INDONESIAN CRUDE PALM OIL: PRODUCTION, EXPORT PERFORMANCE AND COMPETITIVENESS. Tulus Tambunan Kadin-Jetro September 2006

1 INDONESIAN CRUDE PALM OIL: PRODUCTION, EXPORT PERFORMANCE AND COMPETITIVENESS I. Palm Production Tulus Tambunan Kadin-Jetro September 26 During the last twenty years, the history of the crude palm oil (CPO) industry in Indonesia is one of evolution from government sponsorship and market interventions to private sector initiative in response to international price signals and market growing. Until early 199s, most CPO was produced on publiclyowned estates, but it changed rapidly in the next decade as existing plants mature. In 1985 Indonesia had about 597,362 hectare (ha) of palm plantation, in which 335,195 ha of it owned by government. In 25, the area for palm plantation increased by more than 8 per cent to more than 5 million ha, and the majority of it is owned by the private sector. In terms of yield, in 1985 total production was around 1,243,43 tons and around 69 per cent came from state-owned estates as compared to only 27.3 and 3.7 per cent from respectively, private estates and people plantation (perkebunan rakyat). The latter is mostly carried out in small scale but the number of units is larger than estates run by the private sector or government. In 25, total production is about 1 times the 1985 level with the private sector as the largest producer, followed by people plantations (Table 1). Table 1: Areas and Production of Palm Plantation in Indonesia by Ownership, 1985 and 25 1985 25 Ha Ton Ha Ton State 335,195 861,175 677,41 3,768,261 Private 143,63 339,241 3,3,8 4,922,88 People 118,564 43,16 1,917,37 4,19,651 Indonesia 597,362 1,243,43 Source: Soeherman et al. (26). 5,597,158 12,62, The growth trend of palm plantation in Indonesia by ownership shows an interesting fact that during the period 2-25, the average growth rate of people plantation is the highest in the group, at 12.85 per cent as compared to 3.2 and 4.99 per cent of state owned and private estates, respectively. Even in 2, the people ownership of palm oil plantation in Indonesia already reached about 1,166,8 ha, compared to 588,1 ha and 2,43,2 ha of respectively state owned and private estates (Figure 1). Although there are some constraints for land expansion of palm plantation due to many factors such as urbanization, population growth, development of new industrial estates, road constructions, it is expected that the area for palm plantation in Indonesia will continue to grow. In 25, it is registered about 5.6 million ha of land used for this crop with an average growth rate per year about 6.9% since 2. In 21, the total area is expected to reach 6.9 million ha, and the private sector will stay as the leader that in 21 Kadin Indonesia-Jetro, 26 1

2 will have almost 3.5 million ha, compared to people plantation slightly above 2.5 million ha and state owned much less than a million ha (Figure 2). Figure 1: Growth Trend of Palm Plantation in Indonesia by Ownership ( ha), 2-25 6 5283.6 5447.5 5597.1 5 567.1 4713.4 4 4158.1 3 2 1 243.2 2542.5 2627.1 1166.8 1561 2766.4 2867.5 33.1 188.4 1854.4 194.9 1917 588.1 69.9 631.6 662.8 675.1 677 2 21 22 23 24 25 State Private People Indonesia Source: Direktorat Jenderal Perkebunan, Buku Statistik Perkebunan 26. 3,5, Figure 2: Long term growth of palm plantation area in Indonesia (ha), 1999-21 3,, 2,5, 2,, 1,5, 1,, 5, 1999 2 21 22 23 24 25 26F 27F 28F 29F 21F State Private People Source: Janurianto (26) (data from BPS & Direktorat Jenderal Perkebunan, Department of Agriculture) The relationship between land availability for palm plantation and levels of urbanization, industrialization and population density (or population concentration) is very observable by province. As can be seen in Table 2, in West Java, the palm plantation area is much smaller as compared to those in other provinces. Sumatera has always been the key area for palm production in the country with Riau as the leading province. Currently, the potential of land availability for palm plantation in Indonesia is about 26 million ha scattering from Aceh to Papua. Interestingly, Papua is the largest province with more than 6 million ha of land available, followed by other traditional provinces in the western part as the center for palm production in Indonesia, i.e. Riau with about 2.6 million ha, Jambi 1.8 million ha, and South Sumatera 1.5 million ha, and Kalimantan in the central part of the country with a total of 6 million ha (Table 3). Kadin Indonesia-Jetro, 26 2

