Indonesia is the largest CPO producer in the world, contributing around 50 percent of total world production
ndonesia is the largest CPO producer in the world, contributing around 50 percent of total world production. CPO exports also contributed significantly to Indonesia’s foreign exchange earnings of US$10.4 billion in 2009 and it is expected to increase to more than $12.0 billion in 2010.
With 33 percent of total production coming from small holders, the CPO industry is increasingly playing an important role in improving economic growth and supporting regional developments in rural areas, particularly in Sumatra and Kalimantan. Moreover, the CPO industry employs around 3.5 million people in Indonesia, helping to raise employment and eradicate poverty.
In 2005-2009, the compound annual growth rate (CAGR) of Indonesia’s palm oil consumption reached 8 percent, just slightly lower than China’s. However, China recently plans to reduce its dependence to vegetable oils’ imports by increasing its capacity of soybean crushers. China’s consumption of vegetable oils showed increasing trend, reaching 26.5 million tons in 2010, up 6 percent year-on-year (y-y). With higher soybean crusher capacity, China’s goal is to see lower imports of vegetable oils in the next 10 years. Going into 2011, China will raise its imports on soybean of around 31 percent vs. only 3 percent of CPO import growth. Currently, China’s major vegetable oils consumption sources are soybean (43 percent) and CPO (22 percent).
Going forward, limited growth in CPO supply might produce imbalance supply-demand equilibrium. This shortage in supply is because many non government organizations (NGO) have stopped their forest conversion into palm oil plantations, based on the speakers on Indonesia Palm Oil Conference (IPOC) in Bali last week. For Indonesia, the condition is worsened by the signing of planting moratorium with Norway.
These will curb new planting ahead, leading to lower supply growth in the next 3-4 years. The pressures from NGO’s and limited new planting will also exacerbate price volatility going forward. Meanwhile, biodiesel, encouraged as an alternative fuel, lacks government incentives in many countries. Thus, since the launch of biodiesel era in 2008, vegetables oils have been traded at certain premium to oil price, often resulting in speculation.
With all challenges remain ahead, the consensus agree that CPO price will remain strong through the first four months in 2011. On top of strong consumption, supply disruptions due to unfavorable weather might create shortages. However, as production is expected to recover in the second half, 2011, there are mixed views as to what would happen to CPO prices in the period. On the positive camp, with only 3.5 million tons of additional world supply of vegetables oils coming on stream in 2011, bringing total world production to 172.3 million tons, up only 2 percent y-y (2008-2010 CAGR growth of nearly 3 percent), CPO prices would remain well supported. On the flip side, some speakers believed that prices in the second half, 2011 will be weaker as the current La Nina would bring about higher production.
Going forward, world palm oil consumption is expected to grow higher, propelled not only by improving economic condition but also by palm oil’s wide range of usages in many derivative products. Thus, we remain positive and reiterate our Overweight stance to the sector with LSIP as our top pick, given its productive average age tree profile of 11 years, allowing the company to cater to growing domestic market demand ahead.
The writer is an analyst at PT Bahana Securities
Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.
Thank you for sharing your thoughts. We appreciate your feedback.