Problems and Prospect of Indonesian Crude Palm Oil Industry

7.8. Problems and Prospect of Indonesian Crude Palm Oil Industry

As with many other industries in Indonesia, CPO industry is also facing many constraints. Currently, the main constraints in the Indonesian CPO industry are the followings: 1. Scarcity of new land for palm plantation 2. Lack of skilled human resources 3. Low productivity. For instance, Indonesia produced 3.7 tonha compared to 4.3 tonha in Malaysia. This less production per ha in Indonesia is mainly caused by low productivity in the people plantation subsector. The low productivity in this subsector is attributed to a number of factors, including i about 75 per cent of the plantation is already old and it needs rehabilitation; ii lack of maintenance; iii the implementation of harvest is not according to established Good Agricultural Practices GAP; and iv the use of uncertified seeds that are not up to specification. 4. Lack of security and illegal retributions, especially at kabupaten level. 5. Lack of supporting logistics such as from fertilizer and agro-chemical industries, vehicle and heavy equipment industries, factory tools and industrial machinery industries, and supporting services such as transportation, bulking installationport, consultingconstructing, and research and development. 6. Lack of infrastructure and low quality of existing infrastructure; and 7. No clear national policies in favor of smooth development of Indonesian CPO industry. Therefore, the development of Indonesian CPO industry must be fully integrated from upward to downward, the elements of which are listed in order of importance to the Indonesian economy as follows: land, infrastructure, seed, human resource, social and security, distribution, financing, and government support, especially pricing policy, tax incentive, and business regulations. 7.9. Alternative Strategies that can improve the Competitiveness of Indonesian Crude Palm Oil in the World Market Palm oil is the fastest growing sub-segment of the world edible oils industry. For comparison, aside from soya oil, the market for rape seed oil, sun oil, animal fats and fish oils are all in decline . Reasons for the rising demand of palm oil include its price competitiveness palm oil remains the cheapest of all of the major vegetable oils to produce and variety of end-uses. Also relevant is the growing world market for edible oils, at the rate of 3.8 percent per annum. Its growth is driven by two factors: population growth and economic growth. While richer countries use far more oil than poorer ones US consumption of 45 kilospppa compares with India’s 16, future increases in per capita income are likely to be greatest in countries such as India and China - the two biggest importers of Indonesian and Malaysian origin palm oil produce. On the supply side, world stocks of oil palm are currently at a 4-year low and there is very little in the way of new planting activity going on worldwide. However, a policy maker might want to look at the SWOT issues in more detail and from a strategic perspective, not necessarily only from the perspective of overall progress. What, in general, can be said about Indonesia especially with regard to CPO, in terms of its strengths and weaknesses? For strengths, there is no doubt that Indonesia is in a pretty good geographic neighborhood. Many Association of Southeast Asian Nations ASEAN members are richer and fairly fast growing. China is nearby and rapidly increasing its import of commodities that Indonesia produces. The high aid levels have already been mentioned – and these are extremely high in relative and even absolute amounts. If aid were used well, this should be a source to upgrade both physical and human capital. Table 36. SWOT Analysis for the Competitiveness of Indonesian Crude Palm Oil in the World Market Strength: 1. Abundant fertile agricultural land and natural resouces 2. Palm oil is the fastest growing and most profitable high capacity of CPO production 3. Abundance of human resources and cheap labor 4. Indonesia has well established network of universities for research and development Weakness: 1. Low productivity of palm oil and inefficiency 2. High costs of transport, electricity and finance 3. Little use of the scientific and research resources that Indonesia has for innovation purposes 4. Labor market characterized by low skills and low productivity

5. Uncoordinated relationships

between government authorities and the business sector potential investors 6. Corruption

7. Political instability Opportunity:

1. Collaboration with industrial countries bilateral relationship 2. Need for added-value products for CPO in global market 3. Continuous increase in CPO world price 4. Vast market for Indonesian CPO due to high population in China and India Threat: 1. Free trade market agreements 2. Global competition 3. Un-controlled local population growth 4.Overdependence on India and China markets The rapid growth and current relative stability of CPO exports suggests that this membership will provide meaningful opportunities. The relative increasing CPO prices and exchange rates has also helped to create a fairly good macro-economic environment for CPO, leading to strong GDP growth.