Report No. 6356IND Indonesia Policies and Prospec-ts for Non-Oil Fxports Annex l: Export Product Profiles and Prospects December 31, 1986 Country Programs Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY II4 : !:: y ; X§n,:.' -;t A . 3j x. , '1., ,' ' , ,.. ..X* < t 4 n , . ; ; * B ^ D t ~~~~~~~~~ Y '0 , ',, 'r '> ',&S2'-' ''9 ,-'R'-'-' 2. iV,e%t a Aor 9 Sb tbn< * a B Z Oo * b t - , * ; * t - e,,; - g o s o7ba & 4 * 0 V 0 o e1.9*,2E S < b*' S a iicti ributioi Xnaf bQ USZty e ,e - o e g e ow s o -~~!71"VE -;'k o,y bncefiri' bnet - ,' -. : >; o ';-'' <.-Q; idho4tEritwaQlo ............................~~~~~~~~-.. .~ , Ai v - v s n B ; ; o P s s ; \ _ CURRENCY EQUIVALEN-iS Before November 15, 1978 US$1.00 Rp 415 Annual Averages 1979-85 1919 US$1.00 = Rp 623 1980 US$1.00 = Rp 627 1981 US$1.00 = Rp 632 1982 US$1.00 = Rp 661 1983 US$1.00 = Rp 909 A" 1984 US$1.00 = Rp 1,026 1985 US$1.00 = Rp 1,111 December 30, 1986 US$1.00 = Rp 1,654 2/ FISCAL YEAR Government April 1 to March 31 Bank Indonesia - April 1 te March 31 State Banks - January 1 to December 31 1/ On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp 703 to US$1.00 n Rp 970. 2/ On September 12, 1986 the Rupiah was devalued from US$1.00 = Rp 1,134 to US$1.00 = Rp 1,644. FOR OFCIAL USE ONLY INDONESIA ANNEX I Export Product Profiles and Prospects Table of Contents Page No. As FOREST PROWUCTS ................e e oe .................. 1 B. RUBBER 13 C. COFFEE ...........,........,...eo...,.,..,........ 24 D s ...... . 32 Et TEA ....e37 F. PALM OIL *.......,......,..o.o...eo.............., 42 Gs SHRIMP 53 H. MINERALS 73 Tin . 78 Nickel ***¢¢¢****¢*§¢*****e¢§*83 Aluminum 86 Copper Concentrates.... ............ 87 I. FERTILIZER 90 Thb document ha a mtited distibuon and may be usd by rcipients only in the peform e of their ofcil dute. Its contents may not othrwis be dicosd without Wodd Bank authozuion. ARM I 1 PaFe 1 A. Forest Products 1. Forest products are Indonesia's second most important export after oil amounting to US$964 million in 1984. This was considerably less than in 1979/80 (US$2.2 billion) as a result of a slump in the world market for tropical hardwoods and a decision to reduce the export of logs. Approximately 64% of the total land area of Indonesia amounting to 122 million ha is covered by tropica' rain forests. Out of that amount, 56 million he have been marked for production forest, of which nearly 40 million ha have been allocated to logging concessions. Man-made forests are found in Java, Sumatra, Kalimantan and Sulawesi, but only the 2 million ha o5 man-made forest on Java, with its annual productior capacity of 1 million m , are producing at this juncture. The province of lrian Jaya is the largest forested area in the country fol- lowed by East Kalimantan and Central Kalimmntan. About 50 of Indonesia's total forested area is found in these three provinces. The general policy of the Indonesian Government dictates the most economical exploitation of the rich forest area in order to sustain a progressive source of welfare for the growing population. Where exploitation is permitte4 the forests are managed by logging companies on the basis of concessions (Forest Exploitation Rights or HPH) granted by the Department of Forestry. Modern mechanical logging is being practiced and due to the existing government regulations pertaining to felling systems, banning of log ixports, forest conservation and :eforest4tion which are being imposed, the growing wood processing industries are assured of a regular supply of raw materials. In the longer term, the groups of conces- sions are to be integrated with replanted forest area or newly man-made forest into "timber estates" that would secure a sustained yield of logs. 2. Log production reached its peak iu 1978, declining steadily there- after, picking up again in 1983-1984 (Table 1). A sharp decrease in log pro- duction since 1978 was a result of the 001's attempts to control the exports of logs and the low absorptive capacity of the domestic wood processing industry. ANNE I Page 2 Table 1: LOG PRODUCTION i INDONESIA, 1975-1984 (mln m ) Year Production Exports 1975 16.3 12.9 1976 21.4 18.5 1977 22.9 19.8 1978 31.1 20.3 1979 26.4 19.6 1980 23.7 14.6 1981 23.3 6.4 1982 22.4 3.1 1983 26.4 2.6 1984 28.2 1.5 Source: Department of Forestry. In 1978 0o0 decided to give stronger incentives to local processing of logs. In February 1978, GOI increased the export tax (ADO) on logs from 1OZ to 20X of the government-determined "check prices. -" In 1979, a new export tax, at the rate of 5X, was imposed on sawn wood, the ob-ective of which was to capture resource rents from exports of sawn timber. 3. As is clear from Table 1, log exports began to decline steadily after 1978 most notably after the issuance of the Joint Decree in May 1980. The decree changed the effective policy of the government by setting limits on log exports based on the amount of logs made available to the domestic wood processing industry, tnereby indirectly encouraging the industry. Log produc- tion climbed in 1982 due to the tremendous increase in the number of plywood mills. Thus, under present policies, Indonesian log production depends entirely on the absorptive capacity of domestic wood processing mills. The countries which formerly imported logs from Indonesia to supply to their processing industries, such as Japan, South Korea and Taiwan have been severely affected by this policy. 4. Forest exploitation and the sawntimber industry have become import- ant parts of Indonesia's development framework. Production of sawn wood has increased steadily over the past decade. Sawnwood was most immediately affec- ted by the 1980 decree as the process is less complicated and requires much less capital than the production of veneer and plywood. 