Palm Oil Industry in Indonesia 2011 -July 2011

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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