Oil palm tree is a tropical plant belonging to the Palmae family. The plant was brought in to the country from West Africa. The first oil plantation was built in North Sumatra in 1911. The first large-scale Indonesian oil palm plantation was set up by Dutch traders in 1911, using the seed of these Deli-palms. Soon afterwards, British traders set up oil palm plantations in Malaysia as well. Until the 1940s palm oil production developed at a moderate pace in both Malaysia and Indonesia, as it was restricted mainly to use as a lubricant. A more rapid phase of expansion began in Malaysia in the 1950s and 1960s, which turned Malaysia into the dominant oil palm producer in the world.
From 1968, President Suharto started to invest again in the Indonesian oil palm sector by making direct investment via state run companies called Perseroan Terbatas Perkebunan (PTPs). During this period, the area planted with oil palm on government estates grew from 65,573 hectares in 1967 to 176,408 hectares in 1979. Most of these plantations were found in Sumatra, primarily North Sumatra.
In 1980s, the Indonesian oil palm plantations expanded rapidly notably smallholder plantations following the launching of the Nucleus Smallholder Estate (PIR) scheme. Under the scheme the nucleus company provided seedlings and prepared land for plasma plantations, and the plasma plantations were to sell their production to the nucleus company with a pre set price. The smallholder plantations expanded faster again with the launching of PIR scheme in the transmigration program in 1986. Private plantation companies have the largest oil palm plantations. In 1990s, many private companies built oil palm plantations with facility from Bank Indonesia (Indonesia Central Bank). State owned plantations under PT Perkebunan Negara (PT PN) were relatively unchanged in size.
In 1996, Indonesian government lifted ban on new foreign investment in the palm oil sector. The new policy attracted investors especially from Malaysia. In 1996, the government allocated 9.13 million hectares of land for oil palm plantation to boost development of the plantations that was expected to relegate Malaysia as the world's largest producer of palm oil. Papua accounted for 5.56 million hectares of the land. Sumatra had limited space for new plantations as it is also crowded with HTI projects and other plantation and farm projects. Investors, however, still preferred Sumatra as it had much better infrastructure compared with Kalimantan and Papua.
In 1997, the Indonesian government also banned new investment in oil palm plantation in Sumatra due to environment degradation. As a result investors built new plantations in West Kalimantan where lands were easily available and the infrastructure was relatively more adequate than in eastern part of the country. West Kalimantan had the third largest oil plantations. The government provided 5.5 million hectares of land for oil plantations all over the country. So far more than 2.1 million hectares of the lands have offered to investors but only half of which have been used. In 1997, National Investment Coordinator Board reported 105 new investment projects in the sector. Implementation of the projects, however, was hampered by the crisis. In 1998, there were only 21 new projects following the financial crisis.
In 1998, the government imposed a 40% export tax on CPO and derivatives resulting in a decline in exports--leading to a decline in production. In 1999 and 2000, production rose after the government cut the export tax to 10%. From June, 1999 to May, 2002, the price of CPO dropped to around US$ 400 per ton before rising to US$ 460 in January, 2003. The production rose from 5-6 tons of fresh fruit bunches per hectares in 1997--up to 10-11 tons of fresh fruit bunches per hectares in 2003.
The Indonesian exports of crude palm oil (CPO) leapfrogged while the export tax was slashed to 3% in Feb. 2001. In 1999, exports totaled only 1.46 million tons. The export volume rose to 5.48 million tons in 2001 and to 7.07 million tons in 2002 and to 8 million tons in 2003. With 411,261 hectares relegating South Sumatra, Jambi and Aceh, the export value of CPO was recorded at US$ 2.35 billion in 2002 up to US$ 3 billion in 2003 placing it among the top export earners outside oil and gas. Non-oil/gas commodities after electronics US$ 9.16 billion and textiles and garments US$ 7.05 billion and timber US$ 3.18 billion in 2003.
For 2010, Indonesia's production of palm oil is expected to overshoot international prediction of 12 million tons as projected by Oil World. On the other hand, Malaysia's CPO production rose from 8,386 tons in 1996 to 13,354 tons in 2003 or 49% of the world's production making that country the world's largest producer. Indonesia came second with production rising from 4.54 million tons in 1996 to 9.75 million tons in 2003. It climbed 25% to 9.16 million tons from 7.4 million tons in the previous year. In 2004, the production was predicted to reach 11.5 million tons. In 2004, it reached an estimated 11.5 million tons. Indonesia, therefore, is expected to relegate Malaysia in a few years to come. [2]
Malaysia, however, has long developed oleo chemical industry and it has become a major supplier of oleo-chemicals to the world market. In Malaysia, the government gives strong support or incentives to boost development of oleo-chemical industry, but in Indonesia there is no such incentive. The government gives the initiative to the palm oil producers or the private sector to develop oleo-chemical industry. They are left alone to face external and internal pressures in the form of demand for better quality, looting in plantations, conflicts with plasma farmers and extortion by hoodlums. Illegal levies and extortion forced CPO producers to seek a short cut to earn money by directly exporting CPO. They do want to take a long way which will mean facing more illegal levies and extortions. CPO exports could also face big hurdles with the government regulation issued by the previous government making it possible for the government to impose export tax of up to 60%.