1/ World Bank, K. Takeuchi, "Export Prospects for Forest Products in Indonesia, 1983-1990." Division Working Paper No. 1983-1 ANEX 1 Page 3 Table 2: TRENDS OF SAWN TIMBER IN INDONESIA (mln m3) Year Production Consumption Export 1973 1.4 1.1 0.3 1974 1.8 1.5 0.3 1975 2.4 2.0 0.4 1976 2.5 1.8 0.7 1977 3.2 2.6 0.6 1978 4.0 3.2 0.8 1979 4.0 2.7 1.3 1980 4.8 3.6 1.2 1981 5.2 3.9 1.3 1982 5.8 4.3 1.5 1983 6.3 4.6 1.7 1984 6.5 4.5 2.0 Source: Indonesian Sawn Timber Association. During the period of unrestricted log exports, the growth in production of sawn wood was slow and inconsistent. In 1979-84 log production declined and sawn-wood production increased. Between 1980 and 1984, sawn-wood production has been growing at an average annual rate of 7.9% p.a., whereas log produc- tion increased by 4.9% p.a. for the same period (Tables 1 and 2). 5. From Table 3, it can be seen that the installed capacity of sawmills in Indonesia is far greater than realised production. Capacity utilization is 60% at present. Approximately 30% of production is exported and the rest is sold in the domestic market (Table 2). In the long run, the domestic market will occupy a more important role and will enhance the resiliency of timber/ forest economy. Exporters still pay little attention to the specific require- ments of each market such as dimensions, quality and delivery time. Also, freight rates from Indonesia are higher than from other neighboring coun- tries. According to Indonesian Sawn Timber Association, 751 of sawn wood is consumed by the Housing Construction sector and 11% by commercial cunstruc- tion. Exports of sawn timber grew by 13.6% p.a. between 1980 and 1984, whereas consumption grew by 5.71 p.a. (Table 2). The significant importers of sawn wood from Indonesia are the EEC and Asia, which together account for about 901 of total exports. More than 50% of the exported Ramin sawn timber is imported by Italy. Recently Middle East has also started importing sawn wood from Indonesia (Table 4). ANNEX 1 Page 4 Table 3: DEVELOPMENT TREND OF SAWMILL INDUSTRY IN INDONESIA, 1979-1984 Sawmill UPH /a Sawmill Non-HPU Total Installed Installed Installed capaUiiy capaciUy capacity Year Unit (mln m ) Unit (miln m ) 1979 145 4.1 1t510 3.8 1,655 7.9 1980 188 5.5 1,639 4.3 1,827 9.8 1981 239 7.1 1,788 4.8 2t027 11.9 1982 257 7.6 1,957 5.4 2,214 13.0 1983 286 8.5 2,205 5.9 2,491 14.4 1984 294 8.7 2,205 5.9 2,499 14.6 1985 319 9.4 2t205 5.9 2,526 15.3 /a 1PH or Forest Exploitation Right Source: Indonesian Sawntimber Association. Table 4: MEPORT OF SMA TINKBS9 BY DESTINATION, 1979-84 ( 000 1 ) 1979 1980 1981 1982 1983 1984 Africa - - 4.5 7.6 - 29.9 America 24.0 14*6 21.8 5.3 29.3 65.7 Asia 827.8 773.9 835.5 979.1 1,135.6 1,183.7 Australia 0.8 1.7 5.5 6.8 11.1 5.6 nEC 481.2 412.2 441.3 406.4 441.5 498.0 Other Europe 7.8 6.2 7.5 9.d 5.4 6.4 Middle East 0.1 9*7 26.2 47.3 106.9 66.2 Total 1341.7 1,218.3 19342.3 1,462.2 19729.8 1,991.5 Sources Directorate General of Forestry Indonesia Sawmill Association. The domestic price of a cubic meter of sawn timber (Neranti) is US$134, of which U8$100 is price of the log. Prior to the existence of the Forest Exploitation Rights, small sawmills were already in existence, and the numbers grew whiie Forest Exploitation Rights sawmills were being constructed. These Page 5 nonforest Exploitation Rights sawmills flourished.V During the time when the Forest Exploitation Rights was beginning, only specific types of logo were in demand in foreign markets. The others were left uncut. Later, as large commercial mills began operating, all trees were cut and the less desirable ones were used in the sawn timber/unprocessed timber markets. In this connection, a strategy needs to be developed to inventory the types of timber left with a chest level diameter of 60 cm and to provide the smaller sawmills with access to a source of logs. 6. In order to improve the ability to supply the industry with its raw materials, efficiency in the area of tree cutting must be improved. Selective specie cutting for specific end uses (plywood) means that there are many valuable logs with suitable measurements left behind in the forest. As a result, waste is still high--approximately 471. The structure of logging is such that only the easiest and most valuable timber is removed. 7. Based on the installed capacity of existing plants and those which are still under construction, and the market absorption capacity, no new saw- mills need to be coustructed except around Irian Jaya where obsolete and worn machinery needs upgrading. In order to meet future needs for US and BBC markets, the supply of kiln-dried sawntimber needs to be increased and the marketiug of the lesser-known species needs to be promoted. for the European markets, the demand generally is for small but frequent quantities. In order to minimise transportation costs, the timber terminals at Trieste, Le Havre and Rotterdam should be used. The timber terminals proposed in Indonesia at Pulau Batam (for the Western region) and at Balikpapan (for the eastern region) should be supported if cost-effective. 8. The plywood industry commenced in lIdonesia in 1973 with only 2 fac- tories with a production capacity of 28,000 m . By 1985 t e number of mills has gone up to 108 with production capacity of 6 million m (Table 5). Fifty-flur plywood mills are located in Kalimantan with production capacity of 3,288 m per annum. There are only five plywood mills in Java. More than 771 of existing plywood mills came on stream in the past 4 years. A further 180 firms that have applied for licenses to build plywood mills have been ordered by the Government to wwit until timber prospects improve. foreign joint ven- tures account for about 16X of total plywood production capacity. There arI 15 foreign joint venture plants with a total capacity of nearly 1 million m 9. In 1373 production was only 19 thousand a3; by 1980 it had reached 624 thousand m , i.e., about 66% increase p.a. The dramatic increase occurred since 