Jokowi wants Indonesia to be more than a raw material giant

Indonesia's President Joko Widodo said the resources powerhouse wants to process more crude palm oil domestically.
Indonesia's President Joko Widodo said the resources powerhouse wants to process more crude palm oil domestically.PHOTO: REUTERS

JAKARTA (BLOOMBERG) - Indonesia is far from done in its campaign to squeeze more value from its abundant natural resources, and its next target could be one of the most ubiquitous commodities of all.

President Joko Widodo on Wednesday (Oct 2) said the resources powerhouse wants to process more crude palm oil domestically, which would potentially mean fewer exports of the material that's used to make everything from soap to chocolate.

Its plan to do so with nickel ore is already rattling markets as an outright ban on shipments from January threatens to remove hundreds of thousands of tons of the material from circulation and deepen a global deficit.

And while Jokowi, as the president is known, did not say he was considering banning shipments of crude palm oil, the prospect of more domestic processing, and potentially lower exports, would have a profound impact on the global market.

"We want crude palm oil to become processed goods. Why not? Or jet fuel or cosmetics, soap," said Mr Joko from his home town of Solo in Central Java in an interview with Bloomberg's editor-in-chief John Micklethwait.

"The direction we're going is we want to build a semi-processed or processed goods industry or downstream industry. No longer raw materials, we want added values."

Indonesia is the world's biggest producer and exporter of palm oil, accounting for more than half of the world's supply. It shipped about 34.7 million tons, or 73 per cent of its output, abroad last year, mainly to India and China.

About a third of that is in its crude, unrefined form, and the rest as processed oil.

Indonesia's refining capacity stands at about 70 million tons per year, which means the country can comfortably refine up to 56 million tons, said Mr Alvin Tai, agriculture analyst at Bloomberg Intelligence.

The country benefits from processing more of its trove of raw materials locally because it can make a bigger margin from exporting more refined products than the commodities in their most basic form.

 
 

It also spurs more domestic investment, generating jobs and incomes for local communities. Lower crude palm exports from Indonesia will potentially hurt refiners in countries like India that rely heavily on shipments from the producer.

"The move towards financing and increasing an Indonesian palm processed goods and downstream industry is in line with their commitment to increase domestic consumption," said Mr Marcello Cultrera, institutional sales manager at Phillip Futures in Kuala Lumpur. This will help the country manage their inventory surplus and price volatility, he said.

Benchmark palm oil futures climbed as much as 0.8 per cent to RM2,157 (S$712) per ton in Kuala Lumpur on Thursday.

In September, the government announced that it was bringing forward the export ban on nickel ore by two years to Jan 1 and has already said it intends to follow a similar path for other minerals such as bauxite and copper concentrate.

The move is seen accelerating investments of US$20 billion (S$27.66 billion) in smelters, stainless steel plants and electric battery units.

Mr Joko said that part of the plan for palm oil would be to use more as an alternative to diesel in what's known as palm-biodiesel.

At the moment, the government mandates that diesel must contain 20 per cent palm-biofuel. Mr Joko wants that to increase to 30 per cent and eventually to 100 per cent.

By doing so the country can reduce its reliance on imported petroleum and the impact of subsidy costs, while absorbing the excess supply of palm oil.

More broadly, Indonesia wants to follow Germany and China's success in developing their domestic industry, Mr Joko said.

"We want to see how industrialisation is in Germany, so we can use it as an example," he said. "We can also take a look at China. We want Indonesia to have a different type of industrialisation because Indonesia has different raw materials."

Indonesia's economy is projected to grow at its fastest pace in seven years in 2020, despite a deteriorating global outlook and rising risks of recession abroad.

The economy is forecast to add 5.3 per cent next year, according to assumptions approved by the Indonesian Parliament last week.

One potential threat to that growth could be the massive wildfires that have been raging in parts of the country in recent weeks, causing a thick haze across Indonesia, Malaysia and Singapore, causing flight disruptions and hurting production in palm oil and rubber plantations.

The central bank last month warned that, if they persist, the fires could hurt economic growth as the smoke disrupts the economy and businesses.

The haze also causes respiratory illness for hundreds of thousands of people, putting children and unborn babies at risk.

Indonesia is committed to improving law enforcement and management of the fires, Mr Joko said. Artificial rain has helped significantly lower the number of hot spots across the archipelago, the authorities say.

He said another of his priorities is to increase the use of renewable energy.

"Every year we increase renewable energy use, such as geothermal, wind power, solar power and we reduce the use of coal," he said. "The direction we're going is in 2025 renewable energy use will reach 26 per cent. Now it has risen and at 13 per cent, more or less. We will continue to raise use of renewable energy."