The government, however, has no fund to build more plantations. It relies on the private sector. Investment in oil palm plantations has good prospects as palm oil is still high in demand in the world market and demand for it has continued to increase. In the period of 2000-2002, productive plantations expanded from 2.45 million hectares to 2.64 million hectares. In the same period new and non productive plantations grew from 1.31 million hectares to 1.47 million hectares. In 2008, oil palm production expanded to 6.9 million hectares in which 39 percent belonged to small farmers, while CPO production reached into 19.2 million ton.
Foreign-exchange earning could still be raised from the palm oil sector if CPO is processed further into derivatives such as oleo-chemicals. Indonesian CPO producers, however, choose to exports CPO rather than processing it before being exported in the form of oleo chemicals with higher value. It is easier to sell CPO, which is still high in demand in the world market.
Despite a volume growth of 60% since 1995, the European Union lost its position as the most important export market for Indonesian palm oil to India. The share of the EU declined from 50% to 23%, while India accounts for 28% of Indonesian palm oil exports in 2004. Some other Asian markets, especially China, Malaysia, Pakistan, Bangladesh and Hong Kong were also quickly expanding their palm oil imports from Indonesia. On a lower level, the same applies to some African countries (Egypt, Tanzania, Nigeria and South Africa) as well as to Jordan and Russia. Between 1998 and 2004, Indonesia diversified its export markets. Indonesian palm oil exported to Malaysia – as the largest palm oil exporter in the world – was worth remarking on. This palm oil was re-exported from Malaysia, but classified as Malaysian palm oil.[3]
The fast expansion of plantations of private companies followed regulation by the government requiring palm oil processing companies to have own oil palm plantation to guarantee supply of feedstock. All cooking oil producers were required at that time to have their own oil palm plantations. In addition, the government offered incentives such as in the form of simpler procedure, land conversion and lower loan interest rate. The facilities had been used by large company groups such as PT Sinar Mas Group, Raja Garuda Mas Group and Salim Group, the plantations of which were later taken over by Malaysia's Guthrie Berhad, through an open tender in 2001. The plantations were bought from the Indonesian Banking Rescue Agency (IBRA), which previously took them over from the Salim Group in compensation for its debt to the government. The Salim group handed over 25 oil palm plantations valued around Rp3.65 trillion to IBRA under four holding companies PT Salim Sawitindo, PT Bhaskara Multipermata, PT Minamas Gemilang and PT Anugerah Source Makmur.
The three palm oil kings, Salim Group, (Guthrie Bhd), Sinar Mas, and Raja Garuda Mas (RGM), dominated palm oil business in the country. Sinar Mas and Salim Groups built cooking oil factories PT Bimoli and PT Sayang Heulang. The two large company groups also cooperated in building oil palm plantations and new cooking oil factories under PT Inti Indosawit Sejati, PT Inti Indosawit Subur and PT Gunung Melayu. RGM has own cooking oil producing subsidiary PT Asianagro Agung Jaya with 300,000 hectares of oil palm plantations in North Sumatra, Jambi, Riau and Central Kalimantan. SMG also had oleochemical plant under Sinar Oleo-Chemical International (SOCI).
Another large company group operating in the palm oil sector was Ciliandra Perkasa Group (CPG), which has 60,992 hectares of oil palm plantations. The Peknabaru-based company also operates in other business areas including animal husbandry, transport and mining sectors. The company has three factories processing palm oil with a total processing capacity of 2110 tons of fresh fruit bunches an hour. The company disposes of most of its production on the domestic market.
[1] The average monthly price of coconut oil (crude) in 2005 fell –14.7% to 32.44 cents per pound, up from the 15-year low of 21.94 cents posted in 2002. The record high of 60.21 cents per pound was posted in 1984. Vegetable oils are much more dominant than animal fats as the feedstock for cooking oil. The world's production of vegetable oils surged from 76.4 million tons in 1976 to 101.4 million tons in 2003, or 81.1% of the world's production of edible oils and fats which totaled 123.9 million tons in 2003. CPO production in 2003 totaled 27.2 million tons or the second only to soybean production of 31.3 million tons.
[2] Goliath, Indonesia to put Malaysia behind in palm oil industry, Indonesian Commercial Newsletter,
[3] Jan Willem van Gelder, 2004, Greasy Palms: European buyers of Indonesian palm oil, Friend of the Earth
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