1980 when the Government started encouraging the development of this industry. The average annual growth rate between 1980 and 1985 is 36X. Capacity utilization is around 70X. This development of the plywood industry was the intended result of the log export ban. This has caused problems for 2/ Indonesian sawmillers and Wood Product Manufacturer's Association, "Role of the Indonesian Sawmillers Association (ISA) in Development, particularly in the Area of Forestry". September 1985. ANEX 1 Table 5: NUMBER AND ANNUAL CAPACITIES OF PLYWOOD MILLS IN INDONESIA Installed capacit3 Real produstion Year Number '000 m '000 m 1973 2 28 19 1974 5 103 24 1975 8 305 107 1976 14 405 214 1977 17 535 279 1978 19 799 424 1979 21 1,809 624 1980 29 1,949 1,011 1981 40 2,602 1,552 1982 61 3,292 2,140 1983 79 4,477 2,943 1984 95 5,328 3,820 1985e 108 6,000 5,000 e - estimate. Source: APKINDO. Singapore, Taiwan, Korea and Japan which formerly depended on the supply of logs from Indonesia. There were 46 plywood mills in Singapore, but currently only 1 is operating at 50X of its capacity. Of 100 plywood mills in Taiwan, only 8 are now in production. In Japan there are now only 105 plywood mills compared with 325 a few years ago. In Korea the number of plywood mills has dropped from 60 to only 8. The world recession in 1981-82 affected plywood demand. A sharp rise in wage rates in Korea, and Singapore was another reason for these countries to close down plywood mills. 10. As a result of the log ban in 1980, Indonesia has become a major exporter of plywood. The main destination for Indonesia's plywood production is the export market. From 1973 until 1980, most of the plywood produced was for the domestic ma.^ket. In fact, through 1979 Indonesia imported plywood to fill domestic reqi-Irements. Since 1981, most plywood has been exported although domestic demand has grown steadily. Still per capita consumption of plywood in Indonesia is lower than that of Singapore and Nalaysia. But there still is a big potential market for plywood in Indonesia. 11. Increasing volumes of plywood have been exported to the US, EEC, Middle East and China. Between 1980 and 1985 exports have increased by about 65Z p.a. (Table 6). Table 7 shows that exports to Europe, Singapore and other markets are steady and exports to USA and to Hong Kong/China increased very significantly. Exports to the Middle Bast dropped by 81 in 1984. ANNEX 1 Page 7 Table 6t TRENDS OF PRODUCTION AND TRADE OF INDONESIAN PLY4JOOD, 1973-85 t'000 m 3) Domestic Year Production sale Export Import 1973 9 7.5 1.5 14 1974 24 24 - 10 1975 107 105 2 7 1976 214 204 10 5 1977 279 261 17 4 1978 424 341 83 3 1979 624 498 126 0.8 1980 1,011 728 283 1981 1t552 778 774 1982 2,140 890 1,250 1983 2,943 943 2,000 1984 3,820 8i0 3,010 1985 4,081 756 3,325 Source: APKINDO (Indonesian Wood Panel Association). Table 7: EXPORT OF PLYWOOD, VENEER AND BLOCKBOARD BY DESTINATION 1981-1984 1981 1982 1983 1984 Destination '000 m3 2 '000 m3 X'000 m3 X '000 m3 Z USA 93.6 12.1 230.1 18.4 599.4 29.6 821.7 27.3 UK 63.7 8.2 84.5 6.7 134.5 6.6 109.6 3.6 Continental Europe 22.4 2.9 37.1 3.0 92.9 4.6 128.2 4.3 Middle East 150.1 19.4 227.2 18.2 446.6 22.1 417.3 13.9 North Africa - - - - 29.9 1.5 67.5 2.2 Japan 30.8 4.0 50.0 4.0 64.0 3.2 145.4 4.8 Rorea 53.5 6.9 22.9 1.8 4.3 0.2 668.8 22.2 Hong Kong/ China 127.4 16.5 271.0 21.7 247.4 12.2 668.8 22.2 Taiwan 36.9 4.8 24.5 1.9 16.8 0.8 110.8 3.7 Singapore 141.9 18.3 258.5 20.6 362.8 18.0 460.6 15.3 Australia 15.9 2.1 0.9 0.1 2.6 0.1 2.6 0.1 Others 37.5 4.8 44.9 3.6 22.1 1.1 46.7 1.6 Total 774.3 100.0 19251.3 100.0 2,023.3 100.0 3,010.5 100.0 Source: APKINDO (Indonesian Wood Panel Association). INDONESIAN PLYWOOD PRODUCTION & TRADE (0430' CUM ) 4vS~~~~~~~o- cum 4.5 - 4 - 3. - 2. 1.5 0. 1973 75 8O as O PROD + DOMESTlC SALE O EXPORT A IMPORT oI.J. ANNEX I Page 9 12. The US is still the main importer and wil' remain a growing market due to the declining supply of plywood in the US. Singapore is also a poten- tial market for Indonesian plywood. In 1984 its imports went up to 460,600 m3 from 141,900 in 1981. Indonesia has high hopes for the China market which currently accounts for over 20% oi Indonesias exports. Plywood exports to China could double to 1 million m by 1986 with Indonesia and China having recently liberalized trade relations and China going forward with a housing development plan. The United Kingdom is another promising market. Thi United Kingdom imports around 1 million m of plywood but inly some 130,000 m from Indonesia. Other markets to be penetrated are Australia and the Eastern European countries. The share of Indonesia in the world trade of tropical hardwood plywood which was only 4% in 1980, jumped to about 24% by 1983. Prospects 13. There are over 100 plywood mills with a total production capacity of over 6 million ml. More than 97% of existing plywood mills came on stream in the past four years. The plywood industry is faced with losaes or low profits over the next few years and despite excess capacity at least 25 more firms will start operations in 1986. As for plywood projections, it is assumed that 150 mills will be operating by 1990 and 185 by 1995. By 1995 production will go up to 8 million m with a capacity utilization rate of about 821 (Table 8). In cooperation with forest concessionaries, the Government is planning to develop 4.4 million ha of industrial forest plantations during the next 15 years. Around 47X of the new estates will be developed by private comanies. The government contribution to the total development costs of these estates will be around 601. The increase in Indonesian plywood production will result in a large market share for Indonesia. Table 8: PROJECTIONS FOR PLYWOOD ('000 m3) Domestic Capacity Production consumption Export 1985 5,800 4,100 760 3,340 1990 8,500 6,400 900 5,500 1995 9,800 8,000 1,100 6,900 Source: Mission Estimates. 