Carbon emissions may cost RI dearly

Adianto P. Simamora , The Jakarta Post ,

JAKARTA | Fri, 03/06/2009 9:37 AM | National

Peatlands for palm oil: Peatland is drained to make way for the cultivation of oil palms in Central Kalimantan. Indonesia is home to the world’s largest peatland areas. Scientists have warned that peatland reclamation could increase the release of carbon emissions stored in its area, leading to the worsening of global warming. (Courtesy Of The Indonesian Peat Land Association)

Indonesia suffers an estimated US$1 billion in potential losses each year from the release of carbon stored in its tropical forests’ peatlands, a study has revealed.

Mitsuru Osaki, a professor at Hokkaido University’s Graduate School of Agriculture in Japan, said the potential losses were due to poor management combined with the massive opening of peatlands for agriculture, such as in Central Kalimantan.

“If we convert it to the price of carbon, Indonesia loses about $1 billion annually, equal with the release of 0.6 gigatons of carbon dioxide [CO2],” he said Thursday on the sidelines of an international conference on carbon management in peat forests in Central Kalimantan.

Asked about the peatland condition in Indonesia, Osaki, involved in a study on peatlands in Kalimantan from 1997 to 2007, said it was “terrible, with no management of peatlands.”

Osaki, together with a team of 16 Japanese scientists, will conduct another five-year study to calculate the total carbon in the country’s peatlands.

The study will be jointly conducted with Indonesian scientists from the State Ministry for Research and Technology, the National Standardization Agency (BSN), the University of Palangka Raya, the Indonesian Institute of Sciences (LIPI) and the Indonesian National Institute of Aeronautics and Space (Lapan).

Tropical peatlands — including swamps and forests found in Indonesia, Malaysia, the Amazon lowlands and central Africa — are estimated to reach 42 million hectares and contain 148 gigatons of CO2.

Rising levels of CO2 emissions add to the greenhouse effect, thus increasing the temperature in the atmosphere, widely blamed for climate change effects.

Bambang Setiadi, chairman of the Indonesian Peatland Association, told the conference Indonesia had about 27 million hectares of peatlands, mostly in Kalimantan, Sumatra and Papua.

“Indonesia’s peatlands store between 10 and 32 gigatons of CO2,” he said.

(JP/Irma)

The depth of the country’s peatlands ranges from 1 to more than 12 meters. About 42 percent of the peatlands are more than 2 meters deep, with deposits of 77 percent of total peat carbon.
Bambang, who is also BSN chairman, said deforestation and repeated forest and peat fires significantly contributed to carbon release.

“Fires have become the most dangerous threat to Indonesian forests and peatlands in the past 15 years,” he said.

Studies show peat deposits in Southeast Asia could be wiped out by 2040 due to fires.

Bambang added that up to 0.6 gigatons of carbon released into the atmosphere in 2006 were due to peat fires.

He said carbon release from reclaimed peatlands could not be avoided. However, improved land management could lower the peat carbon loss rate.

LIPI peatland scientist Herwint Simbolon said the building of canals in peatlands would only accelerate the release of carbon.

“The fact is, carbon release is far higher than storage in peatlands, because the use of canals has sped up carbon release,” he said.

The government is currently drafting a presidential decree on peatland management, in a bid to cut CO2 emissions from peatlands.

Agriculture Minister Anton Apriyantono issued a ministerial decree last month to allow oil palm companies to expand into peatlands with a depth of less than 3 meters.

A report in 2006 from Wetlands International said Indonesia’s peatlands emitted around 2 billion tons of CO2 a year, far higher than the country’s emissions from energy, agriculture and waste, which together amounted to 451 million tons.

This places Indonesia as the world’s third largest CO2 emitter after the United States and China.

Plantations struggle as CPO prices in free fall

Business and Investment - November 14, 2008

Manggi Habir, The Jakarta Post, Jakarta

Plantation companies are one of the first to suffer from the deepening global downturn. And, as the year end nears, it is plantations with scale of production, the right mix of tree maturity and a conservative balance sheet (low debt and high cash levels), that are best able to weather the storm.

It was only a few months back, that the sector's outlook still looked so bright. Crude palm oil (CPO) prices were on an unprecedented upward climb. Fueled by high economic growth in India and China CPO prices soared to reach a peak of US$1,200 per ton by mid-year, about double its historical prices in the $350 to $600 per ton range.

