Palm oil production to dip this year

Palm oil production to dip this year

The following is the first of two articles by Derom Bangun,
who chairs the Indonesian Palm Oil Producers Association. The
article is based on his recent address to Commex Malaysia's Palm
and Lauric Oil conference and exhibition in Kuala Lumpur.

KUALA LUMPUR: Indonesia is not the largest exporter of palm
and lauric oils but the export volume is quite significant. In
early 1998 Indonesia experienced a serious shortage of cooking
oil.

Large quantities of palm, palm kernel and coconut oil were
exported as the international price of palm oil reached US$600
per metric ton (CIF Rotterdam). Indonesia then banned the export
of palm and lauric oils.

The absence of Indonesian palm oil supply and continuously
high demand for vegetable oils in the world market pushed the
price up to $700 per metric ton in May 1998.

This shows that Indonesia's supply of palm and lauric oils
does influence international market prices. The world market is
obviously different in 2001. The price of palm oil fell to below
$ 250 per metric ton early in the year.

The area of oil palm plantations has increased yearly and as a
result, the production of palm and palm kernel oils has been
increasing as well. The rate of area expansion reached 11.8
percent in 1997. The rate then slowed to 10.5 percent in 1998 and
further reduced to 6.4 percent in 1999.

The planted area of 1997 should become productive in 2001.
This recently matured area has a productivity of an average of
six tons of fresh fruit bunches (FFB) per year per hectare, or
about one ton of palm oil per year per hectare.

Further, increased production also originates from the planted
areas of 1996 and 1995. These mature areas would produce higher
yields than in the previous year due to increased age. These
areas would produce about 10 to 13 tons of FFB per year per
hectare.

Given the economic and social political crisis, some negative
aspects of production need to be taken into account. Security in
some areas is not favorable to achieve maximum yield. Combined
with the expensive price of fertilizers and low price of palm oil
in recent times, the impact of the economic crisis has resulted
in insufficient application of fertilizers. Insufficient
fertilizer use has been evident since 1999.

Infrastructure like roads and bridges has also been affected
by the economic crisis. Poor infrastructure has resulted in high
transport cost of bunches, so much so, that when the selling
price of FFB was as low as Rp 200 per kilogram, some farmers were
not interested in harvesting their crops.

The crisis has delayed construction of palm oil mills. In
Jambi province, it was reported that the delay has caused
production losses, since existing palm oil mills cannot cope with
increasing production of FFB.

The climate in 2001 is expected to be slightly different from
that of 2000. At the beginning of this year, rainfall was
unusually high in Indonesia. Some parts of Java were flooded.
March is a transition period and next month is expected to be
dry. A prolonged dry spell may be experienced until August.

As a result the production of palm and lauric oils will be
very low during the second quarter of 2001 -- therefore estimated
production of palm oil this year is 7.2 million tons.

The production of palm kernel oil will likely follow a similar
pattern to that of palm oil. On average, kernel extraction rate
is 5.1 percent compared to the palm oil extraction rate of 21.5
percent.

This year, palm kernel production is estimated to be 1.7
million tons yielding as much as 717,000 tons of palm kernel oil.

In contrast to palm oil, coconut oil production has not
increased. Production for 1999 and 2000 was estimated at
2,715,000 tons and 2,740,000 tons of copra respectively.

Production may decrease slightly by 1.5 percent this year
given the less favorable climate. Reduced production can be
attributed partly to less use of fertilizers last year due to the
low selling price of coconut. Production of coconut in 2001 is
estimated at 2.7 million tons of copra equivalent.

Within domestic consumption of palm and lauric oils, there are
two main uses in Indonesia. The first and largest is for cooking
oil which is about 9 kg per year per capita and the total need is
1.84 million tons of cooking oil, or RBD Olein which is
equivalent to 2.52 million tons of CPO.

This demand changes from time to time; when the economy is on
the decline, the demand goes down. Significant use of palm oil as
cooking and frying oil in Indonesia did not start until the late
1970's. Traditionally, coconut oil used to be the only widely
consumed vegetable oil. But consumers gradually accepted the
introduction of palm olein as cooking oil.

The contribution of palm oil in the cooking oil industry has
increased from about 40 percent in 1985 to about 70 percent in
1995. When the export tax for coconut oil was abolished in June
1999, while export tax for palm oil was maintained at 30 percent,
export of coconut oil increased.

From the export figures, about 100 percent of produced coconut
oil was clearly exported and the need for domestic cooking oil is
fulfilled by palm oil. This is due to the easy availability and
attractive price.

The second use is for industrial purposes like soap-making and
oleo-chemical industries. The soap industry has consumed palm oil
since the beginning of oil palm cultivation in Indonesia. Other
industrial uses of palm and lauric oil started in the late 1980s
when the oleochemical industry begun operation.

Today there are at least seven oleochemical plants using palm
kernel oil, coconut oil and palm oil as raw materials.

Some oleochemical plants change their raw materials according
to market demand. When the selling prices of products derived
from coconut oil are better, the use of CPO as raw material is
stopped.

Other times, palm stearine may be the preferred raw material.
It is not unusual to change the raw material to PKO when the
market shows a strong demand for its products. Hence consumption
of CPO by oleochemical industries varies from time to time.

The quantity consumed by the soap-making and oleochemical
industries is in the range of 500,000 to 800,000 tons. Total
domestic consumption in 2001 is estimated to be between 3 million
to 3.5 million tons of CPO.

Palm oil exports in 2000 increased by 847,000 tons or 25.67
percent to 4.14 million tons from 1999 or more than tripled the
1.2 million tons shipped overseas in 1995. The increase of 0.85
million tons in 2000 was higher than the increase in production
which was only 0.53 million tons. The difference of 0.32 million
ton resulted from the decrease in domestic consumption and the
reduction of inventory.

The decrease in domestic consumption was due to the lower
purchasing power of consumers given the weakening of the rupiah
to the U.S dollar, from Rp 8,000 at the end of 1999, to Rp 9,500
at end 2000.

Less inventory resulted from the fluctuating price of CPO and
RBD Olein. In early 2000 the inventory was rather high in
anticipation of the typically high demand in the domestic market
prior to and during religious festive days.

The high inventory reduced gradually until the third quarter
of 2000 by increasing the volume of export. Total exports from
January to September 2000 for crude and processed products
reached 2.98 million tons.