3 Table 2: Area for Palm Plantation in Indonesia by Province (ha) No. Propinsi 23 24 25 1 Nanggroe Aceh Darussalam 262.161 268.329 261.11 2 North Sumatera 919.68 954.854 964.257 3 West Sumatera 36.496 37.166 324.331 4 Riau 1.319.659 1.37.284 1.383.477 5 Jambi 456.327 457.452 466.79 6 South Sumatera 52.481 515.371 532.365 7 Bangka Belitung 94.886 96.72 1.681 8 Bengkulu 8.218 82.496 83.583 9 Lampung 137.721 138.196 163.589 1 Banten 19.2 19.548 19.639 11 West Jawa 6.242 6.242 646 12 West Kalimantan 416.87 455.814 466.91 13 Central Kalimantan 241.615 244.281 269.43 14 South Kalimantan 141.638 143.321 15.211 15 East Kalimantan 21.871 26.137 222.132 16 Central Sulawesi 43.743 43.762 44.215 17 South Sulawesi 78.932 8.63 8.991 18 Southeast Sulawesi 4.78 4.16 4.149 19 Papua 49.812 52.872 53.375 2 TOTAL 5.283.557 5.447.562 5.597.157 Source: Direktorat Jenderal Perkebunan, Buku Statistik Perkebunan 26. Table 3: Potential of Land Availability for Palm Plantation in Indonesia by Province Province Area (ha) Nanggroe Aceh Darussalam 384,871 North Sumatera 37, West Sumatera 355,814 Riau 2,563,156 Jambi 1,818,118 South Sumatera 1,483,959 Bangka Belitung 593,38 Bengkulu 28,794 Lampung 336,872 Banten 63,742 West Jawa 224,78 West Kalimantan 1,681,186 Central Kalimantan 3,61,819 South Kalimantan 1,162,959 East Kalimantan 4,7,333 Central Sulawesi 256,238 South Sulawesi 192,37 Southeast Sulawesi 1,264 Papua 6,331,128 TOTAL 26,15,372 Source: Hasibuan (26). With respect to the gross domestic product (GDP) contribution, official data indicate that in 25 the current market value of palm plantation is Rp 43.4 trillion or about 11.87% of GDP contributed by agriculture or 1,79 per cent of GDP non-oil and gas (Table 4). During the period 23-25, the rate of Kadin Indonesia-Jetro, 26 3

4 output growth of palm plantation is much higher than that of agriculture as a whole, i.e. at almost 18 per cent versus 8. per cent. Table 4: GDP Contribution of Palm Plantation in Indonesia, 23-25 No Sector 23 24 25 Average growth rate per year (%) 1 Palm (Rp trillion) 31.3 35.3 43.4 17.8 2 Agriculture (Rp trillion) 313.7 331.5 365.6 8. 3 Non-oil&gas (Rp trillion 1,9.2 2,6.6 2,427.6 13.1 4 Total GDP (Rp trillion) 2,86.8 2,261.7 2,729.7 14.5 5 Share in agriculture (%) 9.98 1.65 11.87 9.1 6 Share in non-oil & gas (%) 1.65 1.71 1.79 4.1 Source: Hasibuan (26) (BPS data) II. Development of CPO Production In Indonesia, the CPO industry has been one such source of growth in the Indonesian manufacturing industry. In the last twenty years, production has grown from less than 4, tons of CPO to over 4 million tons. In addition, with production costs among the lowest in the world, investment levels are expected to remain high. Currently, there are 32 industries producing CPO in Indonesia with total production capacity of 13,52 ton TBS per hour. Most of these industries are found in Sumatera and Kalimantan (Table 5). Based on data the Department of Agriculture, in 25 Indonesia produced 12.4 million and growth rate of more or less 15.6 per cent annually in the period 2-25. The biggest growth experienced by people plantation (2.7 per cent) and followed by private sector (15.9 per cent) (Table 6). Table 5: Number of CPO Industry and Its Production Capacity in Indonesia by Province, 25 No Province Number of Production capacity factories (ton TBS/hour) 1 Nangroe Aceh Darussalam 21 54 2 Sumatera Utara 86 2.95 3 Sumatera Barat 8 525 4 Riau 84 4.35 5 Jambi 19 815 6 Sumatera Selatan 23 1.27 7 Bengkulu & Bangka Belitung 3 12 8 Lampung 7 24 9 Jawa Barat & Banten 7 185 1 Kalimantan Barat 1 3 11 Kalimantan Tengah 1 6 12 Kalimantan Selatan 15 745 13 Kalimantan Timur 18 9 14 Sulawesi Tengah 7 36 15 Sulawesi Selatan 9 3 16 Papua 5 18 17 Sulawesi Tenggara 5 235 18 Sulawesi Utara 1 3 Total 32 13.52 Source: Direktorat Jenderal Perkebunan, Department of Agriculture. Kadin Indonesia-Jetro, 26 4

