RI may outrun KL in palm oil production

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.