Investing in Indonesia's Crude Palm Oil Industry - Introduction
Although the palm oil industry of Indonesia is resented by many for the negative impact it has on mother nature (for example the seasonal forest fires that occur on parts of Sumatra and Kalimantan), it also constitutes a vital industry: across the globe crude palm oil (CPO) is used for the production of a wide variety of products from food, cooking oil to cosmetics or biodiesel. Indonesia is the world's largest producer and exporter of CPO. This column is the first installment in a series, written by Senior Consultant William Yang, that discusses Indonesia's palm oil industry, particularly the different business models, the risks, and how to invest safely in this industry.
There exists a negative attitude toward the palm oil industry as this industry is associated with deforestation, destruction of carbon-rich peat lands, forest fires, toxic haze and the loss of wildlife. A tragic example are the forest fires (on parts of Sumatra and Kalimantan) and toxic haze that spread across a large part of Southeast Asia between June and October 2015. More than 100,000 man-made forest fires (to clear land for palm oil or pulp and paper plantations) destroyed a total of 2.6 million hectares of land in 2015. In a report, the World Bank estimated that this disaster cost Indonesia around IDR 221 trillion (approx. USD $16 billion or 1.9 percent of the country's gross domestic product), while Indonesia's real agriculture output was reported to have declined 4.9 percent (at a quarter-on-quarter seasonally adjusted annualized rate) in Q3-2015.
As a result of concern about the environment, the following developments occurred:
1. In several European nations (including France and Italy) voices are heard to boycott palm oil products.
2. In shops there start to appear products with the text "palm oil free" (POF) in a bid to boost sales.
3. Some nations started to implement high import duties or taxes on CPO or palm oil-based products.
4. The Indonesian government announced it will not issue permits for new plantations.
5. Indonesian authorities said they will act against those who burn forests to make way for plantations.
6. Indonesia implemented mandatory additional certification for those plantations that can export CPO.
Do these developments indicate that Indonesia's palm oil industry has had its prime and now awaits a slow death? No, this seems unlikely. There are two points I would like to stress here. Firstly, the price of fresh fruit bunches (FFB) at the farmer level has been rising so far this year, up to IDR 1,300 per kilogram (approx. USD $0.10). Secondly, there are many people (claiming to be representatives of foreign investors) arriving in Kalimantan and Sumatra and who seek to acquire large-sized oil palm plantations. The latter has even given rise to speculation that the ongoing negative palm oil campaigns of western countries are actually a strategy to cause low prices of CPO, thus putting financial pressure on Indonesia's palm oil companies, hence making it easier for western investors to buy these plantations.
Basics of the Oil Palm Industry:
| Stages |
| 1. Oil palm trees (Elaeis guineensis, Attalea maripa and Elaeis oleifera) bear fruit |
| 2. The fruit is harvested |
| 3. The harvested fruit has to be transported to the factory within 24 hours (to avert decay) |
| 4. The fruit is processed at the factory; edible vegetable oil is derived from the mescarp (reddish pulp) |
| 5. The oil is sold to the buyer |
This series of columns is intended for those investors who are interested to buy an Indonesian oil palm plantation. In forthcoming installments I will discuss the different business models for palm oil firms, the risks involved in this industry (such as land disputes), the green certificate, and more.
This column was written by independent Senior Consultant William Yang, author of the books "Secret of the Dragon" and "Dragon Slayer Strategy". For comments, questions or other feedback you can contact William at [email protected]