Palm Oil Industry in Indonesia

By Benazir Maharani Last updated on November 26, 2019

The international demand for palm oil is expected to grow in the future due to the world’s expanding population increasing its diet of palm oil-based goods, including margarine, peanut butter, and brands of cookies and chips. The rapid growth of the palm oil industry in recent years has benefitted the economy of Indonesia. Global palm oil production is dominated by Indonesia and Malaysia. These two countries, together, account for around 85 to 90 percent of total global palm oil production. Indonesia is the largest producer and exporter of palm oil worldwide.

Opportunities

The upstream palm oil sector mostly consists of the planting and harvesting of oil palm. Companies that have produced and exported CPO over the last 15 years have generated substantial profits. The sales of palm oil improved in 2016 as a wet-dry season in Indonesia drove production and improvements in the economies of the EU, China, and India boosted demand.

Strong global demand will likely keep Indonesia’s upstream palm oil sector profitable in the coming years. The U.S. Food and Drug Administration’s decision to ban the use of artificial trans fats in foods beginning in 2018 will increase American interest in palm oil, which has been named as the main replacement for trans fats. The EU’s plan to rely on renewable energy sources for 10 percent of its transportation needs by 2020 has also boosted palm oil sales. The Guardian reports that 45 percent of the palm oil exported to Europe in 2014 was used in biodiesel. Furthermore, the Indonesian government is contributing to the demand for palm oil by implementing biofuel subsidies to decrease the country’s need for imported oils and spur the growth of its domestic renewable energy sector.

The government has also pledged its support for the upstream palm oil industry. In revising the Negative Investment List in 2016 the government permitted foreign individuals/organizations to own up to 95 percent of a palm oil plantation and 25 percent of a plasma plantation. Although the specified plantation does not have to include a palm oil processing unit, it must be at least 25 hectares in size.

Risks

The main dangers for global companies in Indonesia’s palm oil sector are environmental issues and land disputes. First, individuals/organizations interested in CPO production in Indonesia must factor environmental sustainability into their plans.

Land disputes between palm oil companies and local communities present another reputational risk for foreign investors. Indonesia’s National Lands Agency registered over 3,000 conflicts between palm oil companies and communities in 2013. Companies that engage in land grabs and violence against indigenous people have experienced protests and boycotts. Both slash-and-burn farming and violence against indigenous people can lead to lawsuits that result in fines and confiscation of companies’ land. This economic loss in Indonesia is compounded by the risk of a company becoming an international pariah.

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