12 In summary, the CPO industry plays an important role in the Indonesian economy. It
affects consumers, the government and producers. For consumers, palm oil is important because it is used as the main raw material for cooking oil. For the government, it
contributes to significant export earnings and employment. For producers, it is found to be a profitable business, both for large companies and for smallholders. Accordingly, if
producers in this industry exercise some market power, the impacts can be wide ranging and significant. Thus, it is important to analyse the market power issue in this industry.
2.2 Features of the industry
2.2.1 The production pattern and homogeneity of the product
The palm oil industry is an industry which produces a huge range of commodities based on the fresh fruit bunches FFB output from the oil palm Elais guineensis sp. tree.
Among the various commodities, cooking oil appears to be most important to Indonesian economic sector. From 1993 to 2003, on average, the cooking oil industry accounted for
75 per cent of palm oil usage. The remainder was used in the oleochemical 13 per cent, soap 7 per cent and margarineshortening 5 per cent industries CIC 1994, 1997, 2003,
2004. This study focuses on the CPO industry as a part of the cooking oil production chain. Figure 2.4 illustrates the production chain of cooking oil shown by the shaded
area, as a part of the whole palm oil industry. After being harvested, FFB are processed in the mills to extract the CPO. Then, they are further processed in the refineries to
produce the refined, bleached and deodorised olein, which in its pure form could be sold as cooking oil.
The production of FFB is a long term process. The maturation period between initial input and first output is about three years. Then, FFB yield gradually increases from eight
tonnes ha year to 30 tonnes ha year at the age of 13. This peak production continues
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13 for about four years, then decreases slowly and remains steady at 16 tonnes ha year until
the end of the oil palm tree’s economic life at the age of 25 see Figure 2.5.
1
Figure 2.4 The palm oil industry
Source: van Gelder 2004, p. 3.
The mature age comprises three periods: the periods when the oil palm is considered young 3–8 years, prime 9–20 years and old 20 years. Each period has different
levels of productivity and oil content. On average, the mature FFB contain 23 per cent
1
With a production cycle that lasts for several years, capital used in the CPO production process can be seen as a quasi-fixed input. For such an input, it is more expensive to make changes quickly, hence they are
spread over time Perloff et al. 2005 chapter 7, p.3.This shows that the existence of quasi-fixed inputs in a production process induces the existence of non-linear adjustment costs van Gelder 2004.
Oil palm plantation Fresh fruit bunches
CPO mill Crude palm oil CPO
Palm kernels Refinery
Crushing plant
Refined, bleached and deodorised palm oil
RBDPO Oleo chemical plant
Crude palm kernel oil PKO
Palm kernel meal
Refinery
RBD PKO Fatty acids, fatty
alcohols, esters, glycerin
RBD Olein RBD Strearin
Food industry Detergent and
cosmetics industry Chemical and other
industries Animal feed
industry Refinery
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14 CPO, but this depends on when the FFB are harvested. To gain the maximum oil
possible, FFB need to be picked at the right level of ripeness. However, the ripeness level changes quickly. Unless the FFB are processed within 24 hours of harvesting, the amount
of free fatty acid FFA will quickly increase. The FFA reacts to oxygen and causes the oil to develop a rancid taste, thus damaging the CPO quality van Gelder 2004, pp. 4-5.
Figure 2.5 The production stages of the oil palm tree
5 10
15 20
25 30
35
5 10
15 20
25 30
age years O
u tp
u t
t o
n n
e s
h a
y e
a r
, c
o n
te n
t
FFB CPO content
Source: Marihat and Plantation Research Centre cited in CIC 2004, p. 22.
Generally, CPO has a single standard quality and price in both domestic and international markets. The standard specifies FFA content of less than 5 per cent, moisture and
impurity levels less than 0.5 per cent, and an iodine value of less than 51 per cent Alibaba.com 2006. Hence, it would be reasonable to treat CPO as homogeneous
product.
Another factor that determines palm oil productivity is soil condition. Initially most of the Indonesian oil palm plantations were located in Sumatra Island, because these areas have
land highly suitable for oil palm trees. In 1984, 324,883 hectares of oil palm plantations had been established in Sumatra. Two decades later, the oil palm plantation area in
Sumatra had increased more than sevenfold to 2,423,341 hectares see Table 2.1.
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15
Table 2.1 Geographical distribution of oil palm plantations
1984 2003
Island ha
per cent ha
per cent Sumatra
324,883 95.41
2,423,341 82.91
Java 2,661
0.78 14,702
0.50 Kalimantan
11,244 3.30
391,840 13.41
Sulawesi 1,160
0.34 93,002
3.18 Others
563 0.17
n.a n.a
Total 340,511
100 2,922,885
100 Source: Indonesian Bureau of Statistics various issues-e.
Oil palm plantations on Sumatra were found to be more profitable than those in other islands because they yielded higher production at a minimum cost. Moreover, the
infrastructure and services that were needed for the plantation establishment were already developed. However, as land became more limited in Sumatra, the plantation
establishment was extended to other lands, especially those more suited to oil palm production, such as Kalimantan and Sulawesi. From 1984 to 2003 the oil palm plantation
area in Kalimantan and Sulawesi islands had increased more than 30 from 11,244 hectares in 1984 to 391,840 hectares in 2003 and 90 times from 1,160 hectares in 1984
to 93,002 hectares in 2003, respectively. Given land suitability and low labour costs, in 1997, Indonesia was recorded as the most cost efficient CPO industry in the world. The
cost of production was 14.3 per cent lower than the world average and 8.3 per cent lower than Malaysia’s, which is the largest palm oil producer in the world see Table 2.2.
Table 2.2 Comparison of CPO production costs, 1997
US per tonne Colombia
Cote dIvoire
Indonesia Malaysia Nigeria World
Average Establishment
71.2 69.5
64.3 60.7
224.5 72.1
Cultivation 91.2
136.1 72.5
75.7 113.7
79.3 Harvestingtransport
78.9 33.8
40.2 45.1
90.7 47.3
Milling costs 106.1
105.3 82.6
98.3 130.7
96.6 Kernel milling
6.9 7.7
7.2 7.6
8.2 7.5
Total 354.3
352.4 266.8
287.4 567.8
302.8 Source: PT Purimas Sasmita 1998 cited in Casson 2000, p. 15.
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16
2.2.2 The strategic groups