14. Production is expected to grow by 7.11 p.a. between 1985 and 1995 and exports by 7.61 p.a. over the same period. Sawn-wood production and exports are expected to grow by 3.91 p.a. between 1985 and 1995. Table 9 pre- sents actual and estimated production, consumption, and trade of logs and log products from Indonesia, while Tables 10 and 11 provide projections of export volumes and values, respectively, for Indonesia. The value of Indonesia's plywood exports went up from US$55.7 million in 1980 to US$657.8 million in Table 9: INDONESIA'S PRODUCTION, EXPORTS AND CONSUMPTION OF SAWNWOOD, PLYWOOS AND LOGS IN ROUNDWOOD EQUIVALENT ('000 m - roundwood equivalent) Actual Estimated 1975 1980 1981 1982 1983 1984 1985 1986 1990 1995 Sawnwood Exports 759 2,233 2,361 2,764 3,202 3,641 4,118 4,300 5.i00 6,000 Consumption 3,660 6,551 7,155 7,850 8,327 8,327 9,150 9,882 10,550 12,117 Production 4,419 8,784 9,516 10,614 11,529 11,968 13,268 14,182 15,550 18,117 Plywood Exports 4 651 1,781 2,875 4,600 6,923 7,647 8,901 12,627 15,951 Consumptiou 242 1,674 1,789 2,047 2,169 1,863 1,739 1,771 2,116 2,622 Production 246 2,325 3,570 4,922 6,769 8,786 9,386 10,672 14,743 18,573 Logs Exports 12,900 14,600 6,400 3,100 2,600 1,500 - - - Consumption 3,400 9,140 16,900 19,300 23,800 26,700 - - - - Production 16,300 23,740 23,300 22,400 26,400 28,200 22,654 24,854 30,293 36,690 Sources: 1975-1984 (Actual) Based on FAO and industry information. 1986-1995 - Mission projections. ANNE 1 Page 11 1984. The value of plywood exports are expected to grow by 13.31 p.a. and of sawnwood exports by 10.5X p.a. between 1985 and 1995. Table 10: PROJECTIONS OF EXPORT VOLUMES (mln m3) 1985 1986 1990 1995 Logs 0.5 0.36 0.36 0.36 Sawnwood 2.25 2.35 2.50 2.90 Plywood 3.32 3.87 5.50 6.90 Total (roundwood equivalent) 12.27 13.56 17.59 21.54 Source: Mission Estimate Table 11: EXPORT VALUE PROJECTIONS (millions of current dollars) 1985 1986 1990 1995 Logs 44 34 49 60 Sawnwood 329 362 586 888 Plywood 644 900 1,672 2,570 Total 1,017 1,296 2,307 3,518 Source: Mission estiamtes. Conclusions 15. The supply of hardwood plywood from Indonesia accounts for about 701 of that product in the international market. The plywood industry plays a significant role in Indonesia's export trade. During the past seven years plywood production grew rapidly. Plywood exports showed a steady rise between 1979 and 1984. On the domestic scene, one of the challenges to growth in the plywood industry is a continuation in the supply of raw materials. This is an especially difficult problem for small plywood companies not having their own forest concessions. Many plywood producers have faced difficulty in obtaining a regular supply of logs. This is because of the scarcity of certain wood needed for plywood production, the dependence of logging operation upon weather, and the lack of logging facilities -- tractors, trucks and roads. So the main constraint faced by plywood producers in the processing field is the AM= I~~ PNIE 1 Page 12 low recovery of the basic material, and the inability to make adjustments to the demand in the market. Simplification of wasteful and tedious licensing procedures and a number of recently established policies covering shipping and trade can be seen as an attempt by the Government to boost prospects of the plywood industry. By effectively reducing production costs of this industry the Government hopes that it will be better able to compete in the export mar- ket. The rush to build new mills from 1980 caused some unanticipated prob- lems. Basic infrastructure has not kept up with the development of the mills. Many of the mills have no access to state-generated electricity and transport networks. This has caused problems because logs from remote forests cannot be transported fast enough to the plywood mills. 16. With current technology and management, Indonesian plywood produced by the major mills is of the quality required by the US and EEC who are qual- ity conscious. In 1980, 68X of its exports went to China and Middle East (through Hong Kong and Singapore). These countries are not so quality con- scious. In early years lower volumes also meant that shipping was difficult and expensive. Most of the plywood producers were only logging companies a few years ago and it will take time for them to develop the basis for marketing expertise. Export prices of plywood may improve if it is traded on the central exchange. Many companies are not yet experienced in the trading and some are striving to ensure a cashflow. To overcome price competition between exporters, APKINDO has formed a Plywood Export Joint Marketing Board. However, marketing difficulties have led several exporters to trans- gress these regulations and to sell at prices below the agreed price. 17. The price of plywood on the export market has improved and is, at present, in the range of US$250-300/m3 (1980). The industry is improving efficiency all along the production line starting with the logging operation in the forest, the processing operation in the factory, and the marketing (domestic as well as export). In logging operations the industry is restructuring the equipment, utilizing the lesser known species, improving milling of logs and diversifying the product to meet the market demands. 