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INDONESIAN COMMERCIAL NEWSLETTER
July 2011


PALM OIL INDUSTRY IN  INDONESIA

Backgrounds 

Indonesia crude palm oil (CPO) industry has grown fast in the past years. In 2010, the country CPO production  totaled  21.0 million tons from 19.4 million  tons in the previous year. In 2011, the  production is forecast to rise further 4.7%  to 22 million  tons. Meanwhile, exports totaled 15.65 million  tons in 2010 to rise to an estimated 18 million tons in 2011. Indonesia has become the world’s largest producer of  CPO with production reaching 21.0 million tons in 2010. Only 25% or 5.45 million  tons of the production is predicted to be disposed of on the domestic market. The country is still seeking to expand its export market for the commodity and increase sales such as to Pakistan, Bangladesh, and East Europe and China. 
 
The country’s CPO production has grown from year to year  as lands are available for the expansion of its oil palm plantations reaching 7.5 million  hectares  in 2010. The government encourages development of the industry  by supporting in the development of infrastructure. The government is building industrial clusters  for palm oil-based industries in the northern coats of Java, eastern coast of Sumatra , East Kalimantan , Sulawesi  and  Merauke. 

In 2011, the Association of Palm Oil Companies (Gapki) decided to withdraw from Roundtable Sustainable Palm Oil (RSPO) and instead joined the Indonesian Sustainable Palm Oil (ISPO)  obligatory in 2012.  

Development of the country CPO industry is still facing  hurdles mainly in road infrastructure to facilitate transport from the plantations to seaports. The  government has promised to improve or build infrastructure in CPO production centers  in Indonesia. Another problem is slow development of CPO processing industry  and upstream CPO industries producing CPO derivatives  like fatty acid, fatty alcohol, glycerin, methyl ester. So far the country has not made full use of its abundant availability of CPO  to feed downstream industries. The country has produced only a few number of downstream palm oil products including surfactant, pharmaceuticals, cosmetics,  and organic base chemicals, etc.  

Industrial Structure  

Oil palm plantations and owners 
In the past 10 years, the oil palm plantations in Indonesia expanded 8% a year – from 5.45 million hectares in 2005 to 7.82 million hectares in 2010.

The expansion  was faster as from toward the end of the 1980s  when the private sectors began to enter the plantation business in large scale. Earlier state companies dominated oil palm plantations. 

The rising prices of crude palm oil attracted big investors  and many farmers also began to grow  the crop. In the beginning farmers were involved in  this business as plasma farmers in cooperation with big investors under the nucleus smallholder’s scheme. Later more farmers grew the crop outside the nucleus  smallholder scheme. 

Currently private plantation companies dominate oil palm plantations in the country.  In 2010,  plantations owned by private companies made up 49.75% or around 3.89 million hectares of the country’s total oil palm plantation areas of 7.82 million hectares with smallholders’ plantations making up 42.35% or 3.31 million hectares with sate plantations making up the rest or 7.9%. 

In the period of 2005-2010, the plantations owned by state company (PBN) expanded slowly by 3.3%. The plantations owned by  private companies (PBS) grew faster by 10.3% a year  and smallholders’ plantations (PR) expanded by 8.13% a year. 

Plantations dominated by foreign investors 
Not all of the plantations areas, however, have been cultivated. In 2010, the country had 7.8 million hectares of oil palm plantation areas but only 5.7 million  hectares if them were cultivated. Based on data at Gapki and the Forestry ministry, the country has 30 million hectares of land suitable for oil palm plantations mainly in Sumatra and Kalimantan.

Currently big investors in this sector are competing in securing more lands for expansion So far foreign investors mainly from already control around 2 million hectares of land  for oil palm plantations. Based on data at Association of Indonesia Oil Palm Farmers (Apkasindo), by 2010, Malaysian investors had acquired 230 oil palm plantations in Indonesia. The foreign investors are  large company group such as Golden Hope and Syme Darbi from Malaysia, and  Wilmar Group  from  Singapore  with concessions in Kalimantan  and  Sumatra .

More foreign investors are  still eyeing concessions  for plantations in the country where  there are at least 30 million hectares of damaged forest lands that could  be utilized to  develop oil palm, rubber  and sugar plantations.

However, in 2011, the Forestry Ministry  cancelled the  principle licenses  for 3 million  hectares of land reserved for 251 investors in  oil palm plantation as they failed to implement their projects as scheduled. The government decided to hand over the lands to serious investors.  

The minister for state enterprises also supports the plan of the forestry ministry to suspend  issuing new license  for foreign investment in the oil palm and rubber plantations . 

