Palm Oil in Indonesia

Global palm oil production is dominated by Indonesia and Malaysia. These two countries together account for around 85 to 90 percent of total global palm oil production. Indonesia is currently the largest producer and exporter of palm oil worldwide.

Over the long term, global palm oil demand shows an increasing trend as an expanding global population gives rise to increased consumption of palm-oil based products.

Estimated Palm Oil Production in 2014:

 1. Indonesia         33,000,000
 2. Malaysia         19,800,000
 3. Thailand          2,000,000
 4. Colombia          1,108,000
 5. Nigeria             930,000

in metric ton
Source: Index Mundi


Indonesian Palm Oil Production and Export

Few Indonesian industries have shown such a robust growth as the palm oil industry did during the past 15 years. This growth is visible in the country’s production and export numbers as well as in the quantity of its palm oil estate area. Driven by increased global demand and higher yields, palm oil cultivation has been expanded significantly by Indonesian farmers and conglomerates (at the expense of the environment and production numbers of other agricultural products as farmers switch to palm oil plantation).

The majority of Indonesia’s palm oil production is exported (see table below). The most important export destination countries are China, India, Malaysia, Singapore and the Netherlands.

Indonesian Palm Oil Production and Export Statistics:

 2008  2009  2010  2011  2012  2013  2014  2015   2016
(million tons)
  19.2   19.4   21.8   23.5  26.5   30.0   31.5   32.5   32.0¹
(million tons)
  15.1   17.1   17.1   17.6  18.2   22.4   21.7   26.4   27.0¹
(in USD billion)
  15.6   10.0   16.4   20.2  21.6   20.6   21.1   18.6   18.6¹

¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture

Indonesia’s oil palm plantation and processing industry is a key industry to the country’s economy: the export of palm oil is an important foreign exchange earner and the industry provides employment opportunities for millions of Indonesians. Almost 70 percent of Indonesia’s oil palm plantations are located on Sumatra where the industry was started during the Dutch colonial days. The remainder – around 30 percent – is largely found on the island of Kalimantan.

1. Sumatra
2. Kalimantan

According to data from the Indonesian Ministry of Agriculture the total area of oil palm plantations in Indonesia is currently around eight million hectares; a number which is twice as much as in the year 2000 when around four million hectares of Indonesian soil was used for palm oil plantations. This number is expected to increase to 13 million hectare by 2020.

State-owned plantations play a modest role in the Indonesian palm oil industry as big private enterprises (such as the Wilmar Group and Sinar Mas) produce approximately half of total Indonesian production. Smallholder farmers account for around 35 percent, most of whom are highly vulnerable to global downswings in palm oil prices.

Indonesian companies engaged in palm oil are planning large investments to expand palm oil refining capacity. This is in line with the government’s ambition to extract more revenue from Indonesian resources. The country always mainly focused on the export of raw palm oil (and other raw commodities) but has shifted its priority to refined products higher up in the value chain. To spur growth in the downstream industry, export tax on refined palm oil products have been slashed in recent years. Meanwhile, the export tax for crude palm oil (CPO) ranches between 0 and 22.5 percent depending on the international palm oil price. Indonesia has an ‘automatic mechanism’ that when the government benchmark CPO price (based on international and local CPO prices) drops below USD $750 per metric ton, the export tax is cut to zero percent. As this benchmark price slipped below USD $750 per ton in September 2014, Indonesia has seen a zero percent CPO export tax since October 2014.

As this meant the government misses out on much-needed export tax revenue from the palm oil industry, it decided to introduce palm oil export levies in mid-2015. This new policy imposes a USD $50 per metric ton levy on crude palm oil exports, and a USD $30 per metric ton levy exports of processed palm oil products. These palm oil export levies only need to be paid by exporters when the government’s benchmark CPO price falls below the USD $750 per metric ton threshold (effectively cutting the palm oil export tax to zero percent). Proceeds from these new levies will be used to finance the government’s ambitious biodiesel subsidy program (in 2014, the government boosted the mandated amount of palm blending in diesel from 7.5 percent to 10 percent, and ordered power plants to mix 20 percent).

