At the current rate of growth, Indonesia is expected to overtake Malaysia as the single largest producer of palm oil next year. As it stands, the two countries are the world’s most dominant players in one of the fastestgrowing sectors in the global vegetable market, accounting for more than 85 percent of production. Last year, Malaysia produced approximately 15.4 million metric tons of palm oil while Indonesia followed with 13 million metric tons. Thailand and several Latin American countries are also key competitors.
Expansion
The Indonesian palm-oil sector is still one of the most dynamic sectors in the Indonesian agro-industry, with new investment steadily fl owing in. Blessed with fertile land and an abundant supply of low-cost labor, Indonesia’s palm-oil plantations are perceived as an attractive investment domain for plantation companies seeking to expand their operations to meet the increasing CPO (Crude Palm Oil) demand in the world market.
In 2005, the total area of oil-palm cultivation in Indonesia was 5.4 million hectares, spread across fi ve islands. Approximately 80 percent of this total area is considered mature, while the rest has not yet reached the productive stage. The island of Sumatera is the main planting area for palm oil, accounting for 70 percent of the total planted area. In fact, the majority of plantations in Sumatera are mature and in peak conditions. Kalimantan, on the other hand, is a relatively new destination for the development of oil-palm plantations, so most plantations in this island are still immature.
To accommodate the country’s ambition of becoming the world’s largest palm-oil producer, the Indonesian government has maintained supportive policies to attract domestic and foreign investments. Currently, both existing and new players are aggressively expanding their plantation estates in Indonesia through greenfi eld projects and acquisitions.
At present, the expansion of oil-palm planting has reached approximately 0.4-0.5 million hectares per annum; and a further acceleration is expected, thanks to the higher returns offered by palm oil when compared with other tree crops or staple grains. Consequently, Indonesia’s palm-oil production is expected to surpass that of Malaysia next year.
Better efficiency
Improved productivity and oil-extraction rates have also fueled the growth of production in the Indonesian palm-oil industry. Driven by better management and improved infrastructure, some private plantations reported increased yield of Fresh Fruit Bunches (FFB) from 16 tons/hectare/year in 2004 to 19 tons/hectare/year in 2005. Oil-extraction rates are also projected to rise, from 19 percent in 2005 to 19.5 percent this year.
Although Indonesia’s takeover of Malaysia’s leading position as the number one palm-oil producer in the world is usually attributed to the aggressive expansion of total oil-palm planted area, much of the increased production in the next fi ve years will actually come from higher CPO yields due to higher FFB yields and extraction rates.
Rising exports
Palm oil is a dominant commodity in the global edible-oil market, and consumption of CPO is projected to reach 42.4 million metric tons in 2010. Various reasons are behind this strong growth, mainly:
• Growing global population;
• Rapid industrialization of developing countries such as China and India;
• Emerging needs for alternative source of energy which is renewable and cheaper than crude oil such as biodiesel.
About 75 percent of Indonesia’s palm oil is exported while the rest is domestically consumed—mainly for cooking-oil production. The major markets for Indonesian palm oil are India (26 percent), EU (20 percent), China (13 percent), Pakistan (7 percent), and Malaysia (5 percent). Given that per-capita consumption of vegetable oils is only 10 kilograms for India and 15 kilograms for China (compared to around 35 kilograms for the US and over 45 kilograms for Europe) there are signifi cant growth opportunities to be realized over the long term in the export market to these countries.
Challenges
Entering the Indonesian palm-oil industry is not without risk and challenges. Here are a few key ones that have been identifi ed within this industry:
a) legal environment
Indonesia is still struggling with its legal system and enforcement. Since multiple government agencies are involved in the process of setting up or expanding any palm-oil plantation, many companies are facing legal uncertainties in securing plantation land bank along with the rights and/or title.
b) seedling scarcity
The fast expansion of oil-palm plantations has created a growing demand for seedlings. Most of the certifi ed seedlings are being sent to newly-opened areas in Kalimantan; as a result, many falsely-certified or counterfeit seedlings are appearing on other regional market.
c) social tension
The rapid expansion of oil-palm plantations in Indonesia has resulted in tremendous pressure to traditional communities whose livelihood depends on the forest. Local opposition to the establishment and expansion of plantations may lead to heightened social tension, causing unrest, security issues, and the disruption of operations.
d) sustainability
Sensitive issues on the environment and local communities—such as forest clearing, extinction of rare species, and violation of human rights—have become major concerns in the drive for growth in the palm-oil industry. The reality is that there are still many unanswered questions concerning the long-term sustainability of oil-palm plantation practices.
In an attempt to dispel concerns and encourage healthy investment, state and private sectors have initiated multi-party partnerships, roundtable discussions, social and environmental studies and evaluations, and a persuasive campaign with NGOs. Now, many fi nancial institutions—especially foreign ones—require an environmental and social due-diligence study to be conducted prior to fi nancing facilities. Although far from perfect, these initiatives have led to signifi cant efforts on balancing development with social and environmental preservations.
Outlook
The Indonesian palm oil industry continues to attract foreign and domestic investors as the world becomes increasingly dependent on palm oil—both for food and non-food uses. An aggressive expansion drive and improvement of FFB yields and extraction rates will be key factors in driving Indonesia to be the largest palm-oil producer in the world.
| Industry structure
Historically, the palm-oil plantation sector was the domain of state-owned companies. However in early 1990s, private companies started to enter the industry, lured by attractive margins. Currently, about 60 percent of the total-planted area is owned by private companies. Their domination has contributed to a growing share of smallholder plantations as local-government regulations require them to set aside land for farmers.
No doubt that the signifi cant presence of smallholders in the Indonesian palm-oil industry brings many benefi ts to local communities. However, the challenge is the implementation of effective agriculture practices since production is still based on traditional methods. |