Locations of plantations 

Based on data at the plantation directorate general, oil palm plantations are located in 17 provinces in Sumatra, Java, Kalimantan, Sulawesi, Maluku and  Papua. In  2010, Sumatra  had the largest plantation areas  making up around 76.46 % or 5.89 million  hectares of the total areas  of oil palm plantations  in the country. By provinces, Riau has the largest area of 1.82 million hectares, followed by North Sumatra  1.31 million  hectares.

Kalimantan had a total of 1.55 million hectares with the largest or 791,667 hectares in  Central Kalimantan followed by West Kalimantan  having  532,000 hectares.

Java has small plantation areas  totaling only 35,993 hectares  or  0.46%  of the total areas in the country. The plantations are found only in West Java and  Banten.   

Main players in oil palm plantations

State companies lost their domination of oil palm plantations since 1990 to private companies  which  invested in big way  in this thriving business. In 1997  especially after the regional monetary crisis that badly shook the country,  Malaysian investors  took advantage of the condition in the country  to open new plantations and acquire existing plantations . Amid the crisis many plantation companies were facing financial problem forcing them to sell their assets  including to Malaysian investors. 

PT Astra Agro Lestari
PT Astra Agro Lestari (AAL) is subsidiary of the Astra Group. It is a holding company in the agribusiness division of the Astra Group. In  2004,  PT AAL began to focus more expansion of its palm oil business and sold its non core business assesses.
 
AAL acquired  5,000-6,000 hectares of land a per year  to be used  for oil palm plantations. It also took big steps  in replanting  since 2009. Currently its oil palm trees average 16 years in age. Currently AAL is the largest listed oil palm plantation company in the country  controlling 265,000 hectares of plantations. Around 77.3% or 204,845 hectares have been producing  and the remaining 60,155 hectares with young crop are  not yet ready for harvest . 

In 2010, AAL‘s  CPO  production reached 1.1 million  tons, up 2.8%  from 1.08 million tons in the previous year. The CPO production was processed from 3.3 million tons of fresh fruit bunches (FFB) from its own plantations and  from 906,000 tons of plasma farms’ FFB and from 618,600 tons of  FFB acquired from other companies. 

In 2010, AAL built three new CPO processing plants  including one in East Kalimantan with a processing capacity of 105 tons FBB/hour, one in Central Kalimantan  with a processing capacity of  225 tons FBB/ hour  and another one in South Kalimantan with a processing capacity of 30 tons FBB/hour. It also expanded the capacity of CPO processing plant in Riau  with an investment of Rp 1.5 trillion  to be completed in 2012. 

Currently AAL has 22 units of  CPO mill with total processing capacity of 1,050 tons of FFB per hour, an CPO refinery in North Sumatra with a capacity of 300 tons per day, one  unit kernel processing plant  with a  capacity of  700 tons  per day  in Sumatra, Kalimantan,  and  Sulawesi

In 2011, AAL plans to build four CPO processing plants with a processing capacity of 5 tons of FFB per hour to cost around US$ 56 million. Two of the factories are to be built in East Kalimantan, 1 unit  in  South Kalimantan  and another 1 unit in  Central Sulawesi  to be completed in 2014. 

PT Asian Agri 
PT Asian Agri (PT. AA) is a  holding company for the agribusiness division of the Raja Garuda Mas Group having oil palm plantations in number of areas in Sumatra.

PT AA is a parent company for the Asian Agri Group, which includes AA Plantation I in North Sumatra. later the  Asian Agri Group expanded to Riau  and  Jambi. It also cooperates with plasma farmers. 

Currently Asian Agri has  28 oil palm plantations  with 19  palm oil factories  in North Sumatra, Riau  and  Jambi. The factories have the capacity to produce 1 million  tons  of CPO per year. 

The Asian Agri Group through its subsidiary PT. Asianagro Agungjaya built a bio-diesel factory  in Dumai, Riau  with an investment of Rp 350 billion. The factory started operation in 2008 using CPO as the feedstock It has a production capacity  of 200,000 tons per year  in the first year of operation  to be expanded gradually  to 400,000 tons. 

Asian Agri plans to build a bio-diesel factory in Marunda, Jakarta, with a  capacity 200,000 tons per year. The factory will produce bio-diesel with a purity of 100%  and could be used as an alternative  fuel with mixture with oil. 

Asian Agri has  oil palm plantations in a number of provinces in North Sumatra, Jambi and Riau - totaling 160,000 hectares including 100,000 hectares of nucleus plantations and 60,000 hectares of plasma farms. Its total production capacity of CPO is 240,000 tons per month. 

