Global Business Guide Indonesia

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Agriculture | Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth

The year 2015 has been filled with challenges and opportunities for the Indonesian palm oil industry. After being hit by falling commodity prices in the past two years, the national palm oil industry is now upbeat again thanks to increased government support. Over the course of last year, the Widodo administration issued various regulations and policies to boost Indonesia’s second largest foreign exchange earner after the oil and gas sector such as the establishment of the Palm Oil Plantation Fund Management Agency (BPDPKS), CPO (crude palm oil) Fund, mandatory B15 programme, and many more. On the flip side, however, this labour-intensive sector still faces many challenges. These include the decline of global CPO prices in line with the drop in global oil prices, the extension of the forest moratorium and the most ferocious forest fires and choking haze seen to date which has bolstered negative campaigning by local and foreign NGOs, hardened trade barriers by European governments and the US which are all placing pressure on the industry to clean up its act amid dropping revenues.

Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth
Many stakeholders are optimistic that Indonesia’s new biodiesel policy will have positive implications on the supply and demand of CPO both at home and abroad.
 

Increased Government Support

After being neglected for so long despite its strategic position as a key driver of the Indonesian economy, the Indonesian government under President Joko Widodo has begun to pay more attention to the local palm oil industry. A number of breakthrough and business-friendly regulations concerning palm oil were passed throughout 2015. These include the Minister of Energy and Mineral Resources (MEMR) Regulation No. 12 of 2015 on Mandatory Biodiesel Blending of 15% (B15), Government Regulation No. 24 of 2015 on Collection of Plantation Fund and Presidential Decree No. 61 Year 2015 on Collection and Utilization of the Palm Oil Plantation Fund.

Indonesia's CPO Production, 2009-2014 (in million tonnes)

Source: Statistics Indonesia

The MEMR Regulation No. 12 of 2015 on B15 which became applicable as of 1st April 2015 aims to ensure the sustainability of the national palm oil industry. Many stakeholders are optimistic that Indonesia's new biodiesel policy will have positive implications on the supply and demand of CPO both at home and abroad. The rising demand for CPO in the domestic Indonesian market should serve to lower the global supply. This will eventually push up the price of CPO in the international market up to $700-750 USD per tonne.

Other benefits of the mandatory B15 programme are foreign exchange saving through the fuel import reduction, improving the country’s energy security (See Renewable Energy in Indonesia – A Sleeping Giant), reducing emissions and increasing the employment rate. Much to the detriment of this new measure, the removal of government subsidies at the beginning of 2015 and the fall in global oil prices reduced the market absorption of biodiesel throughout the year given the low cost of hydrocarbon fuels. According to the Director of BPDPKS Bayu Krisnamurthi, biodiesel absorption until the end of 2015 equated to around 800,000 kiloliters, or half of the 1.6 million kiloliters recorded during 2014. This is due to the increased price gap between conventional diesel and biodiesel which has risen sharply. Furthermore, the CPO Fund which is designed to replace biodiesel subsidies was not put into action until late in the year in September 2015.

The biodiesel development programme is expected to improve Indonesia’s energy security by reducing its dependence on imported diesel fuel by 15.5% worth 36 trillion IDR in value. This programme is also expected to raise the price of CPO due to increasing demand. In 2016 however, the prospects for biodiesel are expected to be higher as the government introduces mandatory biodiesel blending of 20% (B20). This policy is expected to reduce emissions by 9.4 million to 16 million tonnes of CO2e (CO2 equivalent) per year. This is in line with the outcomes of the COP 21 United Nations Conference on climate change in Paris, France. During the conference, President Joko Widodo promised to reduce Indonesia’s CO2 emissions by 29%.

This means that palm oil demand over the course of 2016 should steadily rise, which in turn will shore up its price. This is an opportunity for investors to invest in palm oil plantations as well as in CPO and biodiesel processing plants as BPDPKS is expected to provide more funding to subsidise 3.6 million out of 7 million tonnes of palm oil needed for biodiesel.

The CPO Fund: Ensuring the Sustainability of the Palm Oil Industry

As part of its efforts to ensure the sustainability of the national palm oil and biodiesel industry, the Indonesian government established the CPO Fund and Palm Oil Plantation Fund Management Agency (BPDPKS). The CPO Fund is a levy imposed on CPO exports to cover the cost of processing biodiesel. The fund will be collected at a rate of $50 USD per tonne of CPO and $20-30 USD per tonne of processed palm oil products in lieu of export duty of 7.5% if the market price of palm oil is under $750 USD per tonne. The government expects the fund to raise $700-800 million USD annually. The fund will not be recorded as a revenue in the state budget and will be managed by four major banks appointed by the Indonesian government.

A significant portion of the fund will be used for research and development within biodiesel, including subsidising the procurement of fatty acid methyl ester (FAME) by Pertamina which is to be used for the mandatory B15 programme. In addition, the fund also aims to provide incentives for replanting older palm oil trees belonging to the community and encourage human resource development within the palm oil industry.

Increased Investments

The Indonesian government expects agro-industrial investments this year to reach 310 trillion IDR which consist of foreign investments of 250 trillion IDR and domestic investments of 60 trillion IDR. The agro-industry is expected to grow by 7.5% this year, or slightly higher than that of last year which grew by 7.21%. Similarly, the number of agro-industrial workers is expected to rise from 1.7 million to 2 million employees; a much needed source of new jobs by the country as other labour intensive industries have cut back on their workforce.

Currently there are 28 companies including state oil firm Pertamina that have expressed their interest in producing biodiesel. However, only 20 companies have filed a Registration Certificate (SKT) in accordance with the MEMR Regulation No. 29 of 2015 on the Provision and Utilization of Biofuel. The Indonesian government has prepared land in six provinces for the development of bioenergy and biofuel crops. The six provinces are Central Kalimantan, East Kalimantan, South Sulawesi, East Nusa Tenggara, Papua and West Papua and a target has been set to increase the share of renewables in the energy mix to 25% in the next ten years.

Barriers to Overcome

Another obstacle faced by the national palm oil industry is the decline in global oil prices which have impacted the price of CPO. The Indonesian Palm Oil Association (GAPKI) recorded that CPO exports in July were only 2.1 million tonnes or down 8% compared to the previous month of 2.7 million tonnes. The daily CPO price was also down 5.2% compared to June reaching $630.6 USD per metric tonne. This has led to a decline in customs revenues which until the first half of 2015 only reached 1.9 trillion IDR.

Other constraints that hamper the national palm oil industry are trade barriers that restrict palm oil exports to developed countries in Europe and the US. Through the RED (Renewable Energy Directive) programme, European countries require palm oil to meet emission saving standards of 11-17%. Similarly,the US also applies renewable fuel standards for the same purpose. Some Indonesian palm oil companies have successfully met the criteria, but now they are accused of dumping practices. The government is currently trying to address this issue by negotiating a Comprehensive Economic Partnership Agreement (CEPA) with the European Union (See Indonesia and the EU CEPA – Deal or No Deal?).

Although environmental issues were often used as a pretext to restrict palm oil exports, there have been murmurings in the press about a supposed trade war. The cost of palm oil production is significantly lower than common vegetable oils in Europe and the US such as soybean, rapeseed and olive oil. In addition, palm oil has a higher level of productivity compared to other vegetable oils which has enabled it to take a larger market share in biofuel use.

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.