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Industry Overview: Indonesia Palm Oil Industry

 Being the third largest export earner, palm oil plantation and its processing industry has indisputably become an important industry in Indonesia. Among the various natural resources, palm oil is considered the most important industry in strategic terms as it contributes to nearly 4.5% of the GDP, makes up a significant portion of foreign exchange earnings. Furthermore, the palm oil plantation industry actively provides opportunity for small-scale farmers to participate in the palm oil planting, develops the rural economy and generates significant employment.

The current total plantation area is approximately 8 million hectare ("ha") and is projected to reach 13 million ha by 2020. During the last decade, the palm oil industry in Indonesia has been developing rapidly, and has close to doubled in size (4.2 million ha in 2000 increased to 8.0 million ha in 2010). In line with the development of the plantation areas, the volume of CPO production also increased significantly from 7.0 million tons in 2000 to 19.8 million tons in the last decade, a significant increase of 182%. In terms of geographic distribution, nearly 66% of the plantation area was located in Sumatera, 30% in Kalimantan, 3% in Sulawesi and the rest spread across other parts of Indonesia including Java and Papua; as per 2010 data released by PwC 2012 report.
 
Indonesia overtook Malaysia as the largest palm oil exporter and currently holds over 50% of global market share. The majority of CPO producers in Indonesia currently sells overseas. The export profile for 2011 is dominated by CPO ahead of olein and biofuel, whereas the export markets are dominated by India and China. The industry is broadly split among private enterprises accounting for an estimated 48% of production, small hold farmers at 40% and state owned plantations at 12%. Some of the largest companies in the sector are Sinar Mas, Wilmar Group, Astra Agro Lestari and Indofood Agri Resources.
 
Buoyed by the steady increase in world prices of Palm Oil, the Indonesian Government has taken several steps to help and boost the industry further. It has set a future production target for the year 2020 at 40 million metric tonnes and plans to double the land currently under cultivation over the next 10 years. The Government has also cut the maximum export duties on refined, bleached and deodorized palm oil from 23% to 10%, the rate for RBD palmolein was reduced from 25% to 13%, while the highest tax for crude palm-oil export was set at 22.5%. 
 
For decades, Indonesia has shipped out tanker loads of raw palm oil for processing into higher value cooking oil and margarine in Rotterdam, Mumbai and Kuala Lumpur. To take advantage of the lower duties in the country, many Palm oil companies have plans to almost double their refining capacity to 43 million metric tonnes with an investment wave of more than $2.5 billion. This has started a new wave of investments in this sector.
 
PT SMART, Indonesia's top palm oil firm had launched $249-million Marunda plant and they now plan to spend a further $200 million on new refining capacity. Singapore's Wilmar, the world's largest listed palm oil firm, has also invested $900 million to build factories in Indonesia to produce Crude palm oil and end products such as soap and margarine.  Mission NewEnergy is moving into the Indonesian market after acquiring an 85% interest in Singapore-based company Oleovest Pte, which holds a 70% equity stake in a newly formed palm oil joint venture in Indonesia. They are planning to invest about US$200 million for the project in Indonesia. Agricultural processor Bunge Ltd is also making its first investment in the palm oil industry by acquiring a 35% stake in an Indonesian company.
 
The future of Indonesia as the world's largest producer of palm oil must be considered in terms of environmental sustainability as a fundamental guiding principle. What is good for the environment is good for business and sustainable farming is the key to the livelihoods of the smallholder farmers as well as to consumers. The steps initiated by the Government have also helped in increasing the exports of palm oil and have given the local manufacturers a global competitive edge. The future outlook of the palm oil sector is quite optimistic as the demand for exports is mainly being driven by China and India's use of palm oil in foodstuffs and biofuel production. 
 
(Source: Insight Alpha)
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