Indonesia: Far out front

After topping Malaysia as the world’s primary producer and exporter of palm oil in 2007, Indonesia is now seeking to support its downstream refining operations and further expand this vital sector.

The Indonesian government’s lowering of the export tax cap on crude palm oil (CPO) and refined products last August has seen local refiners moving ahead of their rivals. Indeed, maximising the country’s domestic CPO capacity was the ultimate goal of an export tax policy initiative announced last August when the Ministry of Trade (MoT) decided to cut the export tax cap on CPO from 25% to 22.5% and on palm oil products from 25% to 13%.

The policy change has been felt throughout the palm oil sector and appears to have encouraged refiners to expand their operations in the country. In February 2012, for instance, Singapore-based Golden Agri Resources announced plans to double its annual refining capacity in Indonesia from 1.4m tonnes to 2.6m tonnes over the next two years and exploit the lower export taxes for refined palm oil products.

“[The export tax] has clearly incentivised us to continue with our strategy of producing more downstream and value-added products and to expand to markets internationally,” said Rafael Concepcion, the executive director at Agri Resources, in a company earnings briefing reported by Reuters in late February.

The effects of the policy change were also highlighted across the region. In a report on the impact of the policy, Hamburg-based Oil World, an independent forecasting service for oilseeds, pointed out that once these tax cuts were made, Indonesian exports of refined palm oil products rose 29% over the fourth quarter of 2011 to 2.9m tonnes, while CPO exports dropped 23% to 2.28m tonnes.

The report also showed that Indonesia’s export tax rate gave local refiners a competitive advantage over their counterparts in Malaysia, and urged the Malaysian government to make changes to its own export tax rate. Palm oil stocks in Malaysia are expected to rise unless the government makes changes, which would eventually lead to a decline in demand for CPO and would build up further stocks in Malaysia.

Indonesia’s MoT, together with palm oil industry officials, decides on the export tax rate on a month-to-month basis. Under the new tariff system, decisions are based on a basket of prices from CIF Rotterdam Exchange, Malaysia’s benchmark palm prices and Jakarta palm oil futures.

Even before the government’s recent export tax policy reform, palm oil’s importance to the country’s economy has steadily increased. From 1999 to 2009, CPO production grew 192% from 6.5m tonnes per year to 19m tonnes, according to a 2010 report from PricewaterhouseCoopers, a global accountancy firm.

Over the same period, the total land area used for CPO cultivation increased from 3.9m ha to 7.3m ha. With its vast plantations, located mainly in Sumatra, CPO producers currently contribute between 6% and 7% of the country’s GDP and the industry employs around 3.7m people. Output over 2012 is predicted to reach 25m tonnes.

The main beneficiaries of these export tax cuts are the country’s larger producers, Singapore-based Wilmar and Sinar Mas Agro Resources & Technology (SMART). Both firms are planning to expand their downstream facilities. Wilmar will invest $900m to develop refined palm oil products, such as soaps and margarine, while SMART has started a $1bn, four-year expansion programme. Other large companies include Proctor & Gamble, which in May 2011 announced plans for a $100m oleochemical plant to supply fatty alcohol.

Having started out as a key exporter of CPO and refined palm oil products, Indonesia’s producers are starting to consolidate their dominant global position. The government export tax cuts have proved a catalyst for this, encouraging large domestic firms to channel investment into their downstream operations and boosting production of refined palm oil. Continued investments in the downstream sector should not only put more value into the country’s palm oil supply chain, it should spread this expansion to the wider economy.

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