Palm Reading

Indonesia

Economic News

22 Jul 2010
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As palm oil prices reached record highs last week, more stringent certification procedures for palm oil cast some doubt on the future of biofuel exports to the EU. This may be the sign of more difficult times to come for biofuel producers.



While prices for crude palm oil (CPO) have traditionally ranged between $360 and $400 per tonne, they reached $1042 on international markets on January 14. Meanwhile CPO futures on the Malaysia Derivatives Exchange, the main CPO futures market, touched $1037 on the same day, signalling that high prices were here to stay. CPO prices are closely correlated with the cost of crude oil, as CPO is used as a raw material for biofuels.



"Prices are going up because of the demand for biodiesel in European countries," Ari Sumarno, the president of Pertamina, the state-owned oil and gas company, told OBG.



The surge in prices also follows on seasonally low production levels in Malaysia and Indonesia due to the rainy season, as well as from increasing demand for food-grade palm oil for cooking in Asia. High cooking oil prices led to widespread protests last summer, causing the Indonesian government to impose a 10% tax on CPO exports in order to subsidise cooking oil for the poorest segments of the population.



The relatively high prices for CPO have put pressure on the profit margins of biodiesel producers. The production cost for one litre of biodiesel has risen from Rp5000 ($0.53) in October 2006 to Rp7700 ($0.82) per litre in October 2007. Domestically however, the retail price of biodiesel is the same as that of subsidised diesel oil, at Rp4300 ($0.46) per litre.



"At the current price it is not profitable to sell only biodiesel," Triharyo Soesilo, President Director of Rekayasa Industri, an engineering and construction company that builds biodiesel plants, told a press conference. "We can also produce other products with good economic values."



Indeed, the construction of up to 12 new biodiesel plants has been delayed due to falling margins and the threat to exports of CPO-based biofuel.



Meanwhile the EU announced last week that more stringent certification procedures would be introduced to ensure the environmental sustainability of biodiesel imported into the common market.



The EU directive on biofuels, passed in 2005, set targets of 10% use of biofuels in the transport sector by 2020, stimulating demand for the 'green' fuel. However the EU's environmental commissioner, Stavros Dimas, announced on January 14 that the EU had underestimated biofuel's risk to the environment through the destruction of rainforest and impact on world food prices. Dimas said the EU would create a certification scheme along the lines set out by the Roundtable on Sustainable Palm Oil (RSPO), an association of CPO producing countries created in 2004.



"The EU is now planning to issue directives where the use of palm oil for fuel can only be made if the CPO is certified as sustainable," Derom Bangun, the chairman of the Indonesian Palm Oil Association (GAPKI), told OBG. "The certification process will be started this year although it will take some time for this certification process since the companies need to be audited along 112 indicators in line with the RSPO criteria."



The Indonesian palm oil industry has already begun adapting to increased scrutiny on environmental aspects from foreign importers. In addition, larger plantations have been accused by non-governmental organisations (NGOs) of monopolising the sector and crowding out smaller farmers.



While large producers such as SMART and Astra Agro Lestari account for the majority of palm plantations, governmental and smaller growers represent 43%. The government has sought to attract investment into this sector through legislation passed in 2007 granting concessions up to 100,000 ha for a maximum of 95 years. This was a significant increase on the previous limit of 20,000 ha for up to 35 years.



The total area covered by palm plantations has increased from 2.7m ha in 1998 to 6.1m ha last year. This represents around 4.5% of the total of 137m ha covered by forest and agriculture in Indonesia.



While CPO production reached 16.9m tonnes in 2007, making Indonesia the largest producer globally, 18.4m tonnes are forecast for 2008, a 10% increase year-on-year.



In an effort to promote agricultural diversification beyond palm oil, the Indonesian government has earmarked an additional 5.25m ha of suitable land to be used by 2010 for plantations of palm oil, jatropha, sugar cane and cassava.



Although the biodiesel sector is facing uncertain times, the palm oil industry remains healthy due to high prices on international markets and expanding production. The move towards environmental and social certification for palm oil companies is a positive one to ensure its sustainability, although some have suggested the sector would benefit from a comprehensive roadmap by the government.

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