Change Observed in the Palm Oil Industry Structure in Indonesia

Written by:

Wiko Saputra

Agribusiness Research & Investment Advisory (A.R.I.A Dept)

PT. Pavillion Capital Indonesia

In the past two years, the Indonesian government sought to develop downstream palm oil industry. Condition that occurs at this time, the imbalance in development between the upstream industries with downstream industries. Upstream industry is growing very rapidly. Oil palm plantation area increased by an average 4-5% per year. Indonesia's CPO production has reached 19.63 million MT and CPKO production has reached 4.90 million MT. Indonesia exports CPO to be the largest in the world with a contribution of 47%. While the downstream industry underdeveloped. Indonesia could produce about 70 types of palm oil derivative products and that too many new semi-finished products is not yet the final product. Compare with Malaysia which has hundreds of palm oil derivative products generated. So the value-added product Indonesia palm oil is very low compared to Malaysia.

In order for value-added palm oil industry is increasing the government of Indonesia has developed a Road Map for the development of downstream palm oil industry. The Government has set three specific areas for development of downstream palm oil industry is in Sei Mengke (North Sumatra), Dumai & Kuala Enok (Riau) and Maloy (East Kalimantan). Through the Master plan Economic Development Acceleration and Expansion of Indonesia, have been developed supporting infrastructure development strategy for the development of special industrial area. This will encourage investors to start investing in the downstream industry sectors as infrastructure issues such as major problems.

The government also seeks to increase the production capacity of cooking oil. This is a very crucial issue in Indonesia today. Indonesia cooking oil industry suffered underutilized. Where only about 56.63% of installed capacity is utilized. In the economies of scale, this is very inefficient, leading to high production costs become so uncompetitive. Though this product is a strategic product in Indonesia. Where the market price rises will have an effect on inflation. So the issue price of cooking oil into the issues that continue to be discussed in the development in Indonesia.

Constraints faced was the lack of supply of CPO for cooking oil industry because of the large Indonesian CPO exports to foreign countries due to high international CPO prices. To press for domestic CPO supply can be maintained then the Indonesian government made a policy of CPO export tax is progressive. This is to move back to the cooking oil industry in Indonesia. In addition to these factors, a lot of cooking oil processing refinery is closed. For that government to revitalize cooking oil processing refinery. And encourage investors to make investments back to the refinery.

Environmental issues in recent years are very hard to hit the oil palm industry in Indonesia. Negative campaign conducted by the developed countries like EU, USA and Australia through environmental NGOs like Green Peace have substantial impact on patterns of trade in palm oil plantations in Indonesia. The most recent issue is the rejection of the sale of PT SMART CPO products by Unilever and Nestle as indicated destroying forests and killing ‘orang hutan’. Though some Indonesian oil palm companies have Rountable Sustainable Palm Oil (RSPO) certificates stating that the company has committed to environmental conservation. Forum RSPO has failed to give a good position against Indonesia's palm oil industry. Finally, GAPKI (Indonesia Palm Oil Association) out of the RSPO. And GAPKI prefer ISPO pattern (Indonesia Sustainable Palm Oil) as a standard that ensures the management of the company is committed to environmental conservation.

Government of Indonesia also has a national commitment to environmental issues. Through the cooperation with Norway's reduction problem and the greenhouse effect of carbon emissions, the government issued Presidential Instruction No. 10 of 2011 regarding New Permit Delays and Completion Management of Natural Forests and Peat lands Basic. This policy will impact on accelerating the opening of new palm oil plantation land in Indonesia. It is estimated that within the next two years will slow the clearing of land for 2-4 million hectares of palm oil, thereby reducing the production of 200-400 thousand MT CPO/CPKO.

The existence of slowing the opening of new land for oil palm plantations in fact provide opportunities for increased land productivity. During this time, the Indonesian oil palm land productivity is very low; approximately 5.6 MT of CPO / Ha with OER is 21-23%. Compared to land productivity Malaysia Indonesia lags far behind. With no restrictions on clearing new land, efforts to encourage increased productivity must be done so that production will continue to rise.

Finally, what happened in the past two years has provided a change in the oil palm industry in Indonesia. Gradually, the Indonesian palm oil industry began a transformation to the downstream industry. This is a significant improvement to improve the value-added palm oil industry. In addition, boost the competitiveness of Indonesia's palm oil industry in the international market.