Supply Management

Indonesia

Economic News

22 Jul 2010
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Palm oil has long been an important revenue earner for both the Indonesian and Malaysian economies. In an effort to control world market prices and strike the right balance with food, energy and environmental concerns, the two countries are working on ways to increase cooperation in the areas of supply management, research, and sustainability.



With Malaysia and Indonesian together accounting for 85% of the world's palm oil production and controlling 88% of all palm oil exports, the two countries have benefited tremendously from the surge in global Crude Palm Oil (CPO) prices experienced in 2007. During that period, both countries have been studying future pricing strategy.



However, earlier this month, the price of CPO fell to $871 a tonne - the lowest level in 15 months. In response, Peter Chin, Malaysia's plantation industries and commodities minister, and Anton Apriyantono, Indonesia's agriculture minister, told the media that the timing was now appropriate to take action, calling for the diversion of 6m tonnes of stored CPO to biodiesel factories.



An agreement was made to boost the commodity's price by increasing the amount allocated to domestic biodiesel production, thus decreasing the amount made available for export.



"This is intended to prevent over-supply and prices from falling. We will activate biodiesel factories in Malaysia and Indonesia so that supply and demand will remain balanced," said Apriyantono.
While both countries' total biodiesel capacity has been estimated at approximately 1.5m tonnes per annum, 2007 production levels for each were limited to 100,000 tonnes. This was due primarily to the record CPO prices experienced throughout 2007, which lured producers to to sell palm oil on the international market rather than allocate it towards domestic biofuel needs.



With global oil prices soaring, the push towards biodiesel for Indonesia also coincides with the country's aim at reducing its dependence on imported oil. In 2007, Indonesia went from a net oil exporter to a net oil importer, sparking a decision to pull out of the Organisation of Petroleum Exporting Countries (OPEC). With Indonesia's oil reserves expected to last only 11 years at current rates of depletion, the country's energy policy calls for biofuels to make up 5% of the national energy mix by 2025.



On the back of falling CPO prices, Indonesia has announced that it will soon require fuel retailers to ensure that biodiesel accounts for at least 1% of their national fuel sales. The government has also announced that it will soon issue a decree requiring factories to use biofuel for 2.5% of their total energy needs. Meanwhile, Pertamina, the state oil firm, has said it will produce a 2.5% biofuel constituted blend of diesel by the end of the year. In May 2006, the company had introduced a 5% blend and subsequently reduced it to 2.5% in 2007 and 1% in early 2008 due to the rise in the price of CPO.



While reallocating supply to raise the CPO market price will benefit Indonesia's export revenues, some government representatives are worried that this will have an adverse effect on the poor, who use palm as their main cooking oil. However, at the time of the announcement, both Indonesia and Malaysia's respective agriculture and plantations ministers gave an assurance that the move will not result in a cooking oil shortage as it is being implemented at a time of surplus supply.



An additional stakeholder in the food versus fuel debate is the international NGOs. Although biodiesel, through lower carbon emissions, is considered to be more ecologically sound than pure diesel, the move towards its usage is drawing concerns from some environmental groups who view palm plantations as being responsible for deforestation and habitat loss for natural species across Indonesia and Malaysia.



In response to these concerns, the two countries formed a Joint Committee on Palm Oil, Cocoa and Pepper last year. The committee has launched a campaign on the promotion of sustainable palm oil with scheduled visits and dialogues with government officials, NGOs, businessmen and the media across Europe. The two countries have agreed to carry out joint scientific research to counter what they describe as anti palm oil propaganda.



Bryan Dyer, managing director operations for London Sumatra Indonesia, a leading plantations player, told OBG, "To exploit the potential to expand its palm oil area, Indonesia has significant tracts of under-utilised and already degraded land that could be made available for responsible sustainable production. This can be done without undue threat to either the environment or any of the existing social structures...Conservationists need to plan and work with the palm oil producers, and vice versa, to protect particularly important areas of biodiversity."



Similar to the cooperative efforts on palm, Indonesia is also working with Malaysia as well as Thailand on a supply management scheme to stabilise the price of rubber on the world market. Together, the three countries produce over 80% of the world's natural rubber supply and, should an abrupt fall in the price occur, the three countries have agreed to reduce exports through what has been termed an Agreed Export Tonnage Scheme.

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