18. In addition to improvements in marketing skills and quality of pro- duct, much depends on the the Government's success in pressuring importers to lower tariff and non-tariff barriers. Korea has a 201 tariff, Taiwan has 251, Australia has 312 and Japan has 20% for thickness under 6 mm and 17.5Z for thickness, 6 mm and up. APKINDO feels that the EEC ASP quota is less fair because all suppliers (Korea, Singapore, Malaysia, Philippines, Indonesia and Brazil) have the same quota regardless of their production capacity and potential. APKINDO is of the opinion that this system should be annulled and that the import duty should be decreased to around 62. Japan is isporting more plywood, and by 1989 it is projected to be around 1 million m . Japan is also lowering its tariff barriers. Indonesia sells 4 x 8 sheets but if it decides to produce 3 x 6, sheets it can increase sales in the Japanese market. The market for 4 x 8 sheets in Japan is about 102, although it is expected to grow. ANNEX I Page 13 B. Rubber 19. Tree crops account for about one third of the total cropped land in Indonesia and generate about 43% of total non-oil export revenues. Rubber is an important foreign exchange earning and employment generating commodity in Indonesia. Some 16 million smallholder families produce subsistence and crsh crops on 14 million ha, while 1,800 estates produce mainly rubber, sugar, tea, palm oil and tobacco on another 2.2 million ha. At present rubber is grown predominantly in Sumatra and Kialimantan. About 2 million hectares are with smallholders with farm size in the range of 1-3 ha. Government estates and private estates account for 250,000 ha and 236,000 ha, respectively (Table 11). 20. Between 1980 and 1985, smallholder rubber plantations grew only by 2.2% p.a., while private estates had a slight decline and government estates expanded by 6.3% p.a. (Table 11). In terms of productivity Indonesia still lags behind Malaysia. Malaysia is the world's largest rubber producer with high average yields (0.78 mt/ha in 1983) compared to 0.39 mt/ha in Indonesia. The total production in Indonesia is low in part because 81% of total rubber plantations are owned and managed by smallholders who have not planted high-yielding clones and poor tapping techniques. As a result of the extensive areas of sleeping rubber in the smallholder areas, which is tapped only in the periods of favorable prices, the average smallholder yield in Indonesia remains low, at about 350 kg/ha as compared with 450 kg/ha in Thailand and 640 kg/ha in Malaysia. 21. In Indonesia there have been a number of replanting and new planting schemes. During the Repelita II, from 1973 onwards, there were Assisted Replanting (ARP) and Group Coagulation Center (GCC) schemes in which settlers were encouraged to replant old rubber or plant up ladang areas with selected planting materials. Small areas were planted up but after two or three years, when intercropping became impossible, economic pressures forced thq, farmers to leave the rubber with consequent invasion of alang-alang and bush.V The NSSDP and WSSDP schemes in 1973 and 1974 financed by the World Bank and the West German Government, respectively, were early examples. The ARP/GCC program planted about 1,000 ha of rubber in 1976, 3,000 ha in 1977 and 12,000 ha in 1978, all assisted by grants to smallholders. The projects suffered from a shortage of qualified staff, and limited funding, with the result that plantings were of poor quality and well below the prescribed standards. Since 1977 the Government of Indonesia, with the Bank's assistance, has financed 7 nucleus estate and smallholder projects for tree crops which, when fully developed, will have settled, or resettled, 80,000 smallholder families and will have established 100,000 ha of rubber, 41,000 ha of palm oil and 15,000 ha of coconuts. Estate development will comprise 43s000 ha of rubber, 22,000 ha of oil palm and 9,000 ha of coconuts. In addition, 14 rubber 3/ Food and Agriculture Organization of the United Nations "Indonesia Assistance to Tree Crop Subsector Investment Planning TCPTiiNS/2311tI),. November 1983. ANNEX 1 Page 14 Table 11: AREA UNDER PLANTATION--NATURAL RUBBER ('000 ha) Small- Govern- Private holder ment estates Total 1967 1,617 223 292 2,132 1968 1,690 228 291 2,208 1969 1,771 221 294 2,287 1970 1,813 224 281 2,317 1971 1,811 221 307 2,340 1972 1,841 197 306 2,344 1973 1,857 216 275 2,348 1974 1,873 197 259 2,329 X975 1,864 202 255 2,321 1976 1,8 197 252 2,306 1977 1,865 190 236 2,291 1978 1,871 189 253 2,312 1979 1,926 187 271 2,384 1980 1,947 190 246 2,384 1981 1,994 202 244 2,440 1982 2,036 206 243 2,484 1983 2,118 224 237 2,578 1984 2,143 229 236 2,609 1985 2,164 257 236 2,657 Source: Director General of Estates, Ministry of Agriculture. factories, 8 palm oil mills and 4 copra milii will be constructed to process the nucleus estate and smallholders' crops.- 22. Thailand achieved replantings of 20,000 ha annually in the early 1970s, rising to over 60,000 ha per year at present. While Malaysia has planted 20,000 ha and replanted 10,000 ha annually since the mid-19609. During Repelita III, the Indonesian tree crop planting program became the largest in the world. Plantings during Repelita III were promoted through four major schemes: (a) externally financed nucleus estates and smallholders (NES) programs using government-owned estates (PTPs) as the development agency to settle mainly local poor and landless, but also tranomigrants; (b) the Perkehunan Inti Rakyat (PIR) wholly government-financed nucleus estates and smallholders schemes; (c) the Bank-supported Smallholder Development Project; (d) the extensive Projects Rehabilitasi dan Peremajaan Tanaman Ekspor (PRPTE) schemes fully financed by GOI and implemented by small PMUD for replanting and 4/ Indonesia: The Major Tree Crops--A Sector Review, Report No. 5318-IND, World Bank, for official use only. AM= I Page 15 new planting. Some 243,000 ha of rubber were planted or replanted during Repelita III. Only about 50X targets in Repelita III are estimated to have been met. Over the period 1986-90, an area of 207,000 ha and a further area of 250,000 ha for the period 1991-95 is projected for new plantings and replantings. The variable nature of the natural rubber industry, where demand is largely determined by the automobile industry, requires that production levels be kept flexible. Rubber smallholders have a relatively higher short- run elasticity than estates due to the large capital investments of estates. Production on estates is largely inflexible in the short and medium run. Generally, during times of high prices even old trees in smallholder planta- tions are tapped intensively whereas during periods of low rubber prices it is not worth tapping remote and low yielding areas. 