TheJakartaPost

Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

Analysis: The virtue of strengthening domestic palm-oil market

  • M. Ajie Maulendra

    The Jakarta Post

Jakarta   /   Wed, December 17, 2014   /  11:33 am

As crude palm oil (CPO) becomes Indonesia'€™s main export commodity, it is not sinful to have the idea of switching the focus of our CPO market from export oriented to domestic oriented. By having that approach, what this article means is balancing the market between export and domestic demand. The most obvious benefit to having more depth in the CPO market domestically is anticipating the impact of global economic fluctuations.

One example can be seen in the slowdown of palm-oil consumption growth in the Chinese market recently. That missing portion should have been allocated to Indonesia'€™s domestic market. Therefore, in terms of volume, the industry could maintain sales for stabilizing revenue. The second-round effect from stable sales volume is less fluctuation in CPO prices. This is really helpful for exporting countries like Indonesia in this gloomy period.

Instead of the benefits, several conditions can be the reason for arguing why Indonesia needs to develop the domestic CPO market further. First, in a paper published by representatives of Overseas China Investment Limited at the 10th Indonesian Palm Oil Conference, it was explained briefly that from 2003 to 2014, palm oil as a percentage of total vegetable oil consumed in China has trended lower.

Some factors explain as follows: tight competition from soybean oil and many snack mills and instant noodle (which use CPO as a main raw ingredient) factories have shut down. Second, ongoing global negative campaigns surrounding CPO that could hamper customer perception in choosing vegetable oil. In China, there is a campaign about CPO that has lower prices also associated with lower quality.

The smear campaign is considered to have contributed to reducing market share in the world. Third, national agendas in energy security in the future. Indonesia can no longer depend on fossil fuels, which are still mainly imported. Energy based on fossil-fuel resources becomes limited and scarce. As a result, it causes high costs for the economy because of the high burden of fuel subsidies. In the long term, alternative (renewable) energy is crucial and Indonesia (as the biggest CPO producer) has an absolute advantage in procuring CPO as the raw material for making biodiesel.

The final condition discussed in this article is the huge market in Indonesia that has very positive prospects for selling CPO. Note that in 2013, based on Oil World data, Indonesia was the second-biggest CPO consumer in the world after India. The growth of middle-class consumers in Indonesia is one of the contributors to high CPO consumption and it is going to keep increasing in the future.

Based on AC Nielsen data, the middle-income population in Indonesia will grow 174 percent from 2012 to 2020 '€” the highest growth among ASEAN countries. The most widely used palm-oil products in Indonesia are cooking oil, fast-moving consumer goods (FMCG) and also processed foods. Those products are expected to increase significantly in line with the growth of middle-class consumers in coming years. Based on that figure, we easily believe that in the near future Indonesia will become the biggest palm-oil consumer in the world, while it is currently in second position after India.

What to do next? Next, there are two main things needing to be accomplished by the government in order to further expand the domestic CPO market. First is the consistency of the government in developing the palm-oil downstream industry. In fact, government and industry players have been very good in developing downstream industry. Based on data from the Industry Ministry, the variety of palm-oil downstream products has increased significantly from 54 items in 2011 to 169 items in 2014. The spike in the number of product reflects a significant increase in downstream manufacturing investment between 2011 and 2014.

During that period, investment in palm-oil downstream manufacturing went up 71 percent. However, further improvement can be made in terms of product diversification. Based on data, there is still a high concentration of palm-oil refinery (cooking oil) investment (85 percent of total investment) while oleochemical (fatty-acid based and fatty-alcohol based) products only account for 4 percent of total investment and the remaining 10 percent went to biodiesel investment.

Considering the huge consumer market in Indonesia and its prospects in the future, oleochemical production should be even bigger in coming years. As we know, oleochemical products are mostly used for producing FMCGs and other processed food products. Several things that have been done well by the government are incentives for investment (tax allowances and tax holidays) and the right setting of imposing export tax schemes to the oil-palm industry and its products. Last but not least is the improvement of infrastructure to attract both domestic and foreign investors.

Second, mandatory biodiesel implementation must be implemented for the sake of the long-term agenda of national energy security, not for the sake of a short-term crude-oil price spike. This year, biodiesel production has been less than expected (1.8 million tons vs 3.3 million tons). The disappointing production figure makes the market doubt the government'€™s willingness to implement a biodiesel program and it coincides with the sharp decrease of crude-oil prices.

Based on conclusions from many discussions with stakeholders related to the biodiesel industry in Indonesia, one crucial thing to implement in maintaining the sustainability of the biodiesel program is a pricing mechanism. The price of biodiesel must be widely accepted by both producers (industry) and buyers (Pertamina). In order to realize it, solid and comprehensive coordination must exist in every stakeholder of government institutions.

Indonesia is known as the biggest palm-oil producer in the world, and could soon be the biggest palm-oil consumer in the world. Based on that argument, it is not impossible that Indonesia would be the ultimate palm-oil price maker in the world, and strengthening domestic palm-oil market is one of the ways to pursue it.

_____________

The writer is a senior industry analyst at PT Bank Mandiri (Persero), Tbk.

Your premium period will expire in 0 day(s)

close x
Subscribe to get unlimited access Get 50% off now