5 Table 6: Development of CPO production in Indonesia, 22-25 Ownership Production ( ton) Average growth 2 21 22 23 24 25 (%) People State Private 1,95 1,461 3,634 2,798 1,519 4,79 3,427 1,68 4,588 3,517 1,751 5,173 3,745 1,982 6,8 3,874 2,5 6,528 2.7 8. 15.9 Total 7, 8,396 9,623 Source: Direktorat Jenderal Perkebunan, Department of Agriculture. 1,441 11,87 12,452 15.6 Based on recent data from BPS, Figure 3 shows that the growth level of output from the CPO industry for the period 2-24 was almost 28 per cent compared to 3.8 per cent of total output of manufacturing industry. During the period 23-24, the CPO production increased by 49.5 per cent, which was much higher that that of total output of manufacturing industry by only 19.7 per cent. In 24, CPO ranked as the second most important non oil and gas product, and the first most important manufactured product in Indonesia. Figure 3: Output share of CPO in total output of manufacturing industry, Indonesia, 2-24 12 1 8 % 6 4 2 2 21 22 23 24 Source: BPS From the world perspective, in 1962 world production of CPO recorded 1.2 million tons and in 25 reached 33.33 million tons or 28 more than production in 1962. Figure 4 shows that the world CPO production grew steadily and relatively faster as compared to other oil yielding crops such as soya bean, groundnut, cottonseed, coconut, sunflower and fish and since 24 the growth of CPO production tends to dominate these crops. During the period 21-25 the world CPO production grew on average 8.78 per cent per year. Or, from 24, the growth of CPO production in 25 is 7.7 per cent, compared to e.g. soya oil (5.5 per cent), rapeseed oil (6.3 per cent) and sun oil (3 per cent). With respect to the relative position in the world CPO production, based on FAO database, Figure 5 presents a long-term development trend of world production share of Indonesian CPO for the period 1961-24. In 1961, the share was about 6.84 per cent and around 36 per cent in 25. Kadin Indonesia-Jetro, 26 5

6 Based on Data Consult Inc (24) (quoted from Soeherman, et al. (24), it was estimated that in 24 total CPO production in Indonesia reached 12,38, tons, and about 58 per cent of this total supplied to domestic industries as raw material such as soap industry (3 per cent), margarine industry (3 per cent), cooking oil industry (37 per cent) and oleo chemical industry (5 per cent). 35, Figure 4: Long-term growth of palm and other vegetable oils in the world, 1999-25 3, Volume ('' tonnes) 25, 2, 15, 1, 5, 1999 2 21 22 23 24 25 Palm Oil Palm Kernel Oil Soya Bean Oil Cottonseed Oil Groundnut Oil Sunflow er Oil Rapeseed Oil Corn Oil Coconut Oil Olive Oil Custor Oil Sesam e Oil Linseed Oil Butter Tallow Fish Oil Lard Source: Janurianto (26) (MPOB data). Figure 5: World Production Share of Indonesian Palm Oil, 1961-25 4 35 3 25 % 2 15 1 5 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 Source: FAO database However, the CPO production in Indonesia is always smaller than that in Malaysia. During the period 21-22, Malaysia produced 11,858, tons of CPO compared to 9,2, tons in Indonesia. In 23-24, the production in Malaysia reached more than 13 million tons while in Indonesia was 11.6 million tons. It is expected that this gap will proceed in the future reflecting the stronger position of Malaysia in the world production of CPO (Figure 6). Kadin Indonesia-Jetro, 26 6

7 In 25, Malaysia contributed 47 per cent to total world CPO production, compared to Indonesian with 38 per cent. However, it is expected that in 27 Indonesia will pass the Malaysia position in CPO production. Based on Oil World estimation (Soeherman, et al, 26), in 21 Malaysia will produce 17.7 million tons of CPO, while the level of production in Indonesia will reach about 22.5 million tons. 18, Figure 6: Malaysia and Indonesia in CPO production ( ton): 21/22-25/26(F) 16, 14, 12, 1, 8, 6, 11,858 9,2 13,18 13,42 9,8 1,6 15, 15,3 11,6 12,6 Malaysia Indonesia 4, 2, 21/22 22/23 23/24 24/25 25/26(F) Source: USDA Other important CPO producers in the world include Thailand, Nigeria, Columbia, Venezuela, and Cote d Ivoire. However, total CPO productions from these competitors are always much smaller than those from Indonesia and Malaysia. In 25, Indonesia and Malaysia together produced 85 per cent of needed CPO (or about 23 per cent of needed vegetable oils) in the world, while between 1999 and 25 the other producer countries produced, on average, less than 1,, tons. Even, in the last five years, while the CPO production in Indonesia and Malaysia kept growing annually, the productions in the other competitors have more or less stagnated. However, in 25, the CPO production in some of these countries grew relatively high (Figure 7). Figure 7: Growth rate of CPO production in important CPO producing countries, 25 Kadin Indonesia-Jetro, 26 7

% 2 18 16 14 12 1 8 6 4 2-2 Malaysia Indonesia Nigeria Columbia Cote Thailand PNG Ecuador Costarica Honduras Brazil Venezuela Guatemala 8 Source: Visdatin (25), quoted from Soeherman, et al. (26). III. Development of CPO Export Production of CPO in Indonesia is always larger than domestic consumption need. Even, official data (Figures 8 and 9) indicate that domestic demand tends to decline relatively to domestic production. In 1999, the production of CPO was slightly larger than its domestic consumption. But, the gap increases by year, as the production expands rapidly, while the consumption increases slowly. In 25 the production is estimated to reach about 13 million tons, while domestic consumption is slightly higher than 8 million tons, and it is expected that the proportion of domestic production for domestic consumption will stay constant at around 3 per cent. So, from this perspective, Indonesia has a great potential as a big exporting country in the world. Figure 8: Domestic Production, Consumption and Export of CPO in Indonesia, 1999-25 ('' ton) 14, 12, 1, 8, 6, 4, 2, 1999 2 21 22 23 24 25 Production Consumption Expor t Source: Janurianto (26) (data from BPS & Direktorat Jenderal Perkebunan, Department of Agriculture) Kadin Indonesia-Jetro, 26 8

