Friday 29 Mar 2024
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THE Indonesian plantation sector, which is a large contributor to the country’s economy, is still awaiting a government decision on reducing foreign equity ownership in local ventures from a maximum allowable equity of 95% at present.

In September, Indonesia’s House of Representatives passed a plantations bill aimed at aiding smallholders in the sector and maximising its land usage. However, an earlier suggested foreign equity limit of a maximum 30% was excluded from the bill.

It is understood that the limit is still under consideration and will be specified later, say industry experts.

If it materialises, the foreign equity cap will have a significant impact on non-Indonesian plantation companies, particularly Malaysian players, which already face a limit on the size of plantation land they can own in the archipelago — a maximum of 100,000ha.

Major Malaysian planters in Indonesia include Kuala Lumpur Kepong Bhd, Genting Plantations Bhd, IJM Plantations Bhd, Sime Darby Bhd, Felda Global Ventures Holdings Bhd and IOI Corp Bhd.

“[The foreign equity limit] should not be less than 51%,” Derom Bangun, chairman of the Indonesian Palm Oil Board (IPOB), tells The Edge. “The important point is that the law or decree will not be retroactive. That is what I’ve gathered from discussions with the government.”

Derom is also an advisory board member of the Indonesian Palm Oil Association.

He says the Indonesian government will have to consider multiple factors in making a decision. Investment, both local and foreign, is needed to grow the economy but land ownership and use is a sensitive issue for the locals as well as environmentalists.

As it is, the Indonesian economy is starting to slow down with gross domestic product (GDP) growth coming in at 5.1% in the second quarter of the year (2Q2014) compared with 5.2% in 1Q2014. The World Bank expects Indonesia’s GDP to grow 5.3% this year compared with 5.8% in 2013.

The slew of measures that is unfriendly to foreign investment has raised the question as to whether newly elected Indonesian president Joko Widodo can deliver on his targeted 7% GDP growth.

Nevertheless, a key consideration for oil palm planters, whether foreign or local, will be limited land for cultivation. Indonesia has a total land area of 187 million hectares but only 25 million hectares are for agriculture use. But it has 250 million mouths, and counting, to feed.

Of the 25 million hectares, 10 million each are used for the cultivation of oil palm and rice while the remaining five million are used to grow tea, coffee, tobacco and rubber.

Still, Indonesia’s hectarage expansion for new plantings has been declining. In the 1990s, this was 8% to 10% a year.

Daud Dharsono, president director of PT Smart Tbk, expects Indonesia’s land area for oil palm cultivation to be 13 million hectares in 2025, indicating annual growth of around 3% from now.

“Replanting needs to be accelerated. I project that about 1.5 million hectares belonging to independent smallholders will be replanted within 10 years,” said Daud at the Oil & Fats International Congress 2014 held in Kuala Lumpur recently.

Smallholders make up 44% of Indonesia’s palm oil industry at the moment with 49% from the private sector and 7% from state-owned entities.

IPOB’s Derom projects Indonesian crude palm oil (CPO) production this year to be 29.5 million tonnes compared with 27.7 million tonnes in 2013.

This year, eight million tonnes of CPO or 27% of Indonesia’s output is expected to be consumed domestically and the remaining 21.5 million tonnes or 73% exported.

Daud estimated that by 2025, Indonesia’s CPO production would have reached 50 million tonnes. With the aid of tissue culture and advanced planting materials, oil extraction yields are forecast to improve to an average 5.01 tonnes per hectare compared with 3.7 tonnes now.

He forecast Indonesia’s total CPO consumption to be 26 million tonnes in 2025. By then, the percentage of CPO exports would have dropped to 47% or 23.7 million tonnes while domestic consumption would have increased to 53% largely due to an increase in demand for biodiesel.

Palm oil consumption by the Indonesian food and oleochemical industries is expected to reach 13.4 million tonnes in 2025 with another 12.9 million tonnes used for biodiesel.

Last year, biodiesel consumption in Indonesia was only 1.08 million tonnes. This is expected to grow to 3.68 million tonnes next year and 12.39 million tonnes in 2025.

This is in part largely due to Indonesia progressively raising its target for mandatory biodiesel usage over the years. In 2008, its Ministry of Energy decreed that the mandatory biodiesel usage by the power generation, industry and commercial, and transport sectors would be 20% in 2025. This year, it raised the bar to 30%.

The target for 2015 has also been raised to 20% for the transport and industry and commercial sectors, and 30% for power generation. Back in 2008, the decree was 10% for the industry and commercial and power generation businesses, and between 5% and 7% for the transport sector.

“[Global] palm and vegetable oil consumption projected for 2025 is 190 million tonnes with palm oil accounting for 77 million tonnes,” said Daud.

With 50 million tonnes coming on stream in Indonesia, it remains to be seen if Malaysia, the second largest producer of palm oil, can cope with growing global demand.

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This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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