A valuable export: Palm oil sales continue to grow

Topping the global ranking in the palm oil sector, Indonesia continued to cement its position in 2011 by expanding its annual production to 23.9m tonnes compared to 22.2m tonnes in 2010, as well as its share of global production from 48.4% in 2010 to 48.79%, according to data from industry forecaster, Oil World. The country’s closest rival, Malaysia, also increased its output from 16.99m tonnes to 18m tonnes, but saw its total production share continue to decline to 36.75%.

CONTINUOUS GROWTH: Over the past decade, land dedicated to palm oil production has grown steadily from 4.2m ha in 2000 to just over 8m ha. Large-scale estates control roughly 60% of this territory, with acreage of private estates rising over the past decade at a compound annual growth rate (CAGR) of 6%. Smallholder farmers work the remaining 40% and have increased their palm oil acreage by a CAGR of 10.2% over the same period. Further moves into new areas are becoming more difficult, as competition grows, leading to conflicts over land usage permits, ownership and other issues.

This expansion in palm territory has fostered a corresponding increase in exports of palm oil, which totalled around 16m tonnes in 2011, according to data from the Indonesian Palm Oil Association. Through September 2012 the country exported some 12.92m tonnes and is on pace to ship roughly 18m tonnes on the year. The largest operators include foreign and local players such as Sinar Mas Agro Resources and Technology, Wilmar, Musim Mas, Golden Agri-Resources, Sime Darby, Astra Agro Lestari, London Sumatra Indonesia, Sampoerna Agro and Bakrie Sumatera Plantations.

After continuous growth in the industry’s overseas shipments, which have elevated the commodity to Indonesia’s third most valuable export, foreign sales of palm oil are expected to continue to grow in 2012 in spite of a sluggish global economy that continues to depress demand and market prices. After palm oil lost roughly a quarter of its value in 2012 on reduced purchases leading to a build up of crude stockpiles in September 2012, the government slashed export taxes on crude palm oil (CPO) to 9% in November, down from 13.5% the previous month, and the lowest since October 2010, when the rate was 7.5%.

TAXATION: Indonesia changed the export tax structure for palm oil products in 2011 in a bid to increase domestic refining and other value-added downstream industries. Under the current structure CPO is taxed on a sliding scale from 7.5% to 22.5% with the effective tax rate dependent on the market price of the commodity. In practical terms, for every $50 increase in market price, the export tax rises by 1.5%, so higher prices also bring progressively higher tax rates. At the same time, taxes on processed palm products were slashed, with the maximum duty on refined, bleached and deodorised (RBD) palm oil reduced from 23% to 10% and RBD olein falling from 25% to 13%. Even though the country’s closest competitor, Malaysia, implemented a new tax regime in early January 2013, lowering its CPO export tax to 0%, the government has stated that no further changes will be implemented, although some expect that changes may be made in the future.

CERTIFICATION: In addition to competing tax structures, another key concern facing the palm industry is the issue of certification. While the accepted international standards for palm oil were established in 2004 through the Roundtable for Sustainable Palm Oil (RSPO) the time-consuming and costly nature of the certification process (borne primarily by farms and estates rather than manufacturers or retailers) has led Indonesia to develop its own certification system in 2011 dubbed Indonesian Sustainable Palm Oil (ISPO).

Similar in many ways to RSPO, but billed as a less costly and complicated alternative for domestic producers, ISPO certification will be required by all producers by December 31, 2014. Due to a lack of incentives to join the voluntary RSPO programme, only a fraction of Indonesia’s producers had obtained accreditation as of 2012. The exception to this is international agribusinesses supplying European clients that have committed to purchase only 100% RSPO-certified CPO by 2015.