lndonesian Palm Oil lndustry: Challenges and Prospects M. Fadhil Hasan Senior Economist INDEF Indonesian Palm Oil Association Jakarta, Indonesia Presented at Indonesia Synergy s Discussion Series Can Indonesia Develop and Promote Sustainable Palm Oil? Canberra, 20 July 2012
Roles of CPO in the Indonesian Economy Pro-growth; the export volume of CPO is 16.5 million tons in 2011, contributing significantly to foreign export earnings of US$ 19.7 billions (about 10% of total export earnings). Pro-job; the palm oil industry creates about 4 million employment opportunities, consisting of farmers, plantation and industry workers. Pro-poor; palm oil industry supports regional development and poverty alleviation, especially in rural areas of Outside Java However, rapid expansion of large-scale plantation often triggers land-conflicts and declining natural forests, stimulating debates at the policy level and the fields
Indonesia s Revealed Comparative Advantages (Percent; quarter-over-quarter, annualized) Indonesia s RCA 2000 2001 2002 2003 2004 2005 2006 2007 2008 Non-manufactured 2.03 2.09 2.30 2.33 2.07 2.25 2.32 2.39 2.57 Manufactured 0.74 0.73 0.70 0.67 0.73 0.64 0.62 0.60 0.55 Top Ten Commodities CPO 24.1 22.97 30.94 30.01 41.79 39.65 40.61 44.58 41.05 Tin 13.45 15.62 20.83 26.11 29.65 34.3 31.41 27.78 37.55 Rubber 9.11 9.14 11 13.27 17.22 14.48 17.55 18.64 18.61 Coal 6.65 7.47 8.14 9.03 9.21 9.5 12.2 12.81 10.48 Papers 2.43 2.34 2.48 2.36 2.42 2.3 2.49 2.53 2.56 TPT 2.2 2.26 2.03 1.99 2.21 2.05 2.03 1.9 1.81 Copper 1.19 1.43 1.76 2.39 2.08 2.26 1.82 2.51 1.87 Electrical Appliances 0.69 0.7 0.75 0.69 0.77 0.66 0.52 0.48 0.47 Chemical Products 0.56 0.52 0.5 0.52 0.58 0.49 0.48 0.53 0.47 Machinery & Mechanics 0.13 0.12 0.14 0.16 0.18 0.2 0.23 0.27 0.28 Source: Calculated from UN Comtrade, 2010
Relatives RCAs 2008 Indonesia Malaysia Philippines Singapore Thailand China Rank Notes CPO 41.05 26.55 8.18 0.34 1.09 0.05 1 Stable Tin 37.55 7.92 0.95 6.77 4.94 0.07 1 Increasing Rubber 18.61 5.34 0.45 0.5 16.79 0.09 1 Increasing Coal 10.48 0.01 0.11 0 0.01 1.06 1 Increasing Papers 2.56 0.31 0.28 0.22 0.63 0.4 1 Increasing TPT 1.81 0.63 1.1 0.18 1.08 3.12 2 Stable Copper 1.87 0.89 4.03 0.31 0.44 0.44 4 Stable Electrical Appliances 0.47 1.87 3.99 2.64 1.61 2.27 6 Decreasing Chemical Products 0.47 0.55 0.21 0.88 0.73 0.52 5 Stable Machinery & Mechanics 0.28 0.23 0.32 0.52 0.86 0.63 6 Increasing Sumber : Modjo, 2010 4
World Demand for Palm Oil (1000 tons) Imports 2007/08 2008/09 2009/10 2010/11 August 2011/12 India 5.013 6.867 6.603 6.750 7.100 China 5.223 6.118 5.760 5.950 6.650 European Union 4.960 5.504 5.422 5.100 5.600 Pakistan 1.958 1.957 2.041 2.100 3.300 Malaysia 669 1.047 1.283 1.350 1.400 Egypt 553 1.024 1.174 1.125 1.250 Bangladesh 724 700 951 1.050 1.120 USA 952 1.036 994 930 998 Iran 610 504 548 570 650 Singapore 287 328 352 475 600 Other Countries 9.335 8.579 9.623 10.309 10.403 Total 30.284 33.664 34.751 35.709 37.971 Source : USDA, 2011
Source: Oil World, 2010
M Ton World Production of CPO: Increasing 90 80 70 60 50 40 30 Indonesia Malaysia World 20 10 0 1995 2000 2005 2009 2010 2015 2020 Source : Oil World (2010) and IPOA (2011)
