As a raw material for the pulp and paper industry, wood is obtained from industrial and community forests. Indonesia has comparative advantages in that area, especially in terms of a much higher crop productivity compared to competing countries in subtropical climates.

Indonesia’s pulp and paper industry also plays an important role in the national economy. It contributed 7.2 percent to the GDP of Indonesia’s manufacturing industry during the first half of this year, while the portion to the country’s GDP was 1.3 percent.

Other interesting information about the sector is that Indonesia’s pulp industry ranked 10th in the world, while paper stood at sixth. In Asia, Indonesia’s pulp industry ranked third, while paper was placed fourth after China, Japan and India.

However, the national pulp and paper industry has experienced ups and downs due to challenges at home and abroad. This sector decreased by about 1.1 percent year-on-year (yoy) in the first half of 2018, from 0.4 percent yoy in the same period last year.

Meanwhile, Statistics Indonesia (BPS) noted that Indonesia’s economy grew by 5.17 percent yoy during the first half of 2018, or 5.27 percent yoy in the second quarter alone. The growth was supported by 4.26 percent yoy increase in the manufacturing industry, which includes pulp and paper, in the first half of 2018. In the second quarter alone, the manufacturing sector grew by 3.97 percent yoy.

On the export side, data from the BPS showed that shipments of pulp and paper reached US$1.29 billion from January to June this year, up 34.47 percent yoy. Paper products reached 61 percent of the export value.

The three main destinations for Indonesia’s paper are China with 10.7 percent of the share, followed by Japan and Malaysia with 9.2 and 6.4 percent, respectively. For pulp exports, the main destinations are China with 70.5 percent of the share, followed by South Korea and India with 7.1 and 5.5 percent, respectively.

Based on its performance in Indonesia’s export of forestry products from 2011 to 2017, the paper industry managed to rank first, while pulp placed third. The pulp and paper industry also recorded the largest increase in exports of non-oil and gas products during the first half of 2018.

However, the pulp and paper industry has several problems, such as the continuity of the raw material supply. Indeed, Indonesia is rich in raw material for pulp and paper, yet there are regulatory changes, such as in the Environment and Forestry Ministerial Regulation No. 17/2017 on forest and industrial plant development (PHTI). This regulation restricts the usage of peat soil on which the raw material for pulp and paper are planted. As a result, plantation companies experience narrowing space management. In addition, the problem is also compounded by forest fires, which have occurred several times and the non-optimal usage of raw materials.

The second problem is the low productivity of machines. Many production machines, ranging from those that process raw materials to the ones that create end products, are simply outdated. While the national production capacity of the pulp and paper industry has reached 11 million and 16 million tons per year, respectively, in the first quarter of 2018, the production utilities have only reached around 70 to 80 percent.

The third issue is the low human resources productivity, which is said to be caused by the lack of training for employees and inadequate facilities. Data shows that the pulp and paper industry contributes to 260,000 direct and 1.1 million indirect jobs.

The fourth area to be addressed is the increasingly intense global competition, which still includes allegations of dumping by the United States and Australia against Indonesia. The US is accusing Indonesia of providing subsidies to its coated and uncoated paper products, so that the selling price is lower. Meanwhile, in Australia, similar accusations are directed at A4-type copy paper products that are still in the negotiation process at the World Trade Organization.

Certainly, there are also several solutions to iron out these problems.

The first is to harmonize regulations at the central and regional administrations. A review of regulations that hamper the supply of raw materials at the central and regional administrations can be taken into consideration to develop a fair situation between the government and all interested parties or entrepreneurs. Afterwards, the issue should be followed by the handling and prevention of potential forest fires. This can be done by preparing appropriate forest fire-handling regulations, including the sanctions. In addition, we can also optimize the use of second-hand paper and non-wood raw materials, such as empty palm oil bunches, kenaf and abaca.

A solution to the second problem is by replacing outdated machinery or equipment. We can initiate this by providing investment incentives when it is time for companies to restructure or update those machines. Incentives could include discounts or subsidizing the cost of updating machines.

Third, organize a structured and massive human resources development program as needed. The availability of skilled human resources and of supporting facilities can increase the productivity of this industry. In addition, vocational schools and education can be established from an early age.

Fourth, the expansion of market shares. As we already know, the main markets for pulp exports are dominated by countries such as China, South Korea, India, Bangladesh and Japan. On the other hand, the largest paper exports went to countries such as Japan, the US, Malaysia, Vietnam and China. Entrepreneurs assisted by the government can expand export areas, such as East Asia, the Middle East and Africa. This expansion is supported by efforts to dramatically increase the production capacity of PT OKI Pulp and Paper in Ogan Komering Ilir, South Sumatra.

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The writer is an industry analyst at Bank Mandiri.

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