2008-2009 DATA CONSULT. All rights reserved.
MARKET INTELLIGENCE REPORT ON

PALM OIL INDUSTRY IN INDONESIA
May 2006

Current issues

Palm oil has gained importance  with the soaring prices of crude oil in the world market. The prospects  are good  for palm oil to be used not only as the basic material for cooking oil and other household consumer goods but many countries begin to use it as the main basic material for bio-diesel as a substitute for oil fuels.
With the prices of crude soaring to exceed US$ 70 a barrel, bio-diesel from palm oil becomes more competitive.

The leapfrogging growth of the Chinese and Indian economies also contributes to an increase in the world's total consumption of palm oil rapid. The two Asian giants have become the largest consumers of crude palm oil (CPO) mainly to be used as the basic material for cooking oil.  In addition, CPO is more competitive facing other cooking oil basic materials such as soybean  oil.
The prospects have strengthened Indonesian determination to emerge as the world's largest producer and exporter of CPO relegating Malaysia. Indonesia has comparative advantage over Malaysia. Indonesia has large land  available for expansion of plantations. Malaysia has limited land. The government already launched a program to expand  the country's oil palm plantations by 2 million hectares  to increase the country's CPO production to 20 million tons a year making the country the largest producer in the world.

However, expansion of oil palm plantation is not  without difficulties. It is not easy to get the 2 million hectares of land for oil palm plantation. The government including the regional administrations have issued many licenses for conversion of forest land into plantations but many of the  license holders are not interested in building  plantation but they want only   the trees from the forests  after that the land is abandoned or left idle. As a result new investors find it more difficult  to have land for plantations.

Meanwhile, the holders of the license to convert forest lands are not serious in using the land for oil palm plantations.

Meanwhile, there is strong call from Europe  that expansion of oil palm plantations must not be at the expense of the environment. It will be a problem if the EU  imposes  restriction on  banks financing such projects.

Industrial Structure

Oil Palm Plantations and Owners

In the past 16 years notably since 1989, oil plantations in the country expanded   by 12% annually on the average - from 974,000 hectares to  5,597,000 hectares in 2005.

Rapid expansion of oil palm plantations began  by the end of the 1980's marked by heavy investment  by large private companies in the  palm oil  sector building plantations and processing plants. Earlier business in oil palm plantation was dominated by state companies.

Increase in the prices of crude palm oil (CPO)  in the  world market has drawn not only large investors to the palm oil sector but also small farmers.

Farmers began by joining the nucleus smallholder estate (PIR) scheme, a system of cooperation between large company and a group of farmers. But later smallholder plantations expanded  outside the scheme.

Currently private plantation companies (PBS) dominate the sector in  size  of plantations. In 2005, the country had 5,597,158 hectares of oil plantations and around 3,003,080 hectares or 53.65% of which were owned by PBS. Smallholders (PR) owned 1,917,037 hectares or 34% and state companies (PBN) accounted for the remaining 12.10%.

State plantations have expanded only by 4% a year on the average lagging behind PR and PBS which grew each by 14% a year in the period of 1990 - 2005.


Table - 1
Area of oil palm plantations by type of owners,
1990 - 2005                                   (000 ha)


Note:
*) Provisional figure (hectare)
PR: Smallholder plantation
PBN: State owned plantation
PBS: Private plantation company
Source : Plantation Directorate General

Riau had the largest oil palm plantations

Based on official data from the Plantation Directorate General, oil palm plantations are located in 17 provinces in Sumatra, Java, Kalimantan, Sulawesi, Maluku and Papua. In 2005, Sumatra had the largest plantations accounting for  4,280,094 hectares or  76.46% of the total plantations in the country. In Sumatra, Riau has the largest part of 1,383,477 hectares, followed by North Sumatra with 964,257 hectares.

Kalimantan also has large oil plantations totaling 1,108,288 hectares or 19.80% of the total plantations in the country. West Kalimantan has the largest part of 466,901 hectares, followed by Central Kalimantan with 269,043 hectares. 

Java has only 26,046 hectares or 0.46% of the total in the country. Oil palm plantations in Java are found only in West Java and Banten. West Java is known more for its tea plantations accounting for 77.83% of the country's total.  


Width of Plantations by condition of crops

Many new plantations such as in Riau, Jambi, South Sumatra and  Kalimantan  have young crops not yet starting production. In 2005, 31% of oil palm plantations in the country were not yet producing. Around 68%  were producing.

Old plantations are dominant only in North Sumatra where oil palm plantations were first developed. The country production of CPO, therefore, is expected to surge in the coming few years  after the young  crop begin to yield fruits. The country, therefore, is optimistic  that it would soon put Malaysia behind  as the world's largest producer.