9 Figure 9: Estimated Domestic Production and Consumption of CPO in Indonesia, 1997-29 ' Tons 2 15 1 5 1997 1998 Production Consumption % consumption 1999 2 21 22 23 24 25 26 27 28 29 7% 6% 5% 4% 3% 2% Source: Janurianto (26) (data from MPOB) Of course, the export potential of Indonesian CPO does not depend only on the excess supply of this commodity in the domestic market, but also, and even more importantly, on the world market opportunity and hence the capability of Indonesian CPO industry to make a good use of this opportunity. Based on FAO database, Indonesian export of CPO increased from 117,3 mt or US$21,39, in 1961 to 6,386,41 mt or US$2,454, 626, in 23. Indonesia also import CPO started since 1973 (except in 1978 and 1979) (Figures 1 and 11). 7 6 Figure 1: Indonesian Export and Import of Palm Oil (mt): 1961-23 5 Mt 4 3 2 1 Source: FAO database Import 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 Export Figure 11: Indonesian Export and Import of Palm Oil ( US$): 1961-23 3 25 2 Value 15 1 5 Kadin Indonesia-Jetro, 26 9 1961 1964 1967 197 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 23

1 Source: FAO database The foreign currency contribution of CPO also increases by year. Based on BPS data, export value of CPO in 1998 reached US$1,357,,, or about 6 per cent of US$7 billion, the country s total export revenues in that year. In 24, the country s total non-oil and gas export revenues recorded at US$54 billion, of which US$4,429,542 (or 8 per cent) came from CPO export. However, Indonesia faces heavy competition from other CPO producing/exporting countries, especially Malaysia. It is shown before that Malaysia always produces more CPO than Indonesia can produce. The gap in export between the two countries is larger than in domestic production, suggesting that Malaysia is not only stronger than Indonesia in production capacity but also in export. As shown in Figure 12, in 21-22 CPO export from Malaysia was 1.5 million tons and Indonesia only 5,979 thousand tons. In 25-26 Malaysia is expected to export 13.4 million tons of CPO compared to only 8.4 million tons from Indonesia. Figure 12: Malaysia and Indonesia in CPO export ( ton): 21/22-25/26(F) 16, 14, 12, 1, 8, 6, 4, 2, 12,9 13,4 11,65 11,765 1,5 7,856 8,1 8,4 5,979 6,6 21/22 22/23 23/24 24/25 25/26(F) Malaysia Indonesia Source: USDA The prospect of world market for CPO, and hence for Indonesian CPO export is great for the following facts. First, world demand for vegetable oils continues to increase, not only for household consumption but also as bio fuel, especially in West European/EU market (Figure 13). Second, in this increasing world demand for vegetable oils, CPO is increasingly important. In 22, CPO consumption was recorded below that of soya oil, another important consumed vegetable oil, but in 25 it passed the share of soya oil. (Figure 14). Figure 13: Development of the Use of Vegetable Oils in Bio Fuel in the World ( tons) Kadin Indonesia-Jetro, 26 1

11 Source: Hasibuan (26) Data from Oil World-ISTA show that since the end of 199s the gap between demand for and production of CPO in the world tends to wider, suggesting rising import needs for CPO (Figure 15). Besides EU, China and India are also the world largest CPO importing countries (Figure 16). It is expected that demand from China and India due to their continued high growth rate in total population will push the world demand for CPO significantly (Figures 17 and 18). Figure 14: Development of World Demand for Vegetable Oils, 22 and 25 22 25 CPO (2.72%) CPO (23.92%) Others Soya bean oil (24.78%) (45.5%) Others (47.72%) Soya bean oil (23.8%) Source: Hasibuan (26) Figure 15: CPO Export Opportunity in the World 26 25 24 23 22 21 2 19 18 17 16 15 14 Kadin Indonesia-Jetro, 26 Demand 11 Production Rising Import Needs

12 Source: Janurianto (26) (data from Oil World-ISTA Mielke GmbH, Hamburg, 25) Volume ('' tonnes) 28, 26, 24, 22, 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Figure 16: World Important CPO Importing Countries. 1999 2 21 22 23 24 25F China EU Pakistan India Others Total Source: Source: Janurianto (26) (data from BPS & Direktorat Jenderal Perkebunan, Department of Agriculture) Figure 17: Population Level and Growth Rate in China and India compared to other countries, 22 Population (') 1,4,. 1,2,. 1,,. 8,. 6,. 4,. 2,. - Sub-Saharan Africa North Africa Near-East Other Asia China Japan Population 22 Growth Rate Indonesia India Pakistan Latin America & Caribbean Western Europe Eastern Europe New Independent States North America Oceania 5 4.5 4 3.5 3 2.5 2 1.5 1.5 Growth Rate % Source: UN Figure 18: The Expected Population Growth in China, India and EU, 195-25 Kadin Indonesia-Jetro, 26 12

