KL seeks RI's coop in palm oil industry

KL seeks RI's coop in palm oil industry

By David Chew

SINGAPORE (JP): The haze, the battered currencies and
depressed stock markets have certainly exacted a heavy toll on
the environment and economies of Indonesia and Malaysia. Not only
have vast tracts of burned forests in Indonesia inflicted
extensive damage on Southeast Asia's ecology, many businessmen in
both countries have also watched helplessly their fortunes being
wiped out at one go in currency and share trading.

But the gloomy outlook has also provided Indonesia and
Malaysia with the opportunity to rebuild their battered economies
in a way which will blend with the region's ecology -- by
reverting to their strong agricultural basics such as palm oil,
that had been relatively unscathed by the ecological and
financial turmoil in the region.

While analysts concede that oil palm trees can be replanted in
burned-out forests in Indonesia in such a way that the ecology of
both countries will never again be threatened by the haze, they
also feel that measures to revamp the palm oil industry could
trigger off intense competition between Malaysia and Indonesia,
its key players.

Palm oil is a versatile commodity with multiple uses. It is a
nutritious household cooking oil, margarine, shortening and
confectionery. It can also be used to manufacture soaps,
detergents and oleochemicals. The palm oil bio-mass -- the pruned
frond, the tree trunk and the empty fruit bunches -- can all be
turned into pulp, paper, medium density fiber board or even
furniture.

There is a big global market for palm oil in developing
countries with huge populations like China, India, Pakistan, the
former Soviet Union and former communist regimes of Eastern
Europe, not to mention Indonesia. The demand for palm oil,
particularly as a cheap and nutritious edible oil, is increasing
in these countries.

According to the Palm Oil Registration and Licensing Authority
(PORLA) of Malaysia, Malaysia produced 7.38 million tons or 54
percent of the world's production of 13.67 million tons in 1993.
Indonesia comes in second with 3.28 million tons or 24 percent.
The remaining 22 percent is shared by Nigeria, Colombia and other
countries.

For the same year, PORLA statistics show that Malaysia
accounted for 6.02 million tons or 63 percent of the world's palm
oil exports of 9.56 million tons while Indonesia's share is 1.72
million tons or 18 percent. The remaining 19 percent is shared by
other countries.

Latest statistics are not available, but palm oil analysts in
Malaysia have told the writer that both Malaysia and Indonesia
aim to increase their production to 9.1 million and 5.4 million
tons respectively by the end of 1997.

From this information, it is clear that Malaysia is head and
shoulders above all the other producers and exporters of palm
oil. But while Indonesia may come in a distant second to Malaysia
in palm oil production and export, analysts in Malaysia point out
that Indonesia has a large potential which has not been fully
tapped.

By contrast Malaysia's potential is nearly exhausted. In the
long run, Indonesia could challenge Malaysia's position as the
world's top producer and exporter of palm oil.

In terms of physical size and population, Indonesia is very
much larger than Malaysia. Indonesia's total area under palm oil
cultivation is slightly more than 1 million hectares or half that
of Malaysia's which is slightly more than 2 million hectares. But
while Indonesia's palm oil hectarage has barely covered vast
tracts of flat and swampy land suitable for palm oil cultivation
in Sumatra and Kalimantan, Malaysia's hectarage mainly in Johor
and Sabah has almost reached its limit.

However in terms of research and development, which has led to
better strains and higher yields and other regulatory procedures
to improve the palm oil industry, so as to add value to its
product, Malaysia is far ahead of Indonesia. Malaysia has PORLA
and the Palm Oil Research Institute of Malaysia (PORIM) while no
such parallel bodies exist in Indonesia at present.

Some of the Malaysian key players in the palm oil industry are
tycoon Robert Kuok, the Johor Corporation and Sime Darby while on
the Indonesian side are the Salim Group led by Indonesia's
richest man Liem Sioe Liong and the Sinar Mas Group.

There is pressure on Indonesia to ensure that the ecology of
Southeast Asia, which is dominated by Indonesia, is not harmed in
future, particularly after President Soeharto has apologized to
neighboring countries for the haze caused by the burning of
forests to clear the land for planting cash crops and other uses.
Under such circumstances, Indonesia is likely to welcome any
proposal to preserve the greenery of the environment

Malaysian Deputy Primary Industries Minister Datuk
Hishammuddin Hussein has seized this opportunity to sound out to
Indonesia that both countries can develop their respective palm
oil industries into viable commercial ventures within the wider
context of reforestation in harmony with the region's ecology.

"To my mind, the haze that has cloaked our countries,
has...convinced many people of the importance of balancing the
profit motive with greater consideration of the environment..."
he said in a recent interview with the writer in Singapore.

He has also suggested a wide-based financial scheme called
"Green Bonds" which will not only raise funds from almost anyone
willing to contribute but also make them committed socially to
preserve the region's ecology.