In February 2015 the Indonesian government announced to raise biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in a bid to protect domestic biofuel producers. Through this biodiesel program the government wants to compensate these producers for the price differences between regular diesel and biodiesel that occurred due to low global petroleum prices (since mid-2014). Besides funding these subsidies, proceeds from the new export levies will also be channeled to replanting, research and the development of human resources in Indonesia’s palm oil industry. In times when the government’s reference palm oil price exceeds the USD $750 per metric ton threshold and the export tax kicks back in, then the government will use part of its palm oil export tax income to fund the biodiesel program.

Palm oil refining capacity in Indonesia is understood to have jumped to 45 million tons per year by the end of 2014, up from an 30.7 million in 2013, and more than double the 21.3 million in 2012.

The Indonesian Palm Oil Association (Gapki) stated that Indonesia has a long-term target of producing 40 million tons of CPO per year from 2020.

Environmental Issues of Indonesian Palm Oil Plantations

Indonesia has often been criticized by environmentalist groups for giving too much room for palm oil plantation development (resulting in deforestation and destruction of carbon-rich peat lands). However, as more and more international companies are seeking to purchase sustainable palm oil that meets the criteria of the Malaysia- based Roundtable on Sustainable Palm Oil, Indonesian plantations and the government need to enhance their ‘green-policies’. Western governments are putting stricter legislation on imported products containing palm oil, thus stimulating the production of sustainable palm oil.

In 2011 Indonesia established its Indonesian Sustainable Palm Oil (ISPO) which aims to enhance the global competitiveness of Indonesian palm oil and brings it under stricter environmental legislation. All Indonesian palm oil producers are compelled to receive ISPO certification.

Moratorium on New Virgin Forests Concessions

The government of Indonesia signed a two-year primary forest moratorium that came into effect on 20 May 2011 and expired in May 2013. After expiration, Indonesia’s president Susilo Bambang Yudhoyono (2004-2014) extended the moratorium by two years. This moratorium implies a temporary stop to the granting of new permits to clear rain forests and peat lands in the country. In exchange Indonesia received a USD $1 billion package from Norway. On several occasions international media have reported that the moratorium has been breached by Indonesian companies. It has succeeded, however, in limiting – although temporarily – expansion of Indonesia’s palm plantations. Skeptics of the moratorium point out that prior to its implementation the government had concessioned around nine million hectares for new crops. Moreover, the large palm oil companies possess wide land banks of which many are only half planted, meaning that there is still ample room for expansion. In May 2015, Indonesian President Joko Widodo extended the moratorium for another two-year period.

Future Prospects of the Indonesian Palm Oil Industry

The 2000s commodities boom was a blessing for Indonesia due to the country’s abundance of natural resources. Palm oil prices rose steeply after 2005 but the global crisis led to a sharp decline in CPO prices in 2008. There emerged a solid rebound but after 2011 CPO prices have been declining, particularly as demand from China has dropped, while low petroleum prices (since mid-2014) curtail demand for palm-based biofuels. As such, the palm oil industry’s prospects are gloomy for the foreseeable future, especially as Indonesia is still too dependent on crude palm oil, instead of refined palm oil products.

In times of strong global demand, the palm oil business in Indonesia is lucrative for the following reasons:

Big profit margins, while the product is simple to produce.
Large and increasing international demand
Crude palm oil (CPO) production costs in Indonesia are the lowest worldwide
Higher rates of productivity compared to other edible oil products
Bio-fuel is expected to increase its significance at the expense of gasoline

What are matters that hamper development of Indonesia’s palm oil industry?

Awareness of the need for more environment-friendly policies
Land disputes with local communities due to a lack of clarity regarding land ownership
Legal and regulatory uncertainty
High logistics cost due to the lack of quality and quantity of infrastructure

What are the five factors that influence crude palm oil prices?
(1) supply & demand
(2) prices of competing vegetable oils
(3) weather
(4) import policies of importing countries
(5) changes in taxation and import duties

Source: Indonesia Investments. Date: 22 November 2016