Reflecting this trend, the share price of Indonesia's three top listed plantation companies, PT Astra Agro Lestari (AALI), PT Bakrie Sumatera Plantations (UNSP) and PT London Sumatera (LSIP) also doubled in 2007, reaching respective peaks of Rp 28,000, Rp 2,275 and Rp 10,650 per share by early 2008.

However, with the consolidation of the global downturn in the second semester, these earlier gains disappeared in a couple of months. CPO prices began their steep decline after June, reaching a low of $500 per ton by November. Reflecting this drop, share prices of the above three companies also fell by more than 70 percent, to reach lows of Rp 8,550, Rp 340 and Rp 2,725 per share, respectively.

This has been a painful awakening for plantation managers after seeing margins and profitability levels rise. So what has been the impact? First, there has been the drop in revenue with falling commodity prices. Costs, on the other hand, are fairly fixed and not easy to adjust downward in this sector. This ultimately translates into narrowing margins and profitability.

For instance, Astra Agro Lestari, the largest of the three plantation companies, showed a steady decline in quarterly net income from Rp 827 billion in the first quarter of the year, to Rp 770 billion in the second and further down to Rp 532 billion in the third quarter.

How have they responded? In the short-term, the response has been on finding ways to control costs and push them downward. This is difficult in a business with a long business cycle. Palm oil tree crops take 3-4 years to plant and grow to first production level, during which time it is all cash outflow. This is then followed by another 6-7 years for a tree to reach its maturity and generate peak yields.

Interestingly, the plantation cost structure has undergone a fundamental change with the rise in oil prices. In 2006, the largest cost component was labor, accounting for 39 percent of total cost.

However, by 2008, with rising gas prices, fertilizer costs have rapidly grown to replace labor as the largest cost component. Fertilizer, which previously accounted for just 14 percent of total cost, now takes up 34 percent of the CPO cost structure.

As a result, it has become the major focus in the sector's cost cutting efforts. Efforts are underway to use fertilizers more efficiently and to look at replacing costly chemical-based fertilizers with natural organic compost waste. The drop in oil and gas prices should help bring down fertilizer prices, although companies have yet to notice and confirm this trend.

In the long term, there is a focus on improving tree crop yields by investing in higher yielding and disease resistant seeds. Currently Fresh Fruit Bunch or FFB yields are about 18.2 tons per year per hectare. This palm fruit is then further processed by mills yielding an average of about 4.2 tons of CPO per year per hectare.

Most Indonesian plantation companies limit their activity to the upstream part of the value chain, focusing on planting, harvesting and processing palm fruits into CPO. Rarely have they ventured further downstream to vertically integrate into the next phase of processing, for example, into cooking oil or cosmetics, where the value added and larger margins are to be found.

There is also little discussion thesedays about investing in biofuel processing plants, with the decline in oil prices.

Plantation owners explain that moving downstream would require extensive investment. This is not limited to large processing plants but also to building distribution networks and marketing capability, as well as investing in creating strong brand names. This, they argue, requires a different skill base.

Besides, they also say, there is much to do already at their end of the value chain. The argument is that it would be more prudent if they focused on what they are good at, which is expanding and investing in their existing processing mill capacity, improving efficiency in their planting phase and increasing yields and then further seeking additional land or acquiring other plantations to plant more hectares and expand their capacity.

Astra Agro operates some 235,000 hectares of tree crops across the islands of Sumatra, Kalimantan and Sulawesi. About 80 percent of its tree crops are mature, with the remaining 20 percent in the planting or immature phase. In a downturn cycle planters prefer to have a larger mature proportion in their tree crop mix as it minimizes the heavy cash outflow found in the initial phase.

With a large mature area, there is also more cash flow generation, even with lower prices. This is why plantation companies that are relatively new or have a larger immature proportion of tree crops are suffering more in this downturn cycle.

Another cost that needs to be managed well in a downturn is financing costs. All commodity companies that face volatile commodity prices tend to have conservative balance sheets, carrying low debt levels in proportion to their capital. Astra Agro, for example, has Rp 1.9 trillion in cash as of September 30, 2008, and practically no debt.

It is too early to tell whether the recession will be long enough to encourage consolidation in this sector. What is sure is that those with scale, an appropriate mix between mature and immature tree crops and a conservative balance sheet should be able to ride out the storm more comfortably than others.

Manggi Habir is Contributing Editor at The Jakarta Post

COCA TO JATROPHA: THE CHANGING FACE OF INDONESIA'S PLANTATIONS

The Jakarta Post - December 12, 2006Julian Hill, Jakarta

Taking a snapshot of Indonesia's major crops in 1920, the world's largest producer of coca leaf and its derivative, cocaine, was right here on Java. And while the Latin Americans simply said cocaine production here was totally banned by decree. But also in 1920 more than 90 percent of the United State's high end cigar tobacco wrapper leaves were grown on Sumatra.