8 13 n Billio 1. 8 1. 6 1. 4 1. 2 1.. 8. 6. 4. 2-195 196 197 198 199 2 21 22 23 24 25 EU China India Source: UN (database) As far as Malaysia goes, the country has always been the strongest competitor for the Indonesian export of CPO. So, it is interesting to see how has been the relative position of Indonesia with respect to Malaysia in international trade on this particular crop. Figure 19 may give some clue about this. In 1961, the share of Indonesia was 18% compared to 15% owned by Malaysia. However, since the 197s, Malaysia has increased significantly its production and export, and in 23 Malaysia owned about 58% while Indonesia 3.7% of world trade in palm oil. The relative weakness of Indonesian position in world market for palm oil is also observable by looking at the long-term development trend of export ratio between Indonesia and Malaysia. Further, as can be seen in Figure 2, in 1961 the export volume of Indonesian CPO was almost 124 times larger than that of Malaysia, but in 23 it reduced by more than 5% to about 52.9 times. Figure 19: World Market Share for CPO of Indonesia (I/W) and Malaysia (M/W), 1961-23 8 7 6 5 % 4 3 2 1 1961 1964 1967 197 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 23 M/W I/W Source: FAO database Figure 2: Export Ratio of CPO: Indonesia Malaysia, 1961-23 14 Kadin Indonesia-Jetro, 12 26 1 13

14 Source: see Figure 19 IV. Competitiveness of Indonesian CPO Methodologically, the trade performance or global competitiveness of a country can be examined by analyzing a number of indicators/indices or through various methods of analysis. One method which is appropriate to be used to examine the Indonesian competitiveness of palm oil the so-called country market analysis profile conducted by ITC from UNCTAD. This provides an overview of the export performance of developing countries and economies in transition in terms of the product composition of their exports, the dynamics of international demand, and growth patterns of their leading export products. The national export performance analysis shows: the leading export products of each country and their extent of concentration or diversification, the products for which each country has out/under performed other countries and increased/decreased its international market share, the extent to which the leading export products are positioned in growing or declining markets, and the market segments in which the leading export products are positioned in terms of unit values. Conceptually, the national export performance is based on trade data for the years 1997 to 21 reported by 184 countries and territories to the COMTRADE database of the United Nations Statistical Division, which together account for more than 9 percent of world trade. This analysis yields two types of information. The first information is presented in Figure 21 showing the national export performance of Indonesia vs. international demand from the dynamic perspective. The figure presents the performance of Indonesia s 2 leading export product groups, including palm oil. It shows the export value of the products under review (size of the bubbles), and it compares the national export change in world market share (horizontal axis) to the growth of international demand (vertical axis). The figure also provides an overview of the concentration of Indonesian exports: the appearance of one or a few comparatively large circles shows that exports are highly concentrated. In addition, the figure indicates the average nominal growth of world imports (horizontal reference line) over the 1997 to 21 period, which was 4.5 per cent p.a. Moreover, the vertical line (i.e. the line of constant world market share) divides the figure into two parts. Exports of products to the right of this line have grown faster than world Kadin Indonesia-Jetro, 26 14

15 imports and thereby increased their share in the world market. Conversely, products to the left of the vertical line have seen erosion of their world market share. The figure also provides an overview of the concentration of exports. The appearance of one or a few comparatively large circles shows that exports are highly concentrated. The vertical and the horizontal reference lines are of particular interest from a trade development perspective, since they divide the chart into four quadrants with different characteristics. The quadrants have been labeled as follows: 1) Champions : winners in growth markets (upper right, first quadrant): these are the export products for which Indonesia has performed very well, such as palm oil and its fractions and natural rubber. These are particularly dynamic products, which are growing faster than world trade in general and for which Indonesia has outperformed world market growth and increased its share in world imports. Indonesia as an exporter of these products has proven its international competitiveness over the late 199s. Trade promotion efforts for these products are less risky, as there are national success stories, which can serve as reference points. 2) Underachievers : losers in growth markets (upper left, second quadrant): these products such as women s suits, jackets, dresses skirts, etc represent particular challenges for trade promotion efforts in Indonesia. While international demand has been growing at above-average rates, Indonesia has been falling behind. Its exports have either declined or grown less dynamically than world trade. As a result, Indonesia has been losing international market share. In general, the bottleneck is not international demand, but rather on the supply side. For these products, it is essential to identify and remove the specific bottlenecks, which impede a more dynamic expansion of exports. Figure 21: National Export Performance vs. International Demand from the Dynamic Perspective: Indonesia: 1999-23 Kadin Indonesia-Jetro, 26 15