Local Producers

State companies began to lose its domination of oil palm plantations in 1990 to private plantation companies. The change in came after a number of private companies invested heavily in the oil palm plantation sector.

In 1997, notably after the monetary crisis, there was another major change  with a number of Malaysian palm oil giants began venture in the oil palm plantations in the country. They acquired plantations or build new ones.

Big  local plantations companies, facing financial problem, were forced to sell their assets to repay heavy debts. The condition opened an opportunity for foreign investors. The Malaysian investors were the first to grab that opportunity.

PT Astra Agro Lestari

PT Astra Agro Lestari is a subsidiary of  the  Astra Group. It has become a holding company for the agribusiness division of the Astra Group. PT Astra Argo Lestari now operates 29 oil palm plantations  totaling  201,412 hectares.

The largest part of its plantations is in Sumatra totaling 102,021 hectares, followed by  Kalimantan 62,545 hectares and  Sulawesi 36,846 hectares.

Around 91% or 183,319 hectares of its plantation are productive  with plants aged around 11 years. The rest  or 18,093 hectares have young crops not yet yielding fruits.

PT Astra Agro Lestari has 19 units of CPO processing factories altogether with a processing capacity of 790 tons of fresh fruit bunches (FFB) an hour. In 2006, the company plans to increase the capacity to 895 tons  an hour.   

Starting 2004,  PT AAL has focused more on palm oil venture by divesting its  business in other sector.


PT Asian Agri

PT Asian Agri is a  holding company for the agribusiness division of  the  Raja Garuda Mas Group. It has 26 oil palm plantations in Sumatra totaling 170,000 hectares but only 150,000 hectares of the lands have been  cultivated. It has 16 palm oil processing plants with a total annual production capacity of  1 million tons of CPO.

Currently PT Asian Agri is building more plants to keep pace with the growing production of fresh fruit bunches.

PT SMART

PT SMART Tbk  is a  palm oil  company operating cooking oil factories integrated with  CPO  processing plants  and  oil palm plantations as well as factories producing other downstream products of palm oil.

The subsidiary of the Sinar Mas Group has oil palm plantations totaling 102,556 hectares in 2005. The plantations are located in Sumatra and Kalimantan. Most or 91,480 hectares of its plantations have been productive. The rest are still too young and not yet yielding fruits.

PT SMART has 12 units of palm oil processing plants with an annual production capacity of 2.9 million tons of CPO and 2 palm kernel  processing plants with an annual production capacity of 200,000 tons palm kernel oil (PKO). In 2005, it commissioned  three CPO plants in East Kalimantan  and South  Kalimantan  with an annual production capacity of  450,000 tons of  CPO.

PT Smart also has palm oil distillation factory producing cooking oil with an annual production capacity of  840,000 tons.

PT Bakrie Sumatera Plantation

In 2005, PT. Bakrie & Brothers Tbk, the holding company of  the  Bakrie & Brothers Group increased its stake in PT. Bakrie Sumatera Plantation by 28 percentage points. Earlier it already had 28.41% stake in the plantation subsidiary.

PT. Bakrie Sumatera Plantations itself  acquired a rubber plantation and  processing facility from PT. Huma Indah Mekar in Lampung  and an oil palm plantation and processing facility from PT. Agro Mitra Madani in Jambi at a total price of Rp. 140 billion. On the other hand PT. Bakrie Sumatera Plantations has sold its assets considered no longer productive such as oil palm plantations under PT. Patriot Andalas in West  Kalimantan.

In 2004, PT Bakrie Plantation operated 32,712 hectares of oil palm plantations including those under three subsidiaries namely PT Bakrie Pesaman Plantaion, PT Agrowiyana and  PT Patriot Andalas. However, the 2,090 hectares under PT Patriot Andalas have been sold .

The Bakrie & Brothers Group plans large scale expansion in the agribusiness sector mainly oil palm and rubber plantations. It hopes to expand its oil palm plantations to 50,000 hectares. After that it wants to invest in  the downstream sector producing cooking oil.


PT Perusahaan Perkebunan London Sumatra Indonesia Tbk (Lonsum)

The company has the largest oil palm plantations in the country totaling 41,870 hectares in North Sumatra, South Sumatra and East  Kalimantan.

Around 27,359 hectares of its oil palm plantations in North Sumatra are productive with complete infrastructure. The rest are not yet fully productive in South Sumatra and East Kalimantan.

After the process of restructuring  in 2004, Lonsum resumed activity in expanding its plantation business in North Sumatra and opening new plantations in South Sumatra and East Kalimantan. The company has replanting seedlings over 14,000 hectares of plantations and operating 15,000 hectares of oil palm plantations in  South  Sumatra.

