Indonesia Palm Oil Industry: Current Status and Outlook 2018

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1 Indonesia Palm Oil Industry: Current Status and Outlook 2018 M. Fadhil Hasan Director of Corporate Affairs Asian Agri Group Board Member of Indonesian Palm Oil Association (IPOA)

2 Outline World palm oil production historical trend and outlook World palm oil consumption historical trend and outlook Factors determined and outlook of palm oil prices Conclusion

3 World Palm Oil Production Production Trend in the past five years Indonesia and Malaysia continue to be the major producers of palm oil contributing to about 85% of world palm oil production. The rest 15% of global production come from other countries such as Nigeria, Thailand and Colombia. Global palm oil production has expanded at around 4% in the past six years, up from 52.6 MMT in 2011/2012 to MMT in 2016/2017 on the back of slight productivity improvements, favourable climate conditions (except in year 2016), and area expansions especially in newly palm oil producing countries.

4 World Palm Oil Production Production Outlook Indonesia Indonesia s palm oil production growth is trending down. The significant growth reduction is envisaged in timeframe. Overall, the production is expected to maintain slow expansion at 3% per year in the next decade. Moratorium on the issuance of license to open new plantation, reduced price incentive, extreme weather pattern, productivity gap between smallholders and private plantation, and black campaign that ties with environmental, health and child labor issues will continue impeding production expansion. The declining seed sales in the past five years further confirms low production growth prospect in 10 years time. In 2017 the amount of seed sales estimated at 72 million seed. 10% Indonesia: Average Annual Palm Oil Production Growth 8% 3% 3% Indonesia: Annual Seed Sales (million seed) Source: USDA & Indonesia Oil Palm Seed Producer Association

5 Production Outlook Malaysia World Palm Oil Production Malaysia s palm oil production expansion is also trending down with much slower growth performance compared to that in Indonesia. Future production palm oil will be challenged by the various hindrances that include Low replanting rate that result in high portion of old crops and stagnant but tend-to-decline productivity. Labor shortages The land available for the new planting area is very limited and random weather pattern. 3.2% Malaysia: Average Annual Palm Oil Production Growth 2.3% 0.7% 1.0% Source: USDA

6 World Palm Oil Production Production Outlook Other producing countries Building on the abundant land supply, other producing countries should be in a good position to compensate for low growth prospect in major palm oil producers, restoring the global supply. Foreign direct investment, in terms of capital and technology, will play pivotal role to support production expansion in this new frontier. Lack of price incentives, uncertain socio-political condition and high labor cost in Southern America such as Brazil, however, will limit the FDI inflow to these countries in the medium term. Drawing on the above-mentioned challenges, palm oil production in other producing countries is projected to grow at 2-3% annually from 9.5 million tons in 2017 to 12.8 million tons in 2027, which is considered insufficient to compensate production slowdown in the two largest producing countries.

7 Indonesia s palm oil production in 2018 Palm oil production back to normal trend after experiencing a slight drop in However, production in 2017 is lower than expected. After showing significant increase in the first half of the year, the growth of the second half of the year is lower than the growth of last year in the same periods. Thus, in 2017 I estimated that palm oil production in Indonesia amounts to about 36.5 million tonnes. In 2018, the output growth will be more moderate compared to 2017 (after strong El Nino) although climate back to normal. In total, there would be an increase of around 4 million tonnes of world palm oil in There are many reasons for this, including; yield stagnation, lack of replanting, and effect of area restrictions. In 2018, if the trend continues then palm oil production will record at about 38.5 million tonnes. Thus, there is 2 million tonnes increase compared to last year.

8 Oil, Palm Production Indonesia (1000 MT) 40,000 35, ,000 26,200 28,500 30,500 25,000 20,000 20,500 22,000 23,600 15,000 10,000 5, / / / / / / / / / /2018

9 World Palm Oil Consumption Consumption trend in the past five years World consumption of palm oil has expanded at annual growth of 5.3% within 2011/ /2017 timeframe on the back of growing population and income, increasing fuel use and price competitiveness. India, Indonesia and EU are the major consuming countries followed by China and Malaysia. Indonesia is not only the world largest palm oil producer and exporter, but it will also become the largest consumer thanks to B-20 mandatory program. China will experience flat consumption growth due to moderation in GDP growth. Despite various negative campaigns against palm oil, EU remains the stable export market.

10 World Palm Oil Consumption Consumption outlook Growing fuel use, population growth especially in developing countries, emerging demand from new importing countries such as Pakistan, Iran and Bangladesh will become the positive factors to positive palm oil consumption growth. At the other side, China s economic growth moderation and a more intense negative campaigns against palm oil could slow the consumption pace. In addition to that, the use of biodiesel based palm oil will be another factors that determining palm oil consumption. Building on such mixed factors, palm oil consumption is predicted to expand at slower pace than that in the past five years. It is predicted global palm oil demand to grow by 3.1% per annum within time frame.

