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Challenges facing the CPO Industry in Indonesia
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27th July 2007

Crude Palm Oil (CPO) is presently the prime commodity in Indonesia, with the government aspiring to rival Malaysia as the world’s largest producer and exporter of the commodity. The increasing popularity of biodieselproduced from processing CPO has made the crop seemingly more lucrative. PT Indofood Sukses Makmur, one of the largest food processing companies in Indonesia, has already acquired extensive permits to produce 225,000 tons of biodiesel per annum from CPO with the backing of the government.

The initial stage involves the opening of 20,000 hectares of CPO plantations in Riau, West, and East Kalimantan with USD 20 million as initial capital. Early forays to secure raw materials started with the purchase of 60% ownership of Rascal Holdings, which collectively manages PT Mega Citra Perdana, PT Mentari Subur Abadi, dan PT Swadaya Bhakti Negaramas.i With a total of 5.6 million hectares of plantations predominantly in Sumatra and Kalimantan, Indonesia plans to add approximately 3.5 million hectares of CPO plantations up to 2020.

A large part of these new plantations will form the border between East Malaysia and the provinces of Kalimantan.ii Despite rivalling Malaysia with the scale of the plantations, the lower productivity in Indonesia as well as the lesser developed downstream industries resulted in recent increases in the price of domestic cooking oil. The CPO industry is a crossroads on the matter of the financial gains of exporting CPO to feed the downstream industries in Malaysia or channelling the resource for domestic consumption.

While the prospect of Biodiesel as a cleaner alternative energy of the future is optimistic, the existing strain on the environment, the annual haze from legal and illegal land conversion, and the lack of financial support for small-scale CPO farmers seem to suggest that Indonesia may not enjoy much of the fruits of this industry. The impact of the shortage of CPO supplies on the domestic consumer market is a possible source of social instability that cannot be resolved in the short term without devastating regional implications.

The Domestic Impact
In June 2006, the government notched the price of domestic cooking oil at IDR 5,026 per kilogram. Between March and April 2007, the price peaked at IDR 9,000 and it has presently stabilised at approximately IDR 8,000. This is the average price in central Jakarta. In the outlying regencies like Samarinda, prices are approximately 15-20% more, given the cost of transportation that has also been affected by recent increases in fuel costs.iii The root cause of this social issue is the increasing global prices of CPO resulting from its increased usage as Biodiesel.

The supply of
CPO cannot keep up with the demand. In mid-November 2006, when oil price hit USD 58.25 per barrel, CPO exports by PT Astra Agro Lestari sold for IDR 4,451 per kilogram. With Crude oil averaging at USD 66 in mid 2007, CPO prices in Indonesia hit IDR 7,626 per kilogram.iv The relationship between the high demands for CPO to produce Biodiesel as an alternative to oil products is clear.

The only hope for price stabilization is that the CPO harvest between June and September in Malaysia and Indonesia coincides with successful harvests of soy in the US that can compensate the demand for the Biodiesel industry. Given tensions in the global oil supplies with the resurgence of terrorist activities in the supply region as well as the key markets in London and the U.S., it is most likely that the price of CPO will continue on a steady upward trend.

The impact of this upward cost of CPO and other sources of energy on the Indonesian households is destabilising the rural economy. Despite government efforts to stabilise prices by bringing subsidised cooking oil to the markets, prices remain high. With the price of cooking oil rising by more than 80% over a 12 -month period, restaurants and more significantly, street side vendors, suffer lower incomes given that they are unable to increase the prices of their food to absorb the cost.

In downtown Jakarta, a piece of banana or tapioca fritter sold by the pushcart vendors is already priced at IDR 400, (approximately USD 0.38). That is considered high for the working class that has to manage the increased costs of transport from the central business district and retail centres to their homes, which are normally at least an hour out of town. Vendors are fearful that increasing prices will affect their competitiveness and they may lose their regular customers.

The upward trend in the prices of CPO exports does not lead to the improvement of the lives of domestic farmers. The increased cost of cooking oil already adds pressure to the social tensions arising from the increase in fuel costs in October 2005. Despite the increase in the price of CPO in the international markets, the price of raw CPO fruit in Indonesia (TBS =Tandan Buah Segar) remains relatively low. This is caused by increasing duties (PE = Pungutan Export) that the government levies on exports to curb the outflow of raw materials as a control mechanism to manage the price increase in domestic cooking oil.