Estimates of CPO Production, 2011/2012 Country 2010 / 2011 2011 / 2012 Indonesia 24,100 25,900 Malaysia 18.200 18.470 Thailand 1.400 1.600 Colombia 800 900 Nigeria 880 880 Other Countries 3.300 3.400 Total 48.680 51.150 Source : Oil World (2010), USDA (2011)
Production of Vegetable Oils: Increasing 50 45 40 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Production growth of vegetable oils in the last five years: Palm Oil 9%, Soya 3,5%, Rape 8,5%, Sunflower 7,9% 35 30 25 20 Palm Oil Soy bean Sunflower Rapeseed 15 10 5 0 Expansion of three major vegetable oils from 2005 to 2009: Soybean 4.6 millionsha, rapeseed 5.1 million ha, Oil palm 2,8 million ha Source : Oil World (2010)
Production and Trade of Vegetable Oils (000 ton) Vegetable Oil Oil Production Traded Period 2011/12 2010/11 2011/12 2010/11 Metric Ton Metric Ton Metric Ton % Metric Ton % Soybean 43.72 41.74 10.17 15.85 10.26 16.69 Canola 22.97 23.57 3.64 5.67 3.60 5.85 Cotton Seed 5.34 4.92 0.18 0.28 0.17 0.28 Sunflower 13.33 12.15 5.03 7.84 4.57 7.43 Peanuts 3.92 4.12 0.22 0.34 0.20 0.33 CPO 51.10 48.68 39.50 61.56 37.60 62.15 PKO 5.86 5.54 3.35 5.22 3.11 5.06 Coconut 3.40 3.17 2.08 3.24 1.98 3.22 Total 149.64 143.89 64.17 100.00 61.49 100.00 Source : USDA, 2011
FUTURE PROSPECTS OF PALM OIL The World Bank (2009) estimated that 7.6 billion people will occupy the earth as early 2020. The assumes that the growth rate of world population is 11.6% The International Finance Corporation (IFC), expects to see the per capita demand for staple food rise by 5% in the same period Transferred to the need for vegetable oils, this means an additional production requirement of around 27.9 million tonnes vegetable oils in the year 2020 If this demand is to be met with palm oil alone, the cultivated area to be increased by 6.3 million hectares of additional land.
This presupposes, the productivity of the palm oil plantations will increase by 10% within the next 10 years The situation would look even more precarious if the need be met by soybean. In this case an additional 42 million hectares of land would be needed more than five times the area in the palm oil industry. By combining the four main vegetable, the area expansion needed are: palm oil (3,9 million hectares); soybean (6.5 million hectares); rapeseed (14 million hectares); and sunflower (9.7 million hecatres): As notes: productivity of soybean 0.37 ton/ha/year and of palm oil 4.14 ton/ha/year (Oil World, 2010) Future prospects are quoted from Aly Rashad Abdel- Moemin (2011)
Indonesia is the Largest Palm Oil Producer Indonesia is the largest CPO producer, reaching about 23.5 million tosn in 2011 and growing at 5,1 percent per year. Land expansion of oil palm from 2001 to 2009 in average is 372.000 ha/year or increased by 7 percent per year. The growth of palm oil industry in last decade is the largest level ever, similar to the growth level in the 1980s at the initial introduction of oil palm industry. However, the productivity gap between smallholders and large-scale plantations is widening (2.86 ton/ha vs. 3.54 ton/ha).