11 Factors determining and outlook of world palm oil price The projection of palm oil production and demand indicates the presence of an excess demand over the forecasting period, suggesting the palm oil price uptrend is envisaged within timeframe. Despite the prospect for price rally is remote, crude oil prices are also expected to stay firm in a decade to come, providing incentives for stable-to-gradual increase of CPO prices.

12 Price of CPO, 2016-Mar 18 Average 2016 = USD 700 per MT Average 2017 = USD 714 per MT Average Jan-Mar 18 = USD 671 per MT

13 CPO Fund and Indonesian mandatory biodiesel program The program has been successful in boosting palm oil prices back in 2016 and help in maintaining palm oil prices since then. It serves as stabilizing factor. However, in 2017 there was declining in domestic consumption of biodiesel from around 3 million kilolitre to 2.5 million kilolitre. An increase in Indonesia domestic consumption will relatively small unless mandatory program can be well enforced for non-pso(public Service Obligation). Realizing this, government now would impose the program for non- PSO, and we expect additional 1,2 million kilolitre of biodiesel from 2.5 million to 3.77 million kilolitre. Especially now that the difference between gasoil and biodiesel narrowed.

14 Installed capacity of biofuel industry Installed Capacity (kl) Biofuel Industries Biodiesel 23 Companies Feedstock, Palm Oil Ethanol 13 Companies Feedstock, Molasses & Cassava 120,00, ,30, ,00,000 Bioethanol Biodiesel 80,00,000 60,00,000 40,00,000 20,00,000 2,14, Source, APROBI 14

15 RIBU KL Production, domestic consumption and export of biodiesel A D Production ,812 2,221 2,805 3,961 1,653 3,655 3,416 Domestic ,048 1, ,008 2,572 Export ,453 1,552 1,757 1,

16 EU Parliament resolution and the likely impacts Indonesia won the case of EU accusasion of dumping of biodiesel in WTO. Exports of bioiesel to EU resume this year and expected around 400,000 kilolitre of biodesel will exported. Before Indonesia s export of biodiesel reached 1,5 million kilolitre in The plan of EU Parliament to end the use of palm oil based biodiesel in 2021 and the first generation of vegetable oils based biodiesel in process of trialouge is underway. We don t know the result. But if parliament resolution is in place. What is the likely impact? There will a shift in palm oil usage from biodiesel to food and industry, but there will no be significant impacts on price since the volume of palm oil in EU biodiesel relatively small compared to total palm oil production. Palm oil producers exporting to EU biodiesel market is the loser and this market will be replaced by other vegetable oils. This policy punish producer of sustainable palm oil. In turn, there will area expansion of vegetable oils, but where?. However, because of limitations for area expansion, thus there will pressure for vegetable oils price increase, while consumer of palm oil will benefits from lower palm oil prices. Producer of sustainable palm oil (for the use of biodiesel) will have to compete with producer of unsustainable palm oil (for the use of food). Its impact on deforestration will not be significant. In fact, deforestration might even expanded for two reasons; first, no incentive for producing sustainable palm oil; second; there will expansion of other vegetable oils which have much lower productivity than palm oil. This measure followed by US government which starting in July the US government imposes anti dumping duties of 54% of export of biofuel from Indonesia.

17 Indian government tariff increase India increased import tariff of CPO to 48% and processed CPO to 54%. Thus, palm oil will be less competitive compared to other vegetable oils. What is the impact to domestic production? What is the supply response of domestic vegetable oils? Clear impact is the price of vegetable oil will increase and there will be an inflationary pressure. Pakistan plans import tariff increase on CPO and its products.

18 Vegetable Oils Price Comparison 2017-Mar 18 Sumber:

19 CPO Price (CIF ROTT, USD/MT) Price of CPO Vs. Crude Oil 2016-Mar 18 Crude Oil Price (WTI, USD/Barrel)

20 % Delta ( ) CPO Price Vs. Crude Oil Price Mar 18 Average change of CPO Price in 2017-Mar 18 = -0.95% Average change of Crude Oil Price in 2017-Mar 18 = 1.39%

21 Conclusion Growth of palm oil production shows the declining trend in the next ten years comparing in the historical trend of the past ten years especially in the two largest producing countries; Indonesia and Malaysia. In the meantime demand for palm oil is predicted to expand at slower rate than that in the past five years due to factors of China economic growth moderation and more intense negative campaign. However, demand for palm oil is projected to be higher in its supply suggesting the palm oil price uptrends within the time frame. Price of palm oil will be determined by crude oil prices, differences in palm oil vs soybean, and EU and US policy on palm oil, and. Mandatory program of B 20 will be no longer factor that push prices of palm oil. We estimates that price of palm oil in 2018 will reach on in the range of US $ per tonne (CIF Roterdam).

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