When CPO prices hit USD 622 per ton in June 2007, the Indonesian government levied 1.5% tax on exports. Hence, for every ton of CPO exported, the levy of USD 9.30 caused local buyers to notch the purchase of raw CPO fruits from farmers at between IDR 1,050 to IDR 1,400. As CPO prices crossed the USD 700 mark, the government increased the duties to 6.5%, amounting to USD 40.43 per ton.

The increase in the purchase price of TBS because of the increase in global CPO demand was short-lived, as local buyers had to suppress the purchase price to factor in the massive increase in export tax. The government levy succeeded in reducing the export of CPO by 5% to 7% but also effectively suppressed any hope of local farmers enjoying the benefits of the increase in global prices.

Since January 2007, across the board, the increase in the price of cooking oil has also affected the price of food in the capital. This situation is far worse in remote places like Papua, the eastern islands of the Archipelago where all basic supplies are transported via sea from Java. This shock comes after recent price increases in rice in the first quarter of 2007 due to failed harvest in areas facing erratic weather. These circumstances have pushed the consumer price index of food from about 135 in June 2006 to marginally below 150 in June

The Indonesia Palm Oils Producers Association notes that CPO producers are waiting for the government to detail their plans to stabilise the domestic price of cooking oil and other related products at a time when global CPO prices are steadily increasing. Until the end of May 2007, the supply of CPO is only 23% of the targeted 100,000 tons. Until the position of the authorities is firm, even PT Perkebunan Nusantara (PTPN), the state-owned company, is fearful of being faulted for releasing its stock to the export markets. The caution is understandable given that the media has already labelled the CPO industry a cartel with a substantial and profitable monopoly.vii

Controlling the market price of cooking oil is also becoming controversial as there are suggestions that the revenue from the export tax of CPO which has increased to 6.5% should not be channelled to the national budget but directed to ongoing efforts to bring more subsidised oil to the market. While the government is bearing the financial burden of subsidizing approximately 30,000 tons of subsidised cooking oil per week, the apparent gainer seems to be the downstream oil producers. They are able to release substantial lower quality stock that would otherwise be unsold at relatively higher prices with a ready market; all thanks to the government subsidies.

Counter Measures under Consideration The government is planning to replace the Export Duties (PE = Pajak Export) for CPO.viii This plan hopes to be tabled by the end of July. The general idea is to remove the export duties for CPO and enforce the compulsory provision of stocks for local consumption tabled as Domestic Market Obligation (DMO). The obligatory supply for the domestic market however is problematic for the CPO suppliers who have to honor export contracts that intensify as global demand climbs.

Also by controlling and keeping artificially low prices that do not reflect global CPO prices, there is a higher likelihood for smuggling. Another option is to fix the maximum retail price of cooking oil. This would force downstream producers to manage their costs and bring about better coordination among the industry players without the need for obstructive government intervention.

In the meantime, there are inadequate efforts to assist lower income families in coping with the increased prices of basic essentials. Local authorities still resort to issuing all mothers with vouchers to limit their purchase of cooking oil at the subsidized rate of IDR 6,500 per litre.

Long term efforts are also underway but their impact will not improve the present situation. The Ministry of State Owned Enterprises has directed three of its companies to expand their operations to include downstream sectors. The investments will total IDR 1.6 trillion. The hope is that the integration of CPO processing and production for consumer needs will increase the efficiency of CPO processing, develop competitive end products that will decrease the market cost of essentials like cooking oil.ix

The state-owned plantations will fund 30% of the projects while the balance will come from the central government. This direction to the downstream industry is also balanced with increasing participation by banks to support the opening of new CPO plantations. Early in 2007, BNI already approved IDR 1.2 trillion of credit facilities while Bank Mandiri offered IDR 3.9 trillion of credit to open new CPO plantations. With much of the credit going to large land holdings, and the government insisting on the export tax levy on CPO, it is unlikely that the small-scale farmers can benefit from the massive increase in CPO prices in the international markets.