16 Source: ITC (UNCTAD/WTO). 3) Declining sectors (lower left, third quadrant): 1 the export prospects for these products tend to be gloomy, for example woven fabrics of synthesis. World imports of these products have been stagnating or have actually declined, and the market share of Indonesia has gone down. Trade 1 It should be noted that the criterion for distinguishing growing and declining products is the average nominal growth rate of total world imports from 1999 to 23, which was at around 4 to 4.5 per cent annually. Kadin Indonesia-Jetro, 26 16

17 promotion efforts for product groups in this category face difficulty. Indonesia needs to adopt an integrated approach to take into account bottlenecks both on the supply and on the demand side. 4) Achievers in adversity : winners in declining markets (lower right, fourth quadrant): products in this quadrant are characterized by growing shares of exporters in world import markets, which are declining or growing at a below average rate, such as other paper and paperboard in the Indonesian case. From a trade promotion perspective, niche-marketing strategies are required to encourage this positive trade performance despite the overall decline in these markets. The second information presented in Figure 22 showing the national export performance of Indonesia vs. international demand from the structural perspective. This figure is to some extent similar to Figure 21. The size of the bubble for example is also proportional to the country s export turnover. The key difference is in the horizontal axis, specified here as the country s world market share for the corresponding product group. The vertical axis is also different, since we plot here the average growth of world imports in real terms (i.e. volume terms) over 1999-23. The structural figure is closer to the original Boston Matrix model, also known as the growth-share model. This figure is structural in nature because market shares do not vary much over time and world imports expressed in volume terms are, unlike those expressed in nominal (i.e. value terms), not affected by fluctuations in prices and exchange rates. As a result, the overall picture does not change much from one year to the next. Figure 21, by contrast, reflects the most recent changes in market shares. The two figures are therefore complementary. Bubbles to the right of the vertical axis represent those products in which the country is specialised. That is, those products in which the country has, according to Balassa, a comparative advantage. As in Figure 21, Figure 22 is also divided into four quadrants with different characteristics. The quadrants have been labeled as follows: 1) Stars (upper right quadrant): specialisation in high growth sectors: Products located in this quadrant are those that are growing faster than world trade in real terms. They are also products in which Indonesia is specialised and have captured relatively high world market shares, such as such as palm oil and its fractions, footwear, women s suits and many others. Indonesia as an exporter of these products has proven their international competitiveness over recent years. 2) Emerging products (upper left quadrant): low market share in high growth sectors. These products, such television camera, as present particular challenges for Indonesia s trade promotion efforts. While international demand has been growing at above average rates, Indonesia is a relatively minor player with a relatively low market share. This may be because Indonesia has only recently started developing exports in these products or it may be because Indonesia is specialised in niches within the product group in question. For these products, Indonesia needs to identify strategies to increase its market share in these high growth sectors, by analyzing first supply-side bottlenecks faced by the country and its opportunities for horizontal diversification. Kadin Indonesia-Jetro, 26 17

18 Figure 22: National Export Performance vs. International Demand from the Structural Perspective: Indonesia: 1999-23 Source: ITC(UNCTAD/WTO) 3) Snails (lower left quadrant): low market share in low growth sectors. Export prospects for these products, in which no products are included from Indonesia, tend to be bleak as world imports have been stagnating or declining and the country has a low market share in these products. Trade Kadin Indonesia-Jetro, 26 18

19 promotion efforts for these products face an up-hill battle. Trade strategies for these products need to take into consideration bottlenecks on both the supply (production) and demand side. 4) Traditional Products (lower right quadrant): specialisation in low growth sectors: Products in this quadrant, such as parts and accessories of video, are those in which Indonesia has a high market share (i.e. highly specialised) but where world demand is declining or growing at below the world average rate. Trade promotion efforts need to focus on niche marketing strategies in order to identify and increase Indonesia s specialisation in the best performing products within an overall declining product group. Most data used for Figures 21 and 22 can be found in Table 7 too, which, as an illustration, presents the major indicators of the Indonesia s export performance of the 4 leading items of merchandise exports, at the HS 4-digit level and values are in USS million in 23. All goods: it gives value, growth and growth pattern information for Indonesia's total merchandise exports, 2 and, all goods (WTO): it indicates the value of national exports according to national sources as reported in the WTO's Annual Report. 3 The table also gives the rank of the 4 leading merchandise export product groups of Indonesia in 23. Indonesia has negative values of net export for two product groups, which means that Indonesia is a net importing country (imports being higher than exports). 4 The average annual percentage growth of export in value as well as quantity over the period 1997-23 is based on the least-squares method. Whereas, the average annual percentage growth of world trade (=world imports) of the product under review for the same period, both in value and quantity, is based on the least-squares fit. 5 Share in world (%:) indicates percentage share of exports of Indonesia in total world exports based on 23 export values. The horizontal axis in Figure 21 or Figure 22 measures the average annual change of this share over the 1997-23 period. The column of leading markets lists the two largest markets for Indonesia s exports in 23 and their share in Indonesia s export. Another way often adopted to analyze the global competitiveness of a country for a particular products (or group of products) is the so-called Revealed Comparative Advantage (RCA) Index according to the Balassa formula. The index compares the share of a given product in Indonesian exports with the share of this product in world exports. Values above 1 indicate that Indonesia is specialized in the product under review, or Indonesia s global competitiveness for that product is higher than the world average. Values 2 In case of mirror statistics, the export value is estimated according to the import data of the major trading nations. 3 The comparison of this figure with total exports as derived from Indonesian partner country data indicates the level of export flows covered by mirror statistics. In a few countries, the mirror statistics are actually larger than the national data. This may reflect the CIF-FOB difference in valuation and the non-reporting of exports in the country under review. In case of mirror statistics, the export value is estimated according to the import data of the major trading nations. 4 For most of the low-income countries, negative values may indicate that the export goods (such as technology or machinery) are not produced locally, but are imported from abroad and re-exported to the country of origin or third countries. 5 Data at the 6-digit level of the HS has been used for these calculations. The world trade growth of unit values (average prices) is calculated approximately as the difference between the growth rate in value and the growth rate in quantity. Kadin Indonesia-Jetro, 26 19