Source : Oil World, 2011
Indonesian Palm Oil Structure Year Areas (000 ha) PR % PBN % PBS % National 1980 6 2 200 68,9 84 28,9 290 1990 292 25 372 33 463 41 1.127 2000 1.167 28 588 14,1 2.403 57,8 4.158 2008 2.882 39,1 603 8,2 3.879 52,7 7.364 2009 3.061 38,9 630 8,0 4.181 53,1 7.872 2010 3.078 38,3 637 7,9 4.321 53,8 8.036 2011 * 3.090 37,7 644 7,9 4.466 54,5 8.200 PR = Smallholder Palantations; PBN = Government Plantations; PBS = Private Plantations. Source: Central Bureau of Statistics, 2011 * Preliminary data
Production of CPO by Industry Group 14 000 000 12 000 000 10 000 000 8 000 000 6 000 000 4 000 000 2 000 000 Tabel 1.1 Produksi Kelapa Sawit Indonesia Tahun 2004-2010*/ Productions of Palm Oil in Indonesia 2004-2010* 0 2004 2005 2006 2007 2008 2009 2010* PR/Smallholders PBN/Government Plantations PBS/Private Plantations In term of production, the share of smallholders plantation 36% (7,6 million tons), while those of state-owned and private plantation are 12% and 52%, respectively. In terms of land area, the share of smallholders is 41%, while that large-scale plantation is increasing to 48%, and the remaining 11% is state-own enterprise, but tend to decrease.
Productivity Growth of Indonesia s CPO Year Production Mature Area Productivity (million ton) (million ha) (ton /ha) 2008 19,4 4,98 3,90 2009 21.0 5,37 3,91 2010 21,9 5,73 3,82 2011* 24,55 6,28 3,91 Data for 2011 is an estimate Source : Oil World, 2010 and IPOA, 2011
Export Destination of Indonesia s CPO in 2011(%)
EXPORT OF OTHER CRUDE PALM OIL BY COUNTRY DESTINATION 2011
Future Challenges of Indonesian Palm Oil 1. Threats of global economic crisis, triggered by European cases 2. Trade protection and non-tariff barriers of destination countries 3. Price fluctuation does reflect traditional market mechanisms 4. Concerns of sustainable standards and remerging health issues 5. Buyer-driven supply chain, as a typical agro-based commodities (eg: accusation from Nestle, Greenpeace etc is only a symptom) 6. Unpredictable responses to the alternative energy movement 7. Issues of foods vs. fuels are more real than it was 10 years ago
Domestic Issues in the CPO Industry 1. Land conflicts, poor spatial planning and peat-land management 2. Policies on export tax and value added tax do not reflects the deepening strategy of downstream industries 3. Regional levy and retribution for the shake of local autonomy 4. Poor infrastructures, connectivity and business climate 5. Moratorium forestry policy due to REDD schemes 6. Inadequate research and development (R&D) strategies 7. Unclear pricing policy for biofuels industry and development
Strategies to face challenges: Global 1. Anticipate the economic crisis, seek new market destinations 2. Improve economic diplomacy and trade negotiations at the regional and global fora; 3. Strengthen analytical capability for global market changes and develop hedging and derivative instruments domestically; 4. Improve dialogues on sustainability, especially RSPO & ISPO and possible enforceability at the field level; 5. Disseminate positive performance of CPO and its derivatives to counter the negative campaigns of palm oil industry; 6. Improve preparedness for alternative energy development 7. Increase productivity of staple and strategic foods, implement adaptation and mitigation of climate change.
Policy Recommendation: Domestic 1. Strengthen and finalize the participatory spatial planning at local, provincial and central government (as stated in Law 25/2007); 2. Earmark the state revenue from export tax for improving the productivity of smallholder farmers and downstream industries; 3. Remove unnecessary levies and synchronizing central and local government regulations to improve the competitiveness; 4. Improve infrastructures and support the connectivity (hardware and software) and the business climate, especially for SMEs; 5. Support the moratorium policy for natural forest and peat lands; 6. Increase R&D funding at least 1% of GDP and strengthen the innovation policy, and improve the ABGC partnership; 7. Reform the pricing policy for biofuels industry and reallocate the fossil fuel subsidy for the needy and alternative energy.