefore, in order to be commercially viable and attractive for farmers, the HPP needs to be set above 10,000 IDR per kg. The result is that Indonesia’s land under cultivation for sugarcane has dwindled to 469,000 hectares only, compared to 1.35 million hectares in Thailand.

Poor market regulation

Poor market regulation has led to significant tensions between the sugarcane industry and the Indonesian government as the latter aims to strike a balance between the needs of the local sugar industry and the demand from those industries that consume it. The Ministry of Industry estimates that Indonesia’s national sugar consumption in 2015 reached 5.7 million tonnes consisting of 2.8 million tonnes of plantation white sugar for direct consumption by the local market and 2.9 million tonnes of cheaper, refined from raw cane sugar for the industrial segment. In 2015, the government set the raw sugar import quota at 2.8 million tonnes which will be increased to 3.2 million tonnes in 2016. While regulations for import quotas are seemingly tightly controlled, the regulations governing the trading of sugar within the domestic market are laxer and result in a portion of the cheap, imported sugar intended for industrial consumption only, making its way into consumer retail channels. This directly erodes the price of locally produced sugar and directly contradicts government efforts to achieve self-sufficiency for either segment of the market.

Indonesia’s growing middle class' increasing appetite for processed foods is seeing a large scale expansion by the country’s processed food producers which require industrial sugar for production (See Thirst Quenching: Indonesia’s Food and Beverage Industry). Local sugar producers lack the technology and know-how to comply with the standards required by the industry concerning colour and quality. Therefore, limiting or banning refined sugar could also hamper the development of this highly strategic industry given the scope of Indonesia’s domestic consumption and lead to producers looking at other production centres in the ASEAN.

Sweetening the deal for sugar producers

The Indonesian government under President Joko Widodo is making headway in improving the competitiveness of the local sugar industry. The Minister of State-owned Enterprises (SOE), Ms Rini Soemarno, has instructed all state sugar companies to synergise their production and streamline their cooperation with sugarcane farmers as well as requested the Ministry of Agriculture to oversee measures to obtain higher yields. The government itself prefers to revitalize existing sugar factories rather than building new ones due to the scale of the investment and the limited availability of agricultural land. That being said, the government has set the target of building ten new sugar factories in collaboration with the private sector over the next three to four years.

Mr M.H. Thaha
Thaha Engineering
Mr M.H. Thaha
Engineering, Procurement & Construction
Our strategy for the future refers to Indonesia’s push for infrastructure development as well as supporting the country’s efforts to achieve sugar self-sufficiency. For construction projects in Indonesia, we are building a sugar mill in 2016 in Lamongan, East Java and Dumai, Riau.
See Interview Learn more about Thaha Engineering

Revitalization efforts have already begun such as by PTPN X through an investment programme of 1.54 trillion IDR. Farm mechanisation and rejuvenation technology have successfully reduced costs and resulted in a lower HPP of 6,866 IDR per kg. A bioethanol plant that processes sugarcane into bioethanol with a capacity of 30 million litres per year has been constructed at the Gempolkrep factory to diversify sugarcane products. Greater energy efficiency in sugar refining operations has also shown progress with energy consumption by plant operations reduced from 48 billion IDR in 2011 to 1.78 billion IDR in 2014.

In addition to the above efforts, the Chamber of Commerce and Industry (Kadin) of Indonesia has proposed to the government to introduce a sugar fund which functions in the same way as the CPO fund. The fund would be collected from the levy imposed on sugar products which will be paid by sugar importers and traders. The funds raised could be used to support the domestic sugar industry and improve the welfare of farmers. In addition, the government is also trying to improve the sugar trade by ordering PT Perusahaan Perdagangan Indonesia (PPI) to purchase sugar from farmers at the HPP price. PPI will play the role of being a national stock holder to maintain the stability of sugar.

Investment opportunities

According to the Ministry of Trade, Indonesian sugar consumption within the consumer retail segment is 3 million tonnes per year, while national sugar production is only about 2.5 to 2.7 million tonnes per year resulting in a shortfall of 300-500,000 tonnes of sugar. Indonesia’s youthful population and growing middle class is feeding demand from the food and beverage industry as well as hotels and restaurants which means that demand will continue to rise, highlighting the opportunities that the sector has to offer.

The bright prospects for investment in the national sugar industry is evident from the growing interests of the private sector to invest in the sector (See Opportunities in Indonesia’s Downstream Sugar Industry). For example, PT Pratama Nusantara Sakti, PT Indah Cemerlang, PT Gendhis Multi Manis and PT Sukses Mantap Sejahtera will begin construction of four new sugar mills in 2016. These sugarcane-based factories are located in OKI, South Sumatra; Konawe, Southeast Sulawesi; Blora, Central Java; and Dompu, West Nusa Tenggara.

The government will also build a new sugar mill in Comal, Pemalang, Central Java and will revitalise three other existing plants. The mill will have a production capacity of 10,000 TCD and will cost 2 trillion IDR in investment. The Ministry of Industry also plans to transform a sugar factory in Lamongan into the first raw sugar factory in Indonesia. The mill that will boast a capacity of 300,000 tonnes per year and is intended to gradually reduce Indonesia's dependence on imported raw sugar. To achieve this goal, Indonesia requires ten raw sugar factories to eliminate its import dependence. Such investments are in conjunction with measures to cultivate a further 500,000 hectares of land in Kalimantan and Sulawesi to realise the plan of self-sufficiency by 2019.

Indonesia’s self-sufficiency efforts in a number of key commodities have failed to achieve the final goal, however this should not put off investors in the sugar sector. Rather, the positive momentum that such goals generate lead to cutting of much of the red tape that has hampered progress and provide an opportune time for investors to participate in the sector as well as take advantage of various incentives on offer. High yield sugar producing countries that can offer technology and know-how to work together with the government to revitalise aging plants and boost sugarcane output will also find now to be a highly strategic time to work with state-owned as well as private sector companies as they seek to get ahead of the demand from Indonesia’s sweet tooth.

Global Business Guide Indonesia - 2016

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Indonesia Agriculture Snapshot

Contribution to GDP: 13.88% (Q3 2015 including Fisheries & Livestock)
Number Employed in the Sector: 40.12 million (February 2015)
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.