World opinion and politics ended cocaine production and the great depression ended expensive tastes in tobacco. Tea and coffee replaced coca in Java and rubber replaced tobacco in Sumatra. Two major crops displaced for two entirely different reasons, and thus we see the trend that fashion, politics and technology are all capable of changing the crops and the economics of Indonesia's plantations.

Dunlop's invention of the pneumatic tire spawned demand for rubber and as motorized transport grew between the wars so did the need for tires. By 1942, the need was so great that it was a major motivation for the invasion of Indonesia. Post World War II technology, particularly in the non-tropical USSR, began to replace natural rubber with synthetics made from petroleum. No need for natural latex, said the tire manufacturers and rubber prices fell.

Out came the rubber trees and planters started with a new super crop, oil palm. The tire manufacturers over did it though, and whilst they succeeded in keeping the price of latex down, they became worried about shortage of supply. A few years ago they admitted that although synthetic rubber worked well in tire treads, natural rubber was still needed for the walls. Rubber prices soared. Rubber or oil palm? Planters were in a dilemma, but not for long.

The motor car that spurred the demand for rubber is a big contributor to the global warming scare, the next big driver in the plantation game. Palm oil is not only an edible oil with a myriad of uses, it is now also seen as a feedstock for the production of alternative biofuels, the next new big business. After that brief dilemma, most reckon oil palm oil has the ascendancy over rubber again. At the moment.

Many of Indonesia's islands are moist, fertile and warm, perfect conditions for tropical agriculture, notably seen in the 1890s Le Figaro cartoon, Au fertilite du Sumatre, of the planter's walking stick sprouting leaves while he leans on it for a rest. Foreigners have been flocking here for centuries to seek the fruits of this fertility, but what they have sought has changed from cloves and cinnamon for the tables of European nobles to feedstock for biofuels to halt the progress of global warming. So what's next?

Undoubtedly the major influence on Indonesia's plantation sector over the next decade or so will be the demand for biofuels; irrespective of the price of crude oil, governments and interest groups around the world will continue to push the concept of sustainability.

So what are biofuels and why are they sustainable?

Biofuels fall into two categories: those categorized as biodiesel and those produced by fermentation such as bioethanol. Biodiesel is a modification of a vegetable oil which enables it to be used alone or mixed with petroleum diesel, for engines where ignition occurs by compression. Interestingly I know planters in Sumatra who have been mixing crude palm oil with regular diesel for years and they say it works just fine.

To produce bioethanol, carbohydrates need to go through a fermentation process, much the same as producing alcoholic drinks. Ethanol, by the way, is the same as the ethyl alcohol we find in our scotch, wine or beer. Bioethanol may be the rage now but it is volatile and cannot be mixed more than 10 percent with regular petrol.

These biofuels are deemed to be sustainable because, unlike fossil fuels, they are grown by plants which fix the carbon from the atmosphere. When they are burnt they return the same carbon to the atmosphere that was used in growing them. That's the theory, but such a balance does not take account of the equipment and transport used to produce them.

So it takes a vegetable oil to make biodiesel but virtually any old carbohydrate can be used to make bioethanol.

Let's look at a biodiesel plant producing, say, 250,000 tons of biodiesel a year. In petroleum terms that is about 1.75 million barrels. To produce the palm oil feedstock for a plant with that capacity would require oil palm plantations of about 60,000 hectares, about the same size as Singapore.

The 1.75 million barrels of crude, on the other hand, could be produced by a field of about "fifty donkeys" pumps covering an area of 70-odd hectares. So can the benefits of the sustainability be traded against the loss of a huge area of what used to be rain forest and now turned to monoculture? This is an issue the green lobby has yet to address. Sure it may be sustainable, but is it a sword in the side of biodiversity?

So what are the alternatives? Biodiesel can be produced from many vegetable oils. Not just the traditional ones like palm, soya and canola but also from others, less well known oils, such as jatropha and castor. Jatropha can be grown in poor soils with low rainfall, such as is found in the Moluccas and East Nusa Tenggara. These biodiesel crops could help revitalize the economies of some of Indonesia's poorest regions, and do so by utilizing land that does not have the same biovalues as rain forest.

