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.