Commodity ( Oil Palm) - Indonesian Oil Palm Industry

The government of Indonesia considers agriculture as a very important sector in the national economy. Therefore all agricultural activities like cultivation of rice, maize, spices, rubber, cacao and oil palm are encouraged. Agriculture provides job opportunities for majority of work forces in Indonesia.
At the same time, the government makes efforts to maintain the prices of basic needs to be affordable to low-income people. Basic needs are mainly foods and clothing. Cooking oil is included in the basic needs. Therefore the price of cooking oil should remain at an affordable level. When the price of palm oil in international market went up in 1994, the price of cooking oil in domestic market experienced similar increase. In order to lower the price of cooking oil, the government apply export tax on crude palm oil and refined products. By export tax, the local price of the crude palm oil can be brought down to a level which is considered affordable. When the price was not excessively high, the tariff of the export tax was around 15%.
However, when in 1998 the international price of palm oil reached US$ 600 per metric ton (CIF Rotterdam) and the Indonesian currency suffered a dramatic weakening of its exchange rate, the tariff of the export tax was increased to 40%. Even such a high export tax was not sufficient to bring the local price of cooking oil to the expectation of the public. So, the government further increased the tax to 60%.
As a result, the exporter of palm oil received only US$ 240 per ton after a deduction of US$ 360 as export tax.



Subsequently, the price of palm oil in international market declined and the Indonesian currency gained better exchange rate. The government agreed to reduce the export tax to 30%, then to 10%, then 5%, then to 3%.
In a new regulation issued on September 10, 2005, the export tax is called export collection which is categorized as non tax revenue by the government, The tariff of the export collection is tabulated below:

It can be easily calculated that the export of crude palm oil is subject to export collection as much as US$ 5.25 per ton, and for RBD Olein US$1.14 per ton.The reference price is to be adjusted monthly based on the actual prices in Rotterdam and Kula Lumpur.
What about subsidy? There is no subsidy given to palm oil industry. The price of fertilizers is market price. The price of energy (fuel, electricity etc) is the same as applied to other industry.
How is law and regulations? With the objective of achieving good governance, both the government and the parliament promulgated laws on forestry and law on plantation. The law on forestry no 41 was promulgated in 1999 and the law on plantation no.18 was promulgated only recently in 2004.
These two laws give a lot of restriction in converting forest into oil palm plantation. Only certain forest can be converted into plantation. With those new laws already in place, the government has been taking measures to control the protection of forest and also endangered animals.

Commodity (Oil Palm) - Palm Oil Prices

The prices of crude and processed palm oils are mainly determined by the global supply and demand prospects of :
(a) palm oil,
(b) supply and demand developments of soya oil, rape oil and other competing vegetable oils; and
(c) developments in outside markets, like currency changes, crude mineral oil prices, government interference (import or export taxes or any other government intervention) and other factors.
Palm oil in its crude or in any of its processed form is a commodity traded worldwide in both the cash and futures markets. The Bursa Malaysia Derivatives is the most important futures market for palm oil.However, prices of palm oil are also impacted by changes on the Chicago Board of Trade (primarily from soybean and soya oil futures).

Commodity ( Oil Palm) - Major Importers of Oil Palm

During the past 16 years, the largest growth in palm oil imports was in China, India, the European Union and Pakistan. However, USA, Russia, Turkey and several other countries (primarily in Asia) saw an increase in the level of imports and consumption of palm oil. Please refer to the details provided in the table below.

Commodity ( Oil Palm) - Major Exporters of Palm Oil

Malaysia and Indonesia are the largest producers and in aggregate accounted for 85% of world
production in 2007. Malaysia was the top palm oil producer up till 2006 and has since been overtaken by Indonesia. The sharp increase in Indonesian output (average annual growth in palm oil production of 5.7% in the 10 years until 2007) was mainly driven by rapidly rising mature oil palm area from its plantation. Taking into account the very large land reserves still available and suitable for oil palm cultivation, Indonesia has a much larger growth potential than Malaysia in the years ahead. Given the strong global demand and high palm oil prices, these will drive new investments into the development of new oil palm plantings.

