Why The Palm Oil Business in Indonesia is Promising
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.
On 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.
Few Indonesian industries have shown such a robust growth as the palm oil industry did during the last 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. The most important export destination countries are China, India, Malaysia, Singapore and the Netherlands.
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.
According to data from the Indonesian Ministry of Agriculture the total area of oil palm plantations in Indonesia is currently around eight million hectare; a number which is twice as much as in the year 2000 when around four million hectare 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 from 25 percent to 10 percent in 2012. 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 international and local CPO prices drop below USD $750 per metric ton, the export tax is cut to zero percent.
Refinery capacity in Indonesia is expected to jump to 45 million tons per year by the end of 2014, up from 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 as the government wants to increase the role of CPO in the domestic economy amid continued rising global CPO demand (rising by about five million tons per year).
the palm oil business in Indonesia is promising - on the long term - due to a number of 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