2 below 1 indicate that Indonesia is not specialized in the product review, or its global competitiveness is lower than the world average. Table 7: Export of Indonesia by Product Groups and Leading Markets Source: UNCTAD/ITC. Kadin Indonesia-Jetro, 26 2

21 Based on data from the Ministry of Industry (Deprindag), Figure 23 presents RCAs of Indonesia and Malaysia, which indicates that Malaysia is indeed the heaviest competitor for Indonesia in palm oil trade, as in most years the RCA of Malaysia is higher than that of Indonesia. Figure 23: RCAs of Malaysia and Indonesia for Palm Oil, 1996-22 22 21 2 1999 1998 1997 1996 17.7 18.64 26.9 29.39 26.61 22.3 23.36 23.68 29.74 23.33 28.47 28.56 31.64 38.38 1 2 3 4 5 Indonesia Malaysia Source: Deprindag database V. Problems and Prospect As with many other industries in Indonesia, CPO industry is also facing many constraints. According to Janurianto (26, currently, the main constraints in the Indonesian CPO industry are the followings: 1. scarcity in new land for palm plantation; 2. lack of skilled human resources 3. low productivity. For instance, Indonesia produced 2-3 ton/ha compared to 4-6 ton/ha in Malaysia. This less production per ha in Indonesia is mainly caused by low productivity in the people plantation subsector (Table 8). The low productivity in this subsector is attributed to a number of factors, including (Hasibuan, 26): (i) about 75 per cent of the plantation is already old; it needs renovation; (ii) lack of maintenance; (iii) the implementation of harvest is not according to a good plants technique culture; and (iv) the use of wrong seed, not according to determined technique. Table 8: Development in production of CPO per ha by Ownership Ownership 2 21 22 23 24 25 People State Private Kadin Indonesia-Jetro, 26 1.6 2.5 1.5 1.8 2.5 1.6 1.9 2.5 1.7 21 1.9 2.6 1.9 Source: Direktorat Jenderal Perkebunan, Department of Agriculture. 4. lack of security and illegal retributions, especially at kabupaten level; 5. lack of supporting logistic industries such as fertilizer and agro-chemical industries, vehicle and heavy equipment industries, factory tools and industrial machinery industries, and supporting services such as transportation, bulking installation/port, consulting/constructing, and R&D. 2. 2.9 2.1 2. 3. 2.2

22 6. lack of infrastructure and low quality of existing infrastructure; and 7. national policies in favor of smooth development of Indonesian CPO industry. He argues further that the development of Indonesian CPO industry must be fully integrated from upward to downward, which are: land, infrastructure, seed, human resource, social and security, distribution, financing, and government support, especially pricing policy, tax incentive, and business regulations. Kadin Indonesia-Jetro, 26 22

23 Appendix Source: Deprind. (NAFED). Kadin Indonesia-Jetro, 26 23

24 Kadin Indonesia-Jetro, 26 24

25 Type of product HS Code Indonesia Export of Palm Related Products, 1999-25 (Volume: ton) Period CPO 15111 1999 2 21 22 23 24 25 865 427 1 817 664 1 849 142 2 84 792 2 892 13 3 966 971 4 565 625 Other palm oil 15119 2 433 56 2 292 363 3 54 76 3 528 916 3 494 279 5 29 33 5 81 565 Crude palm kernel oil 151321 392 651 437 357 464 334 595 67 522 531 77 531 812 326 Other palm kernel oil 151329 25 192 141 468 117 592 143 349 137 363 198 245 23 869 Palm nuts and kernels 1271 7 828 8 24 1 778 5 73 7 347 34 86 73 149 Industrial stearic acid 382311 99 82 83 27 8 659 65 159 5 297 182 891 189 23 Oleic acid 382312 6 697 1 994 1 69 2 119 1 195 7 26 11 921 Tall oil fatty acid 382313 1 49 25 926 226 343 Acid oils from refining 3823191 29 74 18 56 24 387 29 556 23 314 1 114 12 258 Other industrial acids 3823199 228 448 251 358 25 77 23 44 28 82 179 994 25 272 Industrial fatty alcohols 38237 49 622 56 842 47 479 6 45 79 295 7 42 77 761 Total Source: Suharto (26). 4 32 457 5 19 5 891 158 7 466 8 7 416 797 1 477 681 12 123 979 Kadin Indonesia-Jetro, 26 25