The table below shows the world export of palm oil by Malaysia and Indonesia from 1980 to 2007. Despite the pronounced growth in Indonesian exports of palm oil ( average annual growth rate of 15.6% from 1998-2007), we expect Malaysia will remain as the primary exporter until approximately 2009 or 2010, as the stronger growth in domestic demand of the more populous Indonesia is impeding a more intense expansion of exports. However, Malaysia has lost market share to Indonesia during the past 10 years, from 68% in 1998 to 46% in 2007.

Commodity ( Oil Palm) - Major Producers of Oil Palm

The pattern of global production of crude palm oil has evolved over the past three decades, with Malaysia and Indonesia accounting for 85.4% of the world’s crude palm oil output in 2007. The ecological requirements for the cultivation of oil palm exist in zones lying within ten degrees latitude to the north and south of the equator.

The regions where oil palm is grown includes West Africa, Central America, South America and South East Asia, including Malaysia and Indonesia.

Commodity ( Oil Palm) - Major Consumers of Oil Palm

Large markets for high growth of palm oil usage are countries in Asia, particularly India, Indonesia,China, Malaysia and Pakistan, and in the Middle East. The European Union is also a major consumer.
The table below shows data on consumption of palm oil for the years 1980 to 2007 in certain high growth market countries according to information provided by Oil World.

Commodity ( Oil Palm) - The Economics of Oil Palm

The success of palm oil and the substantial expansion in plantings and production in recent years is linked to a number of advantages as compared to other oil-yielding crops. Firstly, palm oil production costs on a per tonne basis are considerably lower than any other vegetable oil. The production costs for successful producers in Indonesia and Malaysia is between US$170-240 per tonne, which is much lower than the production cost of rape oil, sun oil and soya oil. A major reason for this cost advantage is the high productivity of palm oil production. During the past five years, the average yield for a Malaysian plantation is approximately 4.0 tonnes per hectare of palm oil and for an Indonesian plantation average yield is approximately 3.7 tonnes per hectare. Some plantation companies have reportedly achieved annual average yields of 4.5-6.0 tonnes per hectare in the same period. As a comparison against the competing vegetables oil, the average yields for oil production are considerably lower.

Palm oil producers have an additional advantage over their competitors of other vegetable oils due to the greater supply reliability. Production of vegetable oils from annual crops (like soybeans or rapeseed) are more susceptible to weather conditions. As against this, the oil palm is a perennial crop and is generally less affected by adverse weather conditions. First harvesting can take place approximately three years after planting and it can be done until 20-25 years of age. The optimal time for replanting depends on the variety, the land and the yield performance of the oil palm.

World Production of Oils & Fats and Rising Importance of Palm Oil
The world production of the major 17 oils & fats increased sharply from 103.1 million tonnes in 1998 to 154 million tonnes in 2007, representing an average annual growth in production of approximately 4.3%. Most of the growth in world production occurred in vegetable oils with an average annual increase of 4.9% during the past 10 years. Production of animal oils/fats (butter, lard as well as tallow) increased moderately by 1.9% per annum. Production of fish oil even declined slightly by 1.2%.

Among the 13 vegetable oils, palm oil showed the largest increase during the past 10 years by 7.9% per annum. Soya oil is in the second place with an average annual growth of 5.9% for the same period. Rape oil production (including canola oil) increased by 4.7% per annum for the same period. The increase in palm oil was due to several factors namely limited expansion opportunities of other vegetable oils and animal oils/fats and market price signals accelerated the growth in plantings and production of palm oil. Palm oil producers in Southeast Asia, primarily Indonesia, responded and this has been reflected in a steep increase in new plantings of oil palm trees in many parts of Indonesia since about 2001. The total area planted with oil palm trees has approached 6.7 million hectares as of end 2007. Significant additional expansion in new plantings is needed in coming years to generate the additional quantities required to satisfy prospective world consumption in the years to come.