PT SMART 
PT SMART Tbk operates an integrated palm oil industry from upstream to downstream. It operates  oil palm plantations and production  facilities  for CPO and its derivatives such as cooking oil and other CPO derivatives.  

The company is a subsidiary of the Sinar Mas Group and it has 102,556 hectares of oil palm plantations in 2005 in Sumatra and Kalimantan. Most or 91,500 hectares of its plantations have been productive and the rest  with young crop have not been ready for their first harvest. 

SMART has 12 units of palm oil processing plants with an annual production capacity  2.9 million  tons CPO and 2 kernel processing plants  with a production capacity of 200,000 tons of palm kernel oil (PKO)  per year. In 2005, only three  of  the  factories were operational  in East Kalimantan and South Kalimantan   with a total production  capacity of 450,000 tons of CPO per year. PT SMART  also has CPO refineries producing cooking oil with an annual production capacity   840,000 tons.

SMART has complied with the regulation of  the Indonesia Sustainable Palm Oil USPO) effective as  from March 2011 and  the regulation will be obligatory for all  oil palm plantation companies in 2014. 

SMART sets aside up to Rp 1.1 trillion for capital expenditure in 2011, to be used to finance cultivation of new lands and replanting over 5,000 hectares of old plantations. In addition, SMART is building  factories to increase its CPO n production capacity   to 1.5 million  tons per year.

SMART  has 137,543 hectares of  oil palm plantations in 2011 including 126,553 hectares already producing and 10,990 hectares have yet to start their first harvest. In 2011 until  March, its FFB production reached 641,084 tons,  including from plasma farms. Its CPO production totaled 162,087 tons and  PKO production totaled 34,881 tons . 

PT Bakrie Sumatra  Plantation
In 2005, PT. Bakrie & Brothers Tbk of the Bakrie & Brothers  Group  increased its share in its subsidiary PT. Bakrie Sumatra Plantation by 28% from 28.41% earlier. 

Later PT. Bakrie Sumatra Plantations acquired rubber plantations and  processing factory from PT. Huma Indah Mekar in  Lampung  and an oil palm plantation  and processing facilities  from PT. Agro Mitra Madani in Jambi at a total price of Rp 140 billion. PT. Meanwhile, Bakrie Sumatra  Plantations divested non productive assets including an oil palm plantation  under PT. Patriot Andalas in West Kalimantan.

BSP agreed to cooperate with International Finance Corporation (IFC), a subsidiary of the World Bank  to build  oil palm plantations in West Africa  with an investment of US$ 200 million to start in 2010. 

BSP  was eyeing a concession of 200,000 hectares in Africa, where concession could be effective for 100 years.  

BSP sought to  expand operation to Cambodia  where it planned to open 10,000 hectares of oil palm plantations with an investment of US$ 30 million 

In 2010, BSP acquired the entire assets of the Domba Mas group at a price of Rp 2.06 trillion. The Domba Mas group had 3 subsidiaries PT Flora Sawita Chemindo (FSC), PT Domas Agrointi Perkasa (DAP), and  PT Domas Sawitinti Perdana (DSP).  PT FSC had a  total production capacity of 54,000 tons of  fatty acid per year, consisting of 49,000 tons of stearic acid and  5,000 tons of glycerin per year. Its factory is located in Tanjung Morawa, Medan, North Sumatra. PT FSC started operation in 1998, but in 2007 it was forced to suspend operation. After the acquisition,  BSP spent US$ 2 million on its renovation before resuming operation. Dap and  DSP have  a total production capacity  of 50,000 tons of fatty acid per year and  132.000 tons of fatty alcohol per year.  

PT ASD-Bakrie Oil Palm Seed Indonesia is a producer of oil palm seeds with a processing capacity of 20 million per year. The  cultivation of seedlings,  built with an investment of US$ 4.7 million  started production in 1915. ASD-Bakrie plans to produce varieties of high yield seeds  to turn out plants with a high productivity. PT ASD Bakrie is a joint venture  between BSP and Agricultural Service and Development LLC  from  Costa Rica. 

In 2010,  BSP expanded its oil palm plantations in Sumatra by  opening 10,000 hectares of new plantations with an investment of US$ 25 million to be productive in 2013.

Currently BSP has 150,000 hectares of oil palm plantations and 117,118 hectares of rubber plantations  located in various areas in North Sumatra , Riau, Jambi, South Sumatra and West  Sumatra. BSP  planned to expand  the oil palm  plantations to 200,000 hectares in  2014. 