23. World production of natural rubber has been dominated by Malaysia, Indonesia and Thailand which collectively account for about 80a of total world output. The share of Indonesia, the second largest producer after Malaysia had declined from 301 in the early 1960s to 242 in the late 1970s (Tables 12 and 13), then gradually increased to reach 1 million tons in 1980, with a share of 26.52 (compared with Malaysia's 1.5 million tons and Thailand's 500,000 tons). Indonesian natural rubber output in 1984 was 10.72 above 1983 output. The increase is in part due to the impact of the expansion program over the past five years. Indonesia has the largest area under rubber, although a significant part of it is "sleeping" rubber. Assuming a 30-year replanting cycle, 32 of the holdings (or 80,000 ha) will have to be replanted annually just to maintain the age structure of the trees. Based on the estimates of new plantings/replantings programs and rubber yields, Indonesian rubber production is projected to reach 1.3 million tons by 1990 and 1.52 million tons in 1995, i.e., a growth rate of 3.72 p.a. compared to a 3.11 p.a. growth rate between 1975 and 1985 (Table 14). Malaysian rubber production is p;ojected to grow at a much slower rate of 0.62 p.a. between 1985 and 2000 ._ Production in the estate sector in Malaysia is projected to decline upto 1995. The outlook now is bleak for rubber in Malaysia because of the high cost and difficulty of obtaining labor. While there has been use of some low-cost Indonesian immigrant labor, this may decline as the Indonesian economy develops. 24, About 702 of the world's natural rubber is used by the tire indus- try. The demand for all elastomers (natural and synthetic) is a derived demand, with approximately 50-602 going into tires, another 152 into nontire automotive products and the rest used for household and industrial goods such as rubber gloves, footwear and conveyor belts. The demand for natural rubber is determined by the rate of growth in the demand for tires, the composition of tires produced (radials), developments in the technology and developments 5/ World Bank, "Price Prospects of Major Primary Commodities, 814/86 Draft. Pag 16 Table 12S PIOXTION OF NATURAL tUBt, 1965-84 Malaysia Indonesia Thailand World Total 1965 917 716 216 2,352 (39.0)/a (30.4) (9.2) 1970 1,269 815 290 3,103 (40.9) (26.3) (9.3) 1975 1,459 823 3S5 3,315 (44.0) (24.8) (10.7) 1980 1,530 1,020 501 3,845 (39.8) (26.5) (13.0) 1983 1,562 1,007 587 4,025 (38.8) (25.0) (14.6) 1984 1,529 1,115 629 4,260 (35.9) (26.2) (14.8) /a umbers in parentheses are percentages of world total. Source: Rubber Statistics Bulletin, The International Rubber Study Group (118U), various issues. Page 17 Table 13: VOLUME OF WORLD AND INDONESIA'S NATURAL RUBBER PRODUCTION AND EXPORTS, 1960-84 Production Exports World Prdcto Indonesia's World Indonesia's Year total Indonesia share total Indonesia share - '000 tons - ---- I -- - '000 tons --- ---- X ---- 1960 2,035 620 30.5 1,850 577 31.2 1965 2,352 716 30.4 2,198 709 32.3 1970 3,102 802 25.9 2,853 770 27;0 1971 3,085 781 25.3 2t892 758 26.2 1972 3,120 800 25.6 2,849 738 25.9 1973 3,505 844 24.0 3,356 844 25.2 1974 3t445 816 23.7 3,199 801 25.0 1975 3,315 785 23.7 3,011 795 26.4 1976 3,575 857 24.0 3,249 816 25.1 1977 3,605 856 23.7 3,292 806 24.5 1978 3,715 885 23.8 3,317 866 26.1 1979 3,870 964 24.9 3,422 865 25.3 1980 3,830 1,020 26.5 3,329 981 29.5 1981 3,705 868 26.0 3,144 813 25.9 1982 3,750 880 24.0 39101 801 27.8 1983 4,025 1,007 25.0 3,449 941 27.3 1984 4,250 1,115.0 26.2 3,635 1,010 27.8 Sources: International Rubber Study Group; Directorate General of Estates, Ministry of Agriculture, Indonesia, ANNA 1 Page 18 Table 14: PROJECTIONS OF NATURAL RUBBER Growth rate (X) 1975 1985 1990 1995 1975-85 1985-95 'roduction ('000 tons) 785 1,060 1,300 1,520 3.1 3.7 Export Volume ('000 tons) 795 1,000 1,200 1,400 2.3 3.4 Export Unit Value (million Us$) 454 654 865 1,227 3.7 6.5 Export Value (million US$) 356 654 1,037 1,717 6.3 10.2 Source: International Rubber Study Group, Directorate General of Estates, Ministry of Agriculture, Indonesia, and Mission Estimates. in synthetic rubber (SR) technology. In the last two years, demand for tires in the US replacement market has been sluggish despite the falling oil price. This is due to the utilization of tires with longer tire life. Developments in tire technology in the energy conscious environment have been oriented towards down sizing of tires and extending the mileage attainable per tire. The growth in the SR industry has been dominated by output growth of emulsion SBRs which is the major competitor to NR in tire manufacturing. Developments in tire technology has tended to be concurrent with technical progress in the SR industry. In the last decade, R&D has led to the develop- ment of solution SBRs. NR and SR are close but not perfect substitutes. In the short run at least, a change in the relative market prices has only a small influence on the decision to choose one rubber over another. World elastomer consumption is expected to grow at about 2.81 p.a. over the 1985- 2000 period and demand for NR is projected to increase by 2.3Z p.a. over the 1985-2000 period ,nd demand for NR is projected to increase by 2.3% p.a. over the same period.". The largest increase is expected to take place in developing countries, particularly in China, India and the Republic of Korea, with their rapidly growing rubber-based industries. Other ASEAN countries that are ;xpected to increase natural rubber consumption significantly include major producing countries such as Malaysia and Indonesia, where the policy is to promote the development of rubber-based industries. Indonesia's domestic consumption of rubber is estimated to increase by an average of 6% p.a. between 1985 and 1995 which is in line with manufacturing output. Consumption of natural rubber in industrial countries is projected to grow more rapidly in Japan and the United States where radialization bas lagged behind Western Europe. The growth rate is expected to be faster in Japan with its burgeoning car and tire industries. 