Biodiesel as Alternative Fuel
The notion of using Biofuel as an environmentally friendly option in Indonesia is a somewhat strange phenomenon. The limited supply of CPO as raw material for the production of Biodiesel dampens the excitement of the program taking off on a large scale soon. In addition to the higher cost of producing Biodiesel, the environmental damage caused by massive land burning during the dry seasons nullifies any benefits supposedly acquired from the use of ‘greener’ fuels. But there is extensive hype in the government. Yudhoyono started the move towards Biodiesel with great enthusiasm at the close of 2006 by inviting the competitors in the CPO industry in Malaysia to open their production base in Indonesia. These included Genting Plantation and Biodiesel, Sime Darby Berhad, Khazanah Finance, Telecommunications and Infrastructure, and Petronas; all of which are cash-rich but less tolerant of the high administrative costs and the lack of Bumiputra incentives in Indonesia.x

For Indonesia, resorting to Biofuel is a matter of dire economic survival in the long term. Initial figures place the government’s subsidy at IDR 93 trillion; 54% allocated for fuel subsidies and 46% for electricity. The government has a tolerance margin of 5% for these subsidies.xi These subsidies will cater to the 6% increase in electricity usage, and are based on the assumption that the Indonesia Crude Price is stable at about USD 60 per barrel.

These fuel subsidies also include the ongoing program to reduce the use of kerosene and to promote the use of LPG. The scale of the subsidies, particularly for electricity generation, is worrying given that the consumption is on an upward trend. Government efforts to expand industrial capacity will inevitably cause greater strain on the electricity grid. The relatively weak position of the Indonesian Rupiah and the weak technical logistics overland have affected the flow of oil imports which has recently resulted in blackouts in parts of Jakarta and West Java.

The government hopes that the R&D efforts of PT Perkebunan Nusantara XII (Persero) can produce Biofuel using Jatropha Curcas and Kopra which will not affect the export of CPO. But to get the scale of cultivation that is sustainable, farmers will inevitable encroach on vital land parcels which will give greater returns as CPO plantations. So far the planting of these two feeder crops for Biofuel production has reached approximately 3,000 hectares. This is far from optimal, nor sustainable, to attain the maximum of 20% non-oil component for Biodiesel.

At implementation level, the Biofuel produced only powers the vehicles and generators used in several of their plantations. To use Biofuel in a city like Jakarta, Surabaya and Medan would require far more concerted effort at planting and processing Biofuel. Despite being promoted by the Minister for Agriculture, eventually, the only sustainable crop to produce biodiesel at the moment is still CPO. Taking the substantial supply of CPO out from the export or domestic market for Biodiesel production will affect the supply of other related products to households and dent the income from the export of the crop.

Despite promises of investment by foreign companies, the Biofuel industry is rather stagnant at present. In January 2007 Kanematsu Corporation expressed interest in investing USD 25 million in the development of Bio-energy using cassava as a feed crop.

Riau Province was one willing partner in the endeavour with feed stock supposedly available from 5.4 million hectares of CPO as well.xii The real cost of the transition can however be felt when PT Pertamina, the state-owned oil company, forwarded a request for subsidies to defray the cost of producing, marketing and delivering Biodiesel to consumers who have not been informed and are costsensitive to the higher premium of cleaner fuel.xiii The global prices of Biodiesel stand at USD 0.59 and Bio- Ethanol is sold for USD 0.60 per litre. This is comparatively higher than gasoline that is averaging between USD 0.41 and USD 0.44 per litre.

There is also a lack of critical demand to justify a broad-based and expensive public awareness program of the benefits of converting to Biofuel. The government will respond to the pricing mechanism of Biofuel in the later part of 2007. So far, the key players in the alternative energy sector in Indonesia are Mitsui, Wilmar Group, Sampoerna, EN3 Korea, BPPT, Medco, Genting, Indomal, Sweden Bioenergy, Tolaram, and Eterindo.

Unsustainable Environmental Impact
The expansion of the CPO plantations on a large scale exerts an extensive negative environmental and economic impact. The impact is not restricted to Indonesia and the forests fires over the past decade have encroached on the economic and daily lives of Singapore and Malaysia. Accurate contemporary data is hard to acquire as the government is often protective of the real condition of environmental degradation. But data from 1997 provided by the Indonesian Department of Forestry shows the degradation prior to the Regional Financial Crisis accurately. Riau in 1991 had 62.6% of forest cover.