Demand for Oils and Fats
The world’s consumption of the major 17 oils and fats has increased substantially during the past four years and is expected to continue growing very sharply in 2008 and 2009. World consumption increased from 103.2 million tonnes to 154.7 million tonnes from 1998 to 2007.
The main driving factors for the ever-increasing consumption demand are as follows :
(a) Increasing demand for food per capita, primarily in those countries in Asia as well as in Central & South America where economic activity is strong and average per capita usage levels still relativelylow;
(b) Increasing population (primarily in the developing countries); and
(c) Additional demand for non-food applications i.e. (oleochemicals, compound feed and biofuels)
Over the last decade, consumption of vegetable oil has increased at the expense of other oils and fats. Increasingly, food manufacturers have been using vegetable oils as a substitute for animal oils becausethey contain lower cholesterol levels. In addition, there has been some concern regarding the off-take ofsaturated fatty acids, of which animal fats contain a higher proportion than most vegetable oils.

Overall, Asia accounted for approximately 47% of worldwide oils and fats consumption in 2007. Annual per capita consumption of oils and fats is still relatively low in Asia, but has shown considerable increases over the past ten years in the major consuming countries, primarily China, Pakistan, Indonesia and India. In 2007, per capita consumption in most Asian countries was still considerably trailing the world average of 23.2 kilograms, thus indicating the potential for continued growth in this region. China and India are the most populous countries and in 2007 accounted for 37% of world population. The future expansion in demand of vegetable oils will be significant in Asia, owing to the rising population and increasing per capita usage, particularly if economic growth remains strong (as was the case in the latest five years).

The table illustrates per capita consumption of oils and fats in Indonesia, the United States, the European Union and certain countries for the years 1998 and 2007 according to information provided by Oil World. It should be noted that per capita consumption includes the use of oils and fats for food and non-food purposes (feed, oleochemicals and for biofuels from 2006).

Commodity ( Oil Palm) - Palm Oil Uses

Crude palm oil is extracted through the process of cooking, mashing and pressing the oil palm’s fleshy fruit. During this process, seeds are separated from the fruit and upon cracking the seed’s shell the kernel inside is separated. In addition, the kernel can be further processed to produce palm kernel oil.
Unlike many other oil-yielding crops which are grown for their meal, oil palm is grown primarily for its oil, which contains antioxidants such as carotene and a relatively high content of vitamins A and E. Crude palm oil is a versatile vegetable oil with a variety of edible and industrial applications. Over the past decade, the edible uses of crude palm oil have increased as a result of promotion and research in its applications. Crude palm oil is often further processed to produce “refined bleached and deodorized palm oil”, a major ingredient in margarines and shortenings. Crude palm oil can also be fractionated to produce palm olein and palm stearin. Palm olein, the liquid fraction, can be used as cooking oil to fry processed foods like potato chips, instant noodles and other snack foods. Palm stearin, the solid fraction, can be further processed to make soaps and detergents.

During the past 10 years, about 80% of crude palm oil is processed for consumption in edible products and about 20% is used for inedible applications. In contrast, approximately 25% of palm kernel oil derivatives are used for edible products while the other 75% are used for industrial purposes. Palm kernel meal, a by-product from palm kernel processing, is
generally used for animal feed.

Other Uses of Palm Oil

• Soaps and detergents
• Candles
• Cosmetics
• Lubricating greases for machinery used in the production of edible foods
• Grease for bread molds and bread making equipment
• Grease used to protect tanks, pipelines and similar instruments which remain uncovered and in the open air
• Drilling mud for the petroleum industry
• Epoxidated palm oil used to plastify and sterilize products in the plastics industry, in particular during the production of PVC
• Glue
• Printing inks
• Biodiesel
• Metallic soaps for the manufacture of lubricating grease and metallic dryers
• Steel cold rolling proceses
• Tinplate rolling
• Acids to lubricate fibers in the textile industry