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Global Business Guide Indonesia

Indonesia
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Business Updates | Incentivising Downstream Investment;
A Look into Export Tariffs on Agricultural Commodities

To encourage the development of higher value added activity in the country’s agriculture sector, Indonesia beginning in 2010 initiated several policies limiting the export of unprocessed commodities. In a move to ensure that local industries do not lack for competitively priced raw materials, the government imposed export tariffs on raw cocoa beans and crude palm oil, and introduced an export ban on unprocessed rattan. This course of action has by and large had the desired impact – domestic supply of these raw materials has grown and the industries that create products derived from them have flourished. Despite lingering questions about the long term viability of domestic processing and manufacturing industries reliant upon distorted input prices, there is no doubting the present opportunity for foreign investors to engage in downstream activity.

Cocoa

In 2010, the government implemented a progressive tax whereby the export tariff on raw cocoa beans increases up to 15% when the global price for the commodity exceeds $3,500 per MET as part of its strategy to develop the cocoa processing industry. Signed into law in reaction to skyrocketing cocoa bean prices in late 2009 that reached heights not seen in over thirty years; this policy demonstrated immediate success. Between 2011 and 2012, Indonesia increased the exports of its processed cocoa products from 145,700 MET to 188,500 MET (BPS) despite the fact that this period was marked with volatile global cocoa bean prices. With the price of the commodity now rising again, reaching $2,824 per MET in December 2013 (ICCO) and expected to rally to $3,200 per MET by the end of 2014; action taken to guarantee domestic supply for local downstream industries is all the more important. At present, the export tariff for the beginning of 2014 has been set at 10%.

Downstream cocoa companies now benefit from an established source of raw materials less vulnerable to impending price hikes driven by rising demand for chocolate in Asia as well as lower global production of cocoa beans. The grinding and fermentation industries have experienced substantial growth - the export of processed cocoa products rose by 29.48% between 2011 and 2012 – and remain lucrative fields for foreign investors to enter. International companies that have already reacted to favourable investment conditions include Cargill Inc., which will invest $100 million to construct a 70,000 MET processing facility in Gresik, East Java, and Swiss-based Barry Callebaut, which plans to open a $33 million plant in partnership with local cocoa bean trader Comextra Majora.

Furthermore, a 5% import tax on raw cocoa beans affords Indonesian cocoa producers with an advantage in supplying raw materials to the quickly expanding downstream industry, and foreign investors are advised to seek out cooperation with local farmers to optimise cocoa bean production. With a recent $350 million government initiative having failed to raise output beyond the 456,000 tonnes produced in 2012 (ASKINDO), local cocoa producers are seeking alternative paths to improving productivity. Partnerships with foreign firms are thus becoming more sought after, particularly if said firm is capable of providing investment to replace trees planted in the 1980s and nearing the end of their productive cycle.

Investors experienced in resolving issues brought about by the endemic presence of cocoa pod borer moths are also encouraged to enter the market and implement responsible, pest-mitigating harvesting and post-harvest processes such as pod-sleeving with biodegradable plastics. Developing research facilities to create pest resistant clones and advanced side-grafting techniques are another area for prospective collaboration.

Rattan

In 2012, Indonesia banned the export of unprocessed rattan in accordance with Ministry of Trade Law No. 35/2011 on the Export of Rattan and Rattan Products. Businesses are prohibited from exporting raw or semi-finished rattan, and must produce finished goods such as furniture, crafts and homeware to be able to sell to markets abroad. The ban, controversial given that local rattan farmers previously met over 80% of the world’s raw rattan needs, put in place the framework to ensure the sustainable utilisation of the commodity and to expedite the development of the country’s finished rattan product industry.

Companies in this field have in the past struggled with increasing competition for both market share and raw materials from Chinese manufacturers who sourced the commodity from Indonesia and subsequently pushed domestic utilisation of locally produced raw rattan down to 30% of total harvest. In the years preceding the ban, the industry suffered a substantial drop in export market value from $300 million in 2008 to $138 million in 2010 (AMKRI) as a direct result of raw material shortages. A year removed from the introduction of the ban, the export of rattan furniture and handicrafts jumped by 26.9% and 213.8% to $215.7 million and $42.4 million, respectively (Ministry of Trade). Moreover, the country's voluntary joint partnership agreement with the EU to facilitate the trade of legally sourced forestry products furthers the breadth and scope of this growth to include the prospect of substantial market penetration in Europe.

As such, companies experienced in abiding by stringent timber laws with an existing network of furniture retailers are encouraged to seek out local partners in the rattan manufacturing industry. Additionally, foreign investors with expertise in carrying out marketing campaigns that appeal to international consumers should look to partner with a local manufacturer to produce and brand rattan furniture. These goods are already popular in markets abroad, as is demonstrated by the soon to be showcased range of rattan products at IMM Cologne, a renowned international furnishing exhibition. In preparation for an influx of companies in this industry, the construction of industrial complexes for furniture manufacturers, such as the 1,000 ha furniture industry cluster in Sukabumi, West Java, is currently underway.

CPO

To maintain a supply of palm oil needed by a diverse range of local industries, the Indonesian government determines the size of the export tariff on CPO based upon average prices in Kuala Lumpur, Rotterdam and Jakarta on a monthly basis. As per Finance Ministry Decree No.67 /2010, if the price of CPO reaches between $1,200 to $1,299 per MET, the export tariff is set at 20% and a price above this range results in the levying of the maximum rate of 25%. With the present price hovering around $800 per MET (as of Q1 2014), the tariff heading into 2014 is to remain unchanged from its end of year rate of 12%. To further accelerate downstream development, the government simultaneously slashed the export tax levied on refined palm oil products from 25% to 10%.

These policies will facilitate Indonesia’s downstream dominance over major competitor Malaysia, who in response to Indonesia’s introduction of a steeper export tariff of CPO, lowered their own export tax on unprocessed palm oil to consolidate the upstream sector. Already, the impact of these policy changes are noticeable in the rising success of Indonesian palm oil derived products, with exports increasing 47.67% to 12.54 million MET in 2012 and accounting for 65.9% of total palm oil exports (BPS).

Foreign investors are advised to enter the market at a time when the onus on Indonesia firms to tap into the seemingly limitless fields in which CPO can be applied (See Overlooked Opportunities in Indonesia’s Agribusiness Industry and Opportunities in Palm Oil Derivatives) is only going to become more apparent with the guaranteed availability of CPO stock.

Outlook

Indonesia’s decision to implement export tariffs and bans has not taken place without its share of criticism. As a direct result of initiatives to limit the export of key unprocessed agricultural commodities, upstream industries have had to contend with enforced hindrances to their competitiveness on a global scale. However, to foreign investors this shift away from restrictive upstream businesses towards value added industries more open to international involvement should be construed as a positive development in more ways than one. With expertise in advanced technology and production processes as well as regulatory and marketing know how conducive to forming profitable partnerships with local manufacturers and processing companies; foreign firms are well positioned to play a key role in the development of Indonesia’s downstream agricultural sector. Moreover, this initiative is not a short-term project. Indonesia sees its movement up the value added chain as the realisation of its efforts to become a mature economy and will support companies in these industries with favourable business conditions until they have a proven international foothold.

Global Business Guide Indonesia - 10th January 2014

Indonesia Agriculture Snapshot

Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.