Palm Oil companies began Glancing Investment in Palm Oil Downstream Sector

Written by:

Wiko Saputra

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

PT. Pavillion Capital Indonesia

Indonesian government's efforts to develop downstream palm oil industry to get the response by businesses in the oil palm industry. Based on reports from the Ministry of Industry, there are six large companies that will invest in downstream palm oil sector in Indonesia are Wilmar Group, Permata Hijau Group, Domba Mas, PT. VVF Indonesia, PT. SMART and PTPN III. This is the first step to boost the growth of downstream industries that still underdeveloped compared to the upstream industry.

An estimated total investment of the six companies will reach U$D 2.03 billion. Wilmar Group will build six new plants in two places, namely Gresik (East Java) and Sei Mengke (North Sumatra). The plant will focus on developing industrial oleochemicals will be integrated with the derivatives industry. Wilmar Group is estimated to require an investment of USD 900 million. Later this year, Wilmar Group has started construction of their factory in Gresik and next year in Sei Mengke.

Permata Hijau Group, which has been very focused on the development of cooking oil processing industry. And is the producer of cooking oil in Indonesia's third largest with a market share of 6.04% began to look at the development of oleochemicals industry. Permata Hijau Group will develop their integrated oleochemical industry with an investment of USD 220 million.

Domba Mas also will build a processing plant oleochemical with a focus on two products namely fatty acids and fatty alcohol. Investment is estimated to reach USD 180 million. PT VVF Indonesia also plans to expand into the downstream industry. They will invest $ 100 million to develop palm oil derivative products.

PT. SMART is a leading company in the development of oil palm industry in Indonesia is also committed to fully support the development of downstream palm oil industry in Indonesia. PT. SMART has prepared an investment of USD 250 million. In March 2011, the Sinar Mas Group has inaugurated construction of the plant downstream palm oil industry is located in Marunda Center International Warehouse & Industrial Estate, District Bekasi. The factory is capable of processing 300,000 MT of CPO / year. And will produce 168,000 MT of cooking oil and 112,000 MT of margarine and shortening. In addition, PT. SMART also has expanded its plant Cocoa Butter Subtitute (CBS) 5 hectares with a capacity of 140,000 MT/year.

In addition to investments made by private companies, state-owned company engaged in oil palm industry (PTPN II) also participated in the development of downstream palm oil industry. PTPN II with a working area covers North Sumatra plans to develop the palm oil industry cluster in Sei Mengke. PTPN II will build on the region Sei Mengke industry in the early stages covering 104 hectares. The plan will be built some cooking oil processing refinery, margarine and shortening processing refinery and oleochemcal processing integrated. For the initial stage, PTPN II will invest up to USD 300 million. PTPN II will collaborate with investors to develop industrial areas Sei Mengke as a special industrial area development of downstream palm oil industry in Indonesia.

With these investments, government efforts to encourage an increase in the value-added palm oil products through the development of downstream industries will be realized. Currently, the government is attempting to provide support to the investment plan. The Government will set up the infrastructure that supports the development of downstream industries. This effort has been poured by the government in the Master Plan for Acceleration and Expansion of Indonesian Economic Development 2011-2025. Which the government will give priority to infrastructure development to support the development of downstream palm oil industry in Indonesia.

In addition to efforts to boost infrastructure development. Government of Indonesia also synchronizes policies that will encourage the competitiveness of downstream industries in palm oil sector. The government has revised its palm oil export tax policy is more pro-smallholder and the development of downstream industries. In addition, the government also provides fiscal incentives in the form of a tax allowance against some palm oil derivative products and processing industry with a capacity above of 50,000 MT/year. Providing ease of licensing and so forth. With the joint commitment of the company and the government expected the downstream palm oil industry will be able to contribute greatly to economic development in Indonesia.

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.