By 1997, this became 52.5% of forest coverage. South Kalimantan had 47% forest coverage in 1991. This dropped to 27% of forest coverage in 1997.xiv There is a likelihood that the urbanization has led to reduced forest lands but the extent of the loss suggests extensive clearing activities that are unsustainable.

The clearing of forests for the sake of expanding CPO plantations is likely to intensify with increasing government commitment to rival Malaysia. The annual cycle of land clearing has again caused mayhem along the vital Straits of Malacca and the tourism industry of Malaysia, Thailand and Singapore.xv Indonesia already has 5.5 million hectares while Malaysia has 3.3 million hectares, collectively more than half of the total land area devoted to CPO in the world. The Indonesian government is however preparing incentives for new investments so that the production output of 13.5 million tons per annum can surpass the 15.7 million tons produced by Malaysia.xvi

Despite caution from NGOs and academics, the government is proceeding with auctioning 1.06 million hectares of land for the wood and CPO industry. This adds on to a consistent reduction of 2.8 million hectares of land per annum.xvii The present delay of the dry seasons may not necessarily half the intensity of forests fires as hoped by the Indonesian government as erratic weather patterns may also delay the rainy season. This opens up the potential of a late dry season that may extend beyond the usual monsoon period.xviii

These worries are compounded by the governmental plans to expand the wood and paper industries concurrently with the CPO industry. This would add pressure to the existing rate of deforestation, which ranges from 1.6 to 2 million hectares annually.xix

This issue of increasing deforestation and the continued expansion of CPO plantations is compounded by the often conflicting relationship between the central government in Jakarta and the Provincial as well as Regency administrations.

Conservation is one essential option that few in Jakarta will agree with. But this seems to be the only sustainable and real option while Indonesia develops new, clean and safe sources of energy for domestic consumption as well as for export. There are presently no concrete measures for energy conservation in the city.

There are no existing limitations for the ownership of cars. The import of luxurious and fuel guzzling vehicles is the norm for the wealthy families. Public transportation is still rudimentary and hence private ownership of cars and motorcycles has become a necessity. As long as the strain on oil supplies increases, the pressure to control CPO as a possible source of Biofuel will clash with its already dominant role as an export crop as well as one for domestic consumption. This paper presents a simple conclusion that energy conservation will create massive paradigm shifts in the management of energy and plantation resources in Indonesia.

Any other efforts to add new supplies of CPO will only create greater ecological strain on the already fragile environment. The dry seasons in 2007 will be a barometer of the intensity of increasing CPO plantations on deforestation. The primary paradigm shift is for the Indonesian government to regard the massive peat lands as more valuable in a Carbon-Trading Scheme than as CPO plantations.

i Indofood Lirik Bisnis Biodiesel, Tempointeraktif, 17th October 2007,

ii Tryfino, The Potency and Prospect of the Palm Oil Industry, Economic Review No 206, Dec 2006,

iii Harga Minyak Goreng Masih Tinggi, 11th July 2007,

iv Short-Term Energy Outlook, 10th July 2007,

v Kenaikan PE CPO Turunkan Ekspor 5-7 Persen, 26th June 2007,

vi Perkembangan Indeks harga Konsumen/inflasi, 2nd July 2007,

vii KPPU: Industri CPO diduga kartel, 14th June 2007,

viii Pemerintah Matangkan Konsep Pengganti PE CPO, 26th June 2007,

ix Kementerian Negara BUMN, 30 April 2007,

x SBY woos M'sian investors to put money in biofuel, 7th August 2006,

xi Subsidi BBM-Listrik 2008, 20th June, 2007,

xii Sourced from PT Perkebunan Nusantara XII, 19th January 2007.

xiii Pertamina Minta Subsidi Biofuel, 23rd May 2007,

xiv Perbandingan Data Luas Hutan dan Non Hutan Per Propinsi (RePProT 1985 - Dephut 1991 - Dephutbun 1997),

xv Palm Oil Firms Burning Indonesia Forests, 12th July 2007,

xvi Government Preparing CPO Policies, 22 January 2007,

xvii Melelang Hutan Indonesia, 24th January 2007,

xviii Kebakaran hutan dan lahan dalam 10 tahun terakhir, 30th April, 2007,

xix Hutan Tanaman Dikelola Intensif di Indonesia, Center for International Forestry Research, 8th March 2007,

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