26 Indonesia Export of Palm Related Products, 1999-25 (Value: FOB US$) Type of product HS Code Period 1999 2 21 22 23 24 25 CPO 15111 269 987 476 438 46 49 891 999 1 62 215 1 444 422 1 593 295 Other palm oil 15119 844 255 61 84 674 497 1 2 45 1 392 411 1 997 354 2 162 988 Crude palm kernel oil 151321 226 334 169 55 111 937 2 997 26 242 385 997 448 955 Other palm kernel oil 151329 121 641 69 57 34 322 55 237 58 436 116 683 138 791 Palm nuts and kernels 1271 675 1 248 17 975 1 566 9 21 18 35 Industrial stearic acid 382311 47 79 34 37 26 68 25 922 21 597 97 167 9 62 Oleic acid 382312 4 395 1 484 1 136 1 53 963 4 831 8 149 Tall oil fatty acid 382313 298 2 626 12 231 Acid oils from refining 3823191 8 179 3 29 3 616 5 517 7 71 35 296 33 13 Other industrial acids 3823199 69 85 62 95 49 629 67 84 64 995 67 4 85 31 Industrial fatty alcohols 38237 48 457 57 9 41 678 44 283 53 17 78 13 99 519 Total Source: Suharto (26). 1 648 386 1 486 453 1 35 19 2 495 294 2 868 632 4 429 542 4 679 38 Kadin Indonesia-Jetro, 26 26

27 Palm Oil: Production, Consumption, Exports, and Imports in Selected Most Important Countries, 25 Country Production (1 MT) Imports (1 MT) Exports (1 MT) Industrial domestic consumption Food use domestic consumption Total domestic consumption* Indonesia Malaysia Thailand Nigeria Colombia Papua New Guinea Cote d Ivoire Ecuador Costa Rica Congo Honduras Cameroon Ghana Guatemala Brazil 15 14 8 8 8 69 38 36 34 285 175 165 15 12 115 11 5 4 5 21 16 5 17 2 15 23 125 15 35 1 5 13 1 1 4 22 335 1 115 212 13 1 21 75 45 Note: * including feed waste consumption. Source: www.indexmundi.com/en/commodities/agricultural/oil-palm/25.html. (1 MT) 5 1 9 27 2 6 127 5 68 25 83 (1 MT) 3 875 636 411 85 413 5 24 215 25 111 25 172 224 55 17 (1 MT) 4 455 2 736 747 1 5 488 5 367 225 75 179 5 172 224 55 1 Kadin Indonesia-Jetro, 26 27

28 India Netherlands China Malaysia Singapore Others Country Country Destinations for Indonesian CPO Export (ton) Period 1999 2 21 22 23 24 25 29 415 912 117 713 334 1 46 277 1 42 783 1 786 364 1 796 31 376 361 414 254 466 294 79 193 377 425 522 479 68 871 1 269 3 14 27 65 3 52 34 46 2 118 56 623 147 321 36 438 53 7 364 922 32 528 511 645 477 497 7 959 183 362 228 846 251 886 263 931 364 398 426 29 231 12 268 443 359 948 42 12 493 417 761 967 1 128 35 Total Source: Suharto (26). 865 427 1 817 664 1 849 142 2 84 792 2 892 13 3 966 971 4 565 625 Kadin Indonesia-Jetro, 26 28

29 Kadin Indonesia-Jetro, 26 29

3 References Hasibuan, Akmaluddin (26), Industri Kelapa Sawit sebagai Motor Penggerak Pembangunan Ekonomi Nasional, Juli, Jakarta: Kadin Indonesia Janurianto, Ambono (26), Industri Pengolahan Kelapa Sawit Indonesia Sebagai Bahan Diskusi Roadmap Industri 21, Juli, Jakarta: Kadin Indonesia. Soeherman, G. Sulistiyanto, Daud Dharsono and Lalang Buana (26), Road Map Industri Kelapa Sawit, Juli, Jakarta: Kadin Indonesia. Suharto, Rosediana (26), Tantangan Industri Minyak Sawit Indonesia, Juli, Jakarta: Komisi Minyak Sawit Indonesia (KMSI). UNCTAD (24), 24 Development and Globalization. Facts and Figures, New York and Geneva. WTO (24a), International Trade Statistics 24, Geneva: World Trade Organisation. WTO (24b), World Trade Report 24. Exploring the linkage between the domestic policy environment and international trade: Geneva: World Trade Organisation Kadin Indonesia-Jetro, 26 3