Bioethanol can be produced from a variety of crops; ubi kayu (cassava), potatoes, sugar cane and even, they say, from rice straw. There is a lot of land in Indonesia that could produce simple carbohydrate, and we could see, for instance, large scale production of cassava for biofuels on otherwise unproductive land.

Regional autonomy, has the potential to create a sea change in the countryside. As President Susilo Bambang Yudhoyono has said many times, "Don't talk to me, talk to the Bupati (regent)". A result is that the land rights of the masyarakat, the people, are now inalienable and protected and we will surely see a massive increase in production from small land holders rather than from the large scale corporate planters.

Fear not, this has been the case elsewhere in the world for centuries. For instance, a big-sized farm in most parts of England is 100 hectares and national agricultural production has not suffered as a result of it. What it will mean though is that the primary producer will no longer also be the primary processor, because small producers cannot justify owning processing plants like palm oil mills.

Once implemented in its purest form the Kyoto Protocol mandates the global trading of carbon credits. This will be critically important for Indonesia with its forests and agriculture, and could be worth untold billions to the nation.

The writer is a Technical Advisor with Deloitte in Jakarta. He is involved in providing financial advice to companies in the Indonesian plantation sector. He can be contacted at jchill@deloitte.com.

Source: The Jakarta Post - www.thejakartapost.com

Estates Production by Crops, Indonesia, 1995 - 2006

Estates Production by Crops, Indonesia, 1995 - 2006* (Ton)
Year	Dry Rubber		Palm Oil		Palm Kernel		Cocoa		Coffee		Tea		Cinchona bark		Cane Sugar 1)		Tobacco
1995	341,000		2,476,400		605,300		46,400		20,800		111,082		300		2,104,700		9,900
1996	334,600		2,569,500		626,600		46,800		26,500		132,000		400		2,160,100		7,100
1997	330,500		4,165,685		838,708		65,889		30,612		121,000		500		2,187,243		7,800
1998	332,570		4,585,846		917,169		60,925		28,530		132,682		400		1,928,744		7,700
1999	293,663		4,907,779		981,556		58,914		27,493		126,442		917		1,801,403		5,797
2000	375,819		5,094,855		1,018,971		57,725		28,265		123,120		792		1,780,130		6,312
2001	397,720		5,598,440		1,117,759		57,860		27,045		126,708		728		1,824,575		5,465
2002	403,712		6,195,605		1,209,723		48,245		26,740		120,421		635		1,901,326		5,340
2003	396,104		6,923,510		1,529,249		56,632		29,437		127,523		784		1,991,606		5,228
2004	403,800		8,479,262		1,861,965		54,921		29,159		125,514		740		2,051,642		2,679
2005	432,221		1,019,061		2,155,925		55,127		24,809		128,169		825		2,241,742		4,003
2006*	450,526		10,869,365		2,315,740		55,482		25,179		114,332		796		2,266,812		3,986
Note :
1). Including production which uses raw materials from smallholder.
*). Preliminary figures.

Estates Area by Crops, Indonesia 1995 - 2006

Estates Area by Crops, Indonesia 1995 - 2006* (000 Ha)
Year	Rubber		Oil Palm		Cocoa 1)		Coffee 1)		Tea 1)		Cinchona 1)		Sugarcane 2)		Tobacco 2)
1995	471.9		992.4		125.4		49.3		81.0		4.6		496.9		9.1
1996	538.3		1,146.3		129.6		46.7		88.8		2.2		400.0		4.3
1997	557.9		2,109.1		146.3		61.8		89.3		2.3		378.1		4.5
1998	549.0		2,669.7		151.3		62.5		91.2		0.6		405.4		5.7
1999	545.0		2,860.8		154.6		63.2		91.6		1.3		391.1		5.2
2000	549.0		2,991.3		157.8		63.2		90.0		1.3		388.5		5.2
2001	506.6		3,152.4		158.6		62.5		83.3		1.2		393.9		5.3
2002	492.9		3,258.6		145.8		58.2		84.4		1.2		375.2		5.4
2003	517.6		3,429.2		145.7		57.4		83.3		3.3		340.3		5.2
2004	514.4		3,496.7		87.7		52.6		83.3		3.2		344.8		3.3
2005	512.4		3,592.0		85.9		52.9		81.7		3.1		381.8		4.8
2006*	513.2		3,682.9		86.1		53.2		79.9		3.1		384.0		4.7
Note :
1). Area for annual crops is the area planted at end of the year.
2). Area for seasonal crops is the monthly commulative harvested area.
*). Preliminary figures.