What Hishammuddun fears is that the development of the palm
oil industry in both countries after the haze has gone may go
along strictly commercial motives and in the process neglect the
social obligation to preserve the environment.

Among the key players of the palm oil industry in both
Malaysia and Indonesia are some businessmen whose fortunes made
from other business sectors have been mercilessly wiped out in
currency and share trading. They are anxious to recoup their
losses in the shortest possible time and would not hesitate to
sell their existing stocks of palm oil in the global market for a
good price, especially when the value of the ringgit and the
rupiah has depreciated against the U.S. dollar, making their
exports more competitive.

Fear of intense competition in the palm oil industry was
expressed by the president of the Malaysian Edible oil
Manufacturers' Association Toh Pang Huat. At the association's
37th annual meeting in Kuala Lumpur in July, (even before the
haze) Toh was quoted by the Malaysian Bernama news agency as
saying that Indonesia is a very aggressive seller in the palm oil
market and would prefer to keep its stocks in U.S. dollars rather
than in rupiah, and this would drive the market lower. Malaysia
would have to be very alert in order to remain competitive, he
added.

Hishammuddin has strongly advised against competition in the
palm oil industry, saying that the possible offer of huge
discounts by rivals to undercut each other will make both
Indonesia and Malaysia suffer. "If we start competing among
neighbors, then it doesn't serve us any purpose," he said in the
interview.

He feels that the palm oil market is huge enough to take in
both players in a win-win situation if both cooperate. He says
that at the government-to-government level, cooperation has never
been a problem as ministers get along very well, but the private
sector in both countries may see things differently.

He hopes that Malaysian's offer of R & D and the idea of
planting of oil palm trees to blend with natural forests to
create opportunities in eco-tourism such as the Danum Valley in
Sabah and Endau-Rompin jungle in Johor, will be well received by
Indonesia.

This is facilitated by the extensive investments by Malaysian
companies in the Indonesian palm oil industry through joint
ventures with both the Indonesian government and the Indonesian
private sector under the auspices of sub-regional economic
cooperation such as the SlJORI Growth Triangle.

Johor Corporation has a joint-venture, through its subsidiary
EPA Management, with Indonesian companies PT Bintara Tani
Nusantara and PT Kodel to invest US$35 million to plant 11,000
hectares of oil palm in Air Bangis, West Sumatra. EPA Management
has also signed an MOU to develop 3,000 hectares of oil palm in
Ujong Gading, West Sumatra.

The palm oil industry in Indonesia has also benefited
immensely from expatriate managers and returning Indonesian
workers who have gained valuable experience in Malaysian palm oil
plantations.

Much as Indonesia may be tempted to aggressively sell its palm
oil stocks in the open market to take advantage of the weaker
rupiah vis-a-vis the U.S. dollar, it is constrained by the huge
domestic demand of 200 million people for palm oil as a cooking
oil.

In 1990, about 15 percent of Indonesia's palm oil production
was consumed locally, according to Malaysian palm oil analysts.
This percentage has since gone down due to moves to export more
palm oil in order to secure more foreign exchange.

But such moves have caused the price of domestic palm oil to
soar to Rp 1,500 per kilogram in August 1994 from Rp 1,220 per
kilogram in December 1993, prompting Ibrahim Hasan, the then
Minister for Food Affairs to lament in September 1994 that
Indonesia would need to import palm oil from Malaysia to overcome
this "artificial" shortage.

In the latest development in Indonesia, Malaysian palm oil
analysts told the writer that there has been a surge in local
demand for palm oil with the Hari Raya Idul Fitri festival early
next year. To cope with this huge demand, the Indonesian
authorities are expected to limit Indonesian palm oil exports to
1.2 million tons for the five months of November, December (1997)
and January, February and March (1998), the analysts said.

Thus the offer of R & D and replanting schemes to blend with
the ecology together with a huge domestic demand thereby
discouraging the increase in exports may appear as incentives for
Indonesia to accept Malaysia's offer of cooperation to develop
the palm oil industry for mutual benefit.

But this may be offset by the long gestation period in the
palm oil industry where businessmen are reluctant to invest
because the returns can only come after 25 years, which was one
reason why Hishammuddin proposed the Green Bonds. In addition,
there is competition from other edible oils such as soybean, a
powerful lobby in America some years back painted palm oil as an
"unhealthy" product.

In 1987, the American Soybean Association launched a campaign
to convince people to use soybean oil by saying that palm oil
contained saturated fats which can cause coronary heart disease.
PORIM has successfully counter-attacked by pointing out that palm
oil does not raise cholesterol levels, but the competition from
soybean oil will always remain.

In principle, cooperation between Malaysia and Indonesia is
laudable not only in terms of promoting the palm oil industry and
greening the environment, but also enhancing close and cordial
bilateral ties.

But as the logistics of such massive and complex measures take
time to work out, it remains to be seen whether this ideal will
transform itself into a reality.

The writer is a freelance journalist based in Singapore.