It has 10 CPO factories  altogether with a processing capacity of 220 tons of fresh fruit bunches an hour.

Early 2004, Robert Kuok Hock-Nien, a businessman from Malaysia acquired part of the majority stake of PT Pan London Sumatera Plantation, which  now owns  20.94%  PT PP London Sumatera Tbk. (Lonsum). Kuok acquired the shares of Pan London Sumatera Plantation from Andre Pribadi, a younger brother of the Napan Group's owner  Henry Pribadi.


PTP Nusantara IV

PT Perkebunan Nusantara IV  (PTPN IV)  is a state plantation company established in 1996. It was a merger of  sate plantations in North Sumatra -  PTP VI, PTP VII  and PTP VIII.

PTPN IV has oil palm, cocoa and tea plantations totaling 153,872 hectares. Oil palm plantations total 119,585.71 hectares, cocoa plantations  7,796 hectares and tea plantations total  7,963.77 hectares. PTPN IV also cooperate with farmers as plasma under nucleus smallholder estate (scheme) over 9,158.56 hectares of oil palm plantations  and 8,996.56 hectares of cocoa plantations and  162 hectares of tea plantations.

PTPN IV has 34 units of commodity processing plant including 16 nits  CPO processing plants. It also has fractionation facility to produce CPO derivatives such as RBD Olein, stearin  and  fatty acid.

PTPN IV produces 320,000 tons of CPO  and 31,000 tons of PKO on the average a year. PTPN IV is the largest among state-owned oil palm plantation company year.

Role of  Malaysian investors

Foreign notably Malaysian investors began to show interest in investing in  oil palm plantation sector in the country after the 1997/1998 crisis hit the country. They acquire or build new plantations. British companies already long established their position in the plantation sector in the country.
The Guthrie Group from Malaysia, which has core business in the plantation and property sectors is among the first foreign companies investing in the plantation sector especially oil palm plantation in Indonesia.  It acquired large oil palm plantations from the Salim Group making itself the second largest oil plantation company in the country after the  Raja Garuda Mas Group.    

Recently the Guthrie Group secured a syndicated loan of US$ 480 million from a number of banks to refinance a previous loan to buy the plantations in Indonesia.

Now the Guthrie Group has 325,000 hectares of oil palm plantations in Sumatra, Kalimantan and  Sulawesi.

Other Malaysian investors venturing in oil palm plantations in the country is  Golden Hope, KL Kepong, Johor Group and Oriental Group.

The Johor Group has a subsidiary  Kulim (Malaysia) Berhad operating in the country since 1992 in cooperation with Risjadson. The two partners have three oil palm plantations in North Sumatra totaling 18,563 hectares. In addition the Johor Group has another subsidiary EPA Management Sdn Berhad, which has 73,199 hectares of plantations mostly grown with oil palm trees, bringing its plantations to 91,763 hectares in Indonesia.

Kulim Malaysia Berhad  was reported planning to sell in 2006 its oil palm plantations in North Sumatra to buy build one in Kalimantan. Now it has 63,305 hectares of oil palm plantations in the country.

The  Johor Group is a conglomerate based on Johor, Malaysia. It also has plantations in Papua New Guinea. The Oriental Group has two oil palm plantations in South Sumatra acquired in 1997  totaling 35,900 hectares.

PPB Oil Palm plans to acquire two plantation companies in the country.  The business units of PPB Oil Palm - Quanta Pte Ltd and  Maxceed Pte Ltd - propose to buy  95% of PT. Hamparan Sawit Eka Malan  and  PT. Benua Alam Subur. The plantations of the two companies will be expanded  to 19,680 hectares and 16,160 hectares respectively in the regency of  Seruyan, Central Kalimantan .

Meanwhile, Tradewinds Plantation Bhd. has set aside Rp 240 billion to acquire 20,000 hectares of oil palm plantations in Indonesia. Earlier it already had 6,000 hectares of oil palm plantations in cooperation with local partners. The fifth largest plantation company in Malaysia,  altogether it has 138,980 hectares of land for plantations and 59% of which have been cultivated. Now it is concentrating more on expansion in the upstream sector of the plantation industry.

Golden Hope Plantation has set aside  Rp 3.19 trillion to acquire by phases 150,000 hectares of oil palm plantations  in the country. The company already has 20,000 hectares in Indonesia. The company cooperates with the Savola Group  from Saudi Arabia in its new plan . The Saudi partner wants to imports 1 million tons of CPO a year to be disposed of in Saudi Arabia, Jordan  and Egypt.

TH Plantation Bhd., in joint venture with a Chinese investor plan to  build an  palm oil processing plant  with an investment of US$15 million in Indonesia. The refinery will start operation by the end of this year producing 1,500 tons of CPO a day................



 
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