Palm Oil

Palm oil is one of the world’s most produced and consumed oils. This cheap, production-efficient and highly stable oil is used in a wide variety of food, cosmetic and hygiene products, and can be used as source for bio-fuel or biodiesel. Most palm oil is produced in Asia, Africa and South America because the trees need warm temperatures, sunshine and plenty of rain in order to maximize production. A negative side-effect of palm oil production – apart from its impact on people’s health due to its high level of saturated fat – is that the palm oil business is a key driver for deforestation in countries such as Indonesia and Malaysia. Indonesia is the largest greenhouse gas emitter after China and the United States.

Global palm oil production is dominated by Indonesia and Malaysia. These two countries together account for around 85 to 90 percent of total global palm oil production. Indonesia is currently the largest producer and exporter of palm oil worldwide.

On the long term, global palm oil demand shows an increasing trend as an expanding global population gives rise to increased consumption of palm-oil based products.

Expected Palm Oil Production in 2013:

 1. Indonesia         31,000,000
 2. Malaysia         19,000,000
 3. Thailand          2,100,000
 4. Colombia          1,000,000
 5. Nigeria             930,000

in metric tonnes
Source: United States Department of Agriculture

Palm Oil in Indonesia

Indonesian Palm Oil Production and Export

Few Indonesian industries have shown such a robust growth as the palm oil industry did during the last 15 years. This growth is visible in the country’s production and export numbers as well as in the quantity of its palm oil estate area. Driven by increased global demand and higher yields, palm oil cultivation has been expanded significantly by Indonesian farmers and conglomerates (at the expense of the environment and production numbers of other agricultural products as farmers switch to palm oil plantation).

The majority of Indonesia’s palm oil production is exported (see table below). The most important export destination countries are China, India, Malaysia, Singapore and the Netherlands.

Indonesia’s Palm Oil Production and Export

  2007   2008   2009   2010   2011   2012   2013¹
(million metric tonnes)
  16.8   19.2   19.4   21.8   23.5   26.5   28.0
(million metric tonnes)
   n.a   14.2   15.5   15.6   16.5   18.1   21.0
(in USD$ billion)
   n.a   15.6   10.0   16.4   20.2   21.6   20.0

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture

Indonesia’s oil palm plantation and processing industry is a key industry to the country’s economy: the export of palm oil is an important foreign exchange earner and the industry provides employment opportunities for millions of Indonesians. Almost 70 percent of Indonesia’s oil palm plantations are located on Sumatra where the industry was started during the Dutch colonial days. The remainder – around 30 percent – is largely found on the island of Kalimantan.

1. Sumatra
2. Kalimantan

Palm Oil Production Indonesia - Oil Palm - Crude Palm Oil Indonesia - Indonesia Investments

According to data from the Indonesian Ministry of Agriculture the total area of oil palm plantations in Indonesia is currently around eight million hectare; a number which is twice as much as in the year 2000 when around four million hectare of Indonesian soil was used for palm oil plantations. This number is expected to increase to 13 million hectare by 2020.

State-owned plantations play a modest role in the Indonesian palm oil industry as big private enterprises (such as the Wilmar Group and Sinar Mas) produce approximately half of total Indonesian production. Smallholder farmers account for around 35 percent, most of whom are highly vulnerable to global downswings in palm oil prices.

Indonesian companies engaged in palm oil are planning large investments to expand palm oil refining capacity. This is in line with the government’s ambition to extract more revenue from Indonesian resources. The country always mainly focused on the export of raw palm oil (and other raw commodities) but has shifted its priority to refined products higher up in the value chain. To spur growth in the downstream industry, export tax on refined palm oil products have been slashed from 25 percent to 10 percent in 2012. The export tax for crude palm oil (CPO) ranches between 7.5 and 22.5 percent depending on the international palm oil price.

Environmental Issues of Indonesian Palm Oil Plantations

Indonesia has often been criticized by environmentalist groups for giving too much room for palm oil plantation development (resulting in deforestation and destruction of carbon-rich peat lands). However, as more and more international companies are seeking to purchase sustainable palm oil that meets the criteria of the Malaysia- based Roundtable on Sustainable Palm Oil, Indonesian plantations and the government need to enhance their ‘green-policies’. Western governments are putting stricter legislation on imported products containing palm oil, thus stimulating the production of sustainable palm oil.

In 2011 Indonesia established its Indonesian Sustainable Palm Oil (ISPO) which aims to enhance the global competitiveness of Indonesian palm oil and brings it under stricter environmental legislation. All Indonesian palm oil producers are compelled to receive ISPO certification.

Moratorium on Virgin Forests

The government of Indonesia signed a two-year primary forest moratorium that came into effect on 20 May 2011 and expired in May 2013. After expiration, Indonesia’s president Susilo Bambang Yudhoyono extended the moratorium by two years. This moratorium implies a temporary stop to the granting of new permits to clear rain forests and peat lands in the country. In exchange Indonesia received a USD $1 billion package from Norway. On several occasions international media have reported that the moratorium has been breached by Indonesian companies. It has succeeded, however, in limiting – although temporarily – expansion of Indonesia’s palm plantations. Skeptics of the moratorium point out that prior to its implementation the government had concessioned around nine million hectares for new crops. Moreover, the large palm oil companies possess wide land banks of which many are only half planted, meaning that there is still ample room for expansion.

Future Prospects of the Indonesian Palm Oil Industry

Although international turmoil has resulted in a significant decline of the global palm oil price (and made the government introduce historically low export duties in 2013), the palm oil business in Indonesia is promising – on the long term – due to a number of reasons:

Big profit margins, while the product is simple to produce.
Large and increasing international demand.
Crude palm oil (CPO) production costs in Indonesia are the lowest worldwide.
Higher rates of productivity compared to other edible oil products.
Bio-fuel is expected to increase its significance at the expense of expensive gasoline.

What are matters that hamper development of Indonesia’s palm oil industry:

Awareness of the need for more environment-friendly policies
Land disputes with local communities due to a lack of clarity regarding land ownership
Legal and regulatory uncertainty
High logistics cost due to the lack of quality and quantity of infrastructure

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