6/ Ibid. ANNEX I Page 19 25. Rubber is predominantly an export commodity. About 90% of the pro- duction is exported. During the 1980s, exports of NR are expected to follow production trends. Although domestic utilization in producing countries will increase, NR will continue to be produced mostly for export in unmanufactured form. Wood MR exports are projected to increase at 1.9% p.a. between 1985 and 1995 't and Indonesia's exports at 3.4% p.a. over the same period. 26. An examination of the composition of Indonesian rubber exports not only highlights the causes for Indonesia's relatively low unit export values, but also indicates changes in the pattern of Indonesian exports on its export earnings from rubber. The breakdown by grade of Indonesian rubber exports corresponds to the breakdown by type of enterprise. (Tables 15 and 16 show Indonesia's exports by grade). The two thirds that are exported as Standard Indonesian Rubber (SIR) 20 or SIR 50 are produced by smallholders; and the rest that is exported as latex or RSSI is produced on estates. As shown in Table 17, RSS Table 15: GROSS EXPORTS OF SIR BY GRADES FROM INDONESIA (tons) Period SIR 5L/5 SIR 10 SIR 20 SIR 50 Total 1971 24,769 - 69,629 29,881 124,279 1972 11,253 - 159,803 96,687 267,743 1973 15,637 - 188,089 141,569 345,295 1974 17,164 - 209,068 137,909 364,141 1975 12,646 9,165 251,307 128,188 401,306 1976 16,073 13,541 326,626 111,213 467,453 1977 19,822 16,437 395,813 89,334 521,406 1978 24,221 21,700 439,389 83,492 568,802 1979 28,921 22,420 443,985 76,259 571,585 1980 37,269 37,538 519,070 64,376 658,253 1981 29,712 34,203 446,972 45,935 563,513 1982 34,651 38,467 468,749 37,906 579,772 1983 38,070 50,439 584,859 36,259 709,626 1984 37,362 51,675 677,553 17,324 783,914 Sources: ANRPC, Quarterly Natural Rubber Statistical Bulletin, Vol. 6, No. 2, July 1981; GAPKINDO, Rubber Producers' Association Indonesia. 7/ Ibid. ANNEX 1 Page 20 Table 16: SUMMARY Of GROSS EXPORTS OF MR BY TYPES FROM INDONESIA (tons) Crepe Period RSS SIR rubber /a Latex Others /b Total 1971 257,896 124,279 94,352 33,363 247,925 757,815 19V2 211,117 267,743 199,369 35,552 20,124 733,905 1973 224,987 345,295 208,492 39,786 22,988 841,548 1974 194,400 364,141 190,053 32,633 13,515 794,742 1975 187,535 401,306 141,164 25,513 32,773 788,291 1976 161,849 467,453 122,577 38,013 21,581 811,473 1977 148,493 521,406 91,775 369055 2,447 800,178 1978 167,564 568,802 87,104 36,894 1,186 861,550 1979 167,382 571,585 93,268 27,169 1,600 861,004 1980 191,850 658,254 65,607 43t896 16ts25 976,131 1981 163,316 563,514 53,521 28,052 115 808,733 1982 158*894 579,772 21,866 36,865 211 797,608 1983 173,393 709,626 18,803 35,773 438 938,035 1984 168,482 783,914 20,104 36,928 130 1,009,558 /a Includes brown and pale crepes. From 1977 onwards also includes brown IX, 2X and 3X. /b Includes sole crepe (white and brown), thick remilled blanket crepe, scrap, reclipping and lump for remilling. Prior to 1977 also includes brown IXt 2X and 3X. SourcesS ANRPC, qurterly Natural Rubber Statistical Bulletin, Vol. 5, No. 2, JulyN8 1ubber Producers' Association, Indonesia. AMX 1 Page 21 Table 172 PUCINTACE DISTRIBUTIOI OF WORLD AND INDOSIMN EXPORTS BY TYPE AND GRMS 1975 1981 World Indonesia wort Indonesia Rss 46 24 42 20 RSS 1 3 4 9 17 RSS 2 9 1 6 1 RS 3 14 2 16 1 Other 9 6 10 1 TSR 36 51 46 70 TiSR5/5L 4 2 7 4 TSR 10 3 1 5 4 TR 20 19 32 31 55 TSR 50 9 16 6 6 Latex 8 3 8 3 Other 10 22 S 7 TotaL 100 100 100 100 Source: International lubber Study Group. grades are twice as important in world trade. For Indnesia 3511 is of greater prominence than the norm but its share of othe R 38 grades is mini- mal. TSR 20s share of Indonesia's exports is almost twice that of the world. From Tables 18 and 19 it is clear that there are significant differ- ences between the unit values of the various grades of Idonedsian rubber, with unit values for SIR 20 and SIR 50 being considerably lower than 355!. Sales are conducted in US dollars. The unit value for Indosois is about 20-252 lower than for Malaysia. On the basis of 1979 export unit values it was estimated that if Indonesia's grade structure had emaied uchange, but the price for each grade had be the sam as received by Malaysia, its eraings would have been 9X higer. And, if only the grade cmposition hd been changed, but the price received for each grade had traind unchanged, Indonesia's "port earnings would have bee 172 higer. tus, if the cost of quality upgrading ts less than the increa"d revenue geerated by upgrading, Indonesia would beefit from upgrading their rubber. ANNEX 1 Page 22 Table 18: UNIT VALUES FOR THE MAIN GRADES OF INDONESIAN RUBBER (c/kg) 1977 1978 1979 1980 1981 1982 1983 1984 RSS 1 79 93 121 138 116 84 99 98 SIR 20 73 82 107 112 97 73 100 92 SIR 50 69 77 103 107 93 70 86 91 Ratio SIR 20/RSSI 0.92 0.88 0.88 0.81 0.84 0.87 1.01 0.94 Ratio SIR 50/SIR 20 0.95 0.94 0.96 0.96 0.96 0.96 0.86 0.99 Ratio SIR 50/RSSI 0.87 0.83 0.85 0.78 0.80 0.83 0.87 0.93 Source: GAPKINDO (Rubber Producers' Association, Indonesia). Table 19: COMPARISON OF THE UNIT VALUE OF INDONESIAN RSSI AND RSSI AVERAGE PRICE 1977 1978 1979 1980 1981 1982 1983 1984 Unit value of Indonesian RSSI 79 93 121 138 116 84 99 98 Price of RSSI /a 92 111 142 162 125 100 124 110 Ratio 0,86 0.84 0.85 0.85 0.93 0.84 0.80 0.89 /a RSS No. 1, Spot New York. 27. Possible reasons for the price discrepancy are in its auction system, expensive credit paid by rubber exporters, longer tire to reach its destination, and lack of analysis and dissemination of market information. The difference in freight rate and shipping facilities from the export ports has resulted in different FOB prices of the rubber. The raw rubber fror the farmers goes to the processing plants in the areas where the FOB prices are higher. Since Indonesia occupies an important position in TSR supply, espe- cially TSR 20, the effect of change in grade structure will have a large effect on the balance of supply and therefore, on the prices. 