Its processing capacity  in 2010  was 2.3 million  tons of FFB per year  with CPO production capacity of 174,417 tons in  2010. 

PT Perusahaan Perkebunan London Sumatra Indonesia Tbk (Lonsum)
PT. Lonsum has the largest oil palm plantations  located in North Sumatra, South Sumatra and East Kalimantan. After he process of restructuring in 2004, Lonsum resumed  operation  of its  oil palm plantations in  North Sumatra  and processing industry in South Sumatra and East Kalimantan after being temporarily suspended  The company  made replanting over 14,000 hectares of plantations in South Sumatra . 

In  2004, Robert Kuok  Hock-Nien, a tycoon from Malaysia acquired  part of the shares of PT Pan London Sumatra  Plantation, which now holds 20.94%  of the share of PT PP London Sumatra Tbk. (Lonsum).  Kuok acquired the stake in Pan London Sumatra Plantation  from  Andre Pribadi, a younger brother of  the owner of the  Napan Group, Henry Pribadi. 

In 2007,  Lonsum  was acquired by Indofood through PT Indo Agri Resources Ltd at a price of Rp 8.4 trillion. The acquisition was financed  with a loan  of US$ 25 million from ING, Standard Chartered Bank, Sumitomo Mitsui Banking, and  Bank Cen¬tral Asia. 

Meanwhile PT Indo Agri owns an integrated industry with oil palm plantations and production facilities for CPO-based cooking oil,  margarine, and  shortenings with famous brands. Previously IndoAgri had 224,083 hectares oil palm plantation areas, and 74,878 hectares of which were already cultivated. With the acquisition, its oil palm plantations expanded to 387,483 hectares, of which 138,081 hectares were cultivated. Altogether plantations already cultivated totaled 165,000 hectares, including rubber plantations and other crops. 

In 2011, Lonsum plans to expand its oil palm plantations by 3,000 - 4,000 hectares  with an investment of Rp 400 billion. 

PTP Nusantara IV
PT Perkebunan Nusantara (PTPN) IV (Persero) is a state company established in 1996 through a merger of a number of state plantations companies in North Sumatra  including  PTP VI, PTP VII and  PTP VIII.

PTPN IV  is the largest oil palm plantation owned by the state . It has 34 factories including 16 CPO factories with production capacity  of 365,081 tons of CPO per year, 34,100 tons of Palm Kernel Oil  per year, etc. 

 In  2007,  PTPN IV expanded its plantations by taking over 20,000 hectares of plantation from PT Andalas Agro Nusantara in the regency of Mandailing Natal (Madina), North Sumatra. Around 9,000 hectares of the plantations are for plasma farms involving local farmers. Cultivation of the 20,000 hectares of land is expected to be completed in 2011 using seedlings from Guthrie Malaysia. 

By 2010,  PTPN IV had a total of 175,244 hectares of plantations including 135,198 hectares of oil palm plantations,  and 4,398 hectares of tea plantations. 

In  2011,  PTPN IV sets  CPO  production target at 700,000 tons up 1.55% from 2010. 

In 2011, PTPN IV sets aside  Rp 2 trillion for  capital expenditure including for the expansion of  oil palm and tea plantations to cost Rp 511.024 billion, and  house construction, procurement of machines, farm tools, construction of road, and irrigations to cost Rp 464.678 billion  and  other investment  to cost Rp 100.477 billion. 

Development of  Production 

CPO Production up 5.7% per year
Production has increased  with the expansion of plantations mainly in Sumatra  and Kalimantan and boosted by the commodity price hike in international market. 

In 2007-2011 period, the country’s CPO production grew 5.7% per year. In  2007, the CPO  production  reached 17.6 million  tons,  up to  an estimated 22 million  tons in 2011.  

The increase in CPO  demand that boosted production  of that commodity is also attributable to development of bio-diesel industry using CPO as the feedstock  

Private companies lead in production 

In 2010, private plantation companies contributed 11.1 million tons t the country’s total CPO production - up 8.8% from 10.2 million  tons last year. The CPO production of private companies accounted for 52.9% of the country’s total production  of 21 million  tons. 

Smallholders’ production totaled 7.2 million  tons  or  34.3% of the country’s total  production.  State companies  contributed only 12.8%  or 2.1 million  tons.    

Indonesia  and Malaysia world’s largest 

Malaysia and  Indonesia dominate the world’s production of CPO. In 2010, with total production of 21 million  tons, Indonesia was the largest CPO  producer in the world  followed by Malaysia with production of  17.8 million  tons. The world’s production that year totaled 46 million  tons. Indonesia  and  Malaysia, therefore, accounted for 84% of the production....


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