Indonesia has initiated two big agendas to develop its palm oil industry. First, the acceleration of down-streaming process of the palm oil industry to increase added value of products. Second, increasing the productivity of palm oil, especially the productivity of smallholders’ plantations that is still far behind those of the big companies.
Currently, the smallholders control 6.9 million hectares of oil plantations, which account for 42% of the total 16.37 million hectares of oil palm plantations in Indonesia. But the average productivity of smallholders is only 2.57 tons of crude palm oil (CPO) per hectare per year, which is much lower than the productivity of private and state-owned companies at 7 tons per ha per year. Of the total acreage of smallholders’ plantations, at least 2.4 million hectares are already at the age of more than 15 years, making them eligible for replanting program.
Meanwhile, the down-streaming process has become a central theme in the current Indonesian economy, especially in the industries of mining (oil-gas and minerals) and plantations, including the oil palm plantations. President Joko Widodo (Jokowi) has underlined the importance of the down-streaming process in many occasions. In the palm oil industry, the down-streaming process has been progressing quite well, but it still needs further acceleration and more deepening of various products.
Before 2010, Indonesia’s export of palm oil was still dominated by crude palm oil (CPO). But gradually after that there has been significant change. During the last five years, the percentage of CPO export was below 20%, and the rest are processed products. Currently, its exports of processed palm oil products have reached more than 90%, and only less than 10% export of CPO.
Indonesia has now produced 21 million tons of oleo-chemical with impressive earnings of foreign exchange. In 2018, Indonesia’s export of oleo-chemical earned foreign exchange at US$2.3 billion. It then increased to US$3.8 billion in 2020 and to US$4 billion in 2021.
Previously, the down-streaming process was hindered by the mindset of many producers who preferred to export the unprocessed CPO product. They thought that the down-streaming needs big investments as it is capital intensive and needs technology. Besides, the return on investment (ROI) in the downstream palm oil industries was seen lower than that in the upstream palm oil industry.
The government has been pushing up the down-streaming process through its policy of export levies (PE) and export duties (BK). The PE and BK tariffs are applied much lower for the products of downstream industries, but much higher for the products of upstream industries.
But most of Indonesia’s downstream palm oil products are still categorized as simple ones. It is expected in the future that the downstream industries will further diversify and advance their products and meet the international standards. The downstream industries will open more opportunities for more investments to produce more advanced products. There is also a big potential to invite investors from the palm oil importing countries, particularly from the countries with more advanced technology. But they will demand fiscal and no-fiscal incentives.
The palm oil industry has been increasingly playing a bigger role in the national economy of Indonesia. The industry employs directly 4.2 million workers and indirectly 12 million workers. Its contribution to the national foreign exchange earnings accounted for 13.5% of the total non-oil-gas exsports. This year, Indonesia’s palm oil production is projected to reach 51.3 million tons, which is relatively at the same level with that of last year.
The palm oil products of Indonesia have much higher competitiveness if compared to other products of vegetable oils at the global market. It has been proven by the fact that with only 6% acreage of the total acreage of plantations of global vegetable oils, the palm oil can get 36% market share of the total global market of vegetable oils and it is continually growing. As a comparison, the soybean uses 44% of the total acreage of global vegetable oils’ plantations but only 23% market share.
The down-streaming process and the increase of productivity will further strengthen the position of Indonesia as the world’s respected main producer of vegetable oils at the global market.
The palm oil industry has also increased Indonesia’s energy resilience through the implementation of biodiesel program, which has saved US$8 billion per year in foreign exchange from the reduction of diesel fuel import. Considering its success, the government has planned to upgrade the biodiesel production from the B30 program to B40 program by early next year. It will further expand the local market and increase the local absorption of CPO for the production of biodiesel.
The financial contribution of the palm oil industry to the state coffer has significantly increased through the payments of export levies and duties. The fund, which is managed by the Oil Palm Plantation Fund Management Board (BPD-PKS), has been also used to finance the development of the palm oil industry, including the replanting program for smallholders and the subsidy for the biodiesel program.
Considering the strategic role of the palm oil industry, all of stakeholders should support the development of the industry, including in defending and promoting the palm oil at the global market as it is often accused by other countries as the cause of deforestation. All of the stakeholders should also ensure that the palm oil industry always complies with the principles of sustainability. Issues concerning the sustainability are very sensitive and are often used to attack the palm oil products at the global market.
The down-streaming process and productivity increase should be prioritized in the palm oil industry. The down-streaming is not only a matter of increasing added value, but also a matter of creating new job opportunities and strengthening the structure of palm oil industries from upstream to downstream sectors.
That way the down-streaming of palm oil can become a catalyst to accelerate the transformation of Indonesian economy. It will also increase Indonesian prestige, as it will further enable Indonesia to strengthen its role in the global supply chain of vegetable oils. (*)
Source: Investor Daily