28. TSR 20 is the main grade of rubber used by tire industries in the US. About half of total US imports since 1978 have come from Indonesia. The European tire industries use more TSR 10 and R88I, whereas in Japan combined grades are used, e.g., RSS III/IV and TSR 20/50. These grades, which are consumed by the tire industries, are 702 of the total MR productimn. EEC is ANNX I Page 23 very conscious of quality of rubber and thus imports from Malaysia; Japan imports mainly from Thailand. Indonesia is expected to supply } least 502 of the needs of the Eastern European couatries in the coming year.- The market share of Indonesian rubber in Eastern European countries is around 10 of total Indonesian rubber exports (Table 20). Eastern Europe import demand is expected to increase by 0.7X p. a. between 1985 and 1995. The fall in exports to Singapore in 1982 was a result of a ban on e3xports of low quality rubber. Table 20: INDONESIA--EXPORTS OF RUBBER BY COUNTRY OF DESTINATION, 1979-84 (based on volume datap X) 1979 1980 1981 1982 1983 1984 USA 32.8 34.4 37.0 42.5 40.6 46.4 Singapore 44.2 39.6 35.3 26.1 26.1 25.4 EEC 5.9 6.9 5.7 10.8 8.3 7.2 Japan 3.2 3.2 3.4 3.1 3.8 3.3 USSR 4.6 5.4 6.9 3.3 5.2 4.$ Other 9.3 10.4 11.7 14.2 15.9 13.4 Total 100 100 100 100 100 100 Source: International Rubber Study Group; GAPKINDO (Indonesia Rubber Producers' Association). 29. The upturn in NR prices in 1983, although influenced largely by economic recovery in the US, was reinforced by a prolonged wintering season which constrained supply response in the main producing countries of Southeast Asia. Prices began to fall in the Pecond half of 1984, due to mild wintering period of 1984 which led to greater crop production, particularly in Thailand and Indonesia. During the second quarter of 1985, the NR price fell to its lowest level since 1977. A fall in petroleum price is likely to result in an increase in motor vehicle production and use. An increase in motor vehicle production and use will, in turn, Laad to an increased use of elastomerst both NR and SR. For the long-term NR prices are projected to increase in real terms from 920/kg in 13s5 to 1080/kg in 1995,-ibe., an increase of 1.6X p.a. between 1985 and 1995._ Besides the gain from this expected price increase in real terms, Indonesia can increase its export earnings in the long run by increasing production and by raising the quality of rubber produced. 8/ Based on discussions with CAPKINDO (Rubber Producers' Association Indonesia). 9/ World Bank, "Price Prospects of Major Primary Commodities", Report 814/86, (draft) August 1986. Page 24 Indonesia's export earnings are projected to increase by 10.2% p.a. between 1985 and 1995 as compared to 6.3% p.a. between 1975 and 1985. Yields in Indonesia had been increasing as a result of more extensive planting of high- yeilding clones and improved management. The stagnation in average yields in Malaysian estates and Indonesia's comparative labor cost advantage and quality upgrading can help Indonesia increase its market share in Europe and capture market shares in Korea and China where rubber demand is growing fast. 30. Raw rubber produced by farmers is collected by the collectors/trad- ers and is further supplied to the processors. The fact that there has been no shortage of TSR 20 is attributable to Indonesian smallholders, who unlike their ctunterparts in the other major NR-producing countries, find little incentive to make sheets instead of slabs. The trading system will be more effective when rubber is standardized in cleanliness, size and form to conform to the raw rubber required by the industries. 31. For the smallholder rubber, the principal marketing channel leads through one or more middlemen to a private factory. The rubber is normally sol4 by tho smalliolder in the form of slabs, and an accurate assessment of the dry rubber content of the slab is seldom possible. Rubber processed in private fctories is sold mainly on bid and offer system to traders or end users. For the PUP/PTPs, the marketing of rubber is handled differently. The bulk of the output is auctioned through the Joint Marketing Organizations in twice-weekly auctions in Jakarta and Medan. Some is sold on government-to- government contracts. Auctioning method does not offer the ability to hedge which can be available to futures markets. More direct methods of monitoring and presence of PNP/PTPs in foreign markets should be advocated. C. Coffee 32. Coffee is a tropical product produced in developing countries, consumed mostly in industrial coutries. Coffee (arabica) was first introduced in Zndonesia around 1700. In the 18th and 19th centuries it was maji)y grown in West Java and was exported on the world market as "Java Coffee .- By 1885 Indonesia wa* producing over 60,000 tons of coffee a year and had become the second largest producer in the world after Brazil. Due to attack of leaf- rust, Indonesian pitduction declined by 75%. But through the introduction of robusta, it became a major producer again during the 1920s. Indonesia is now a major producer of robusta coffee, however 5% of the total coffee production is arabica grown mainly in Sumatra. 33. Coffee production in Indonesia increased by 5% p.a. between 1952 and ,1969. Betiween 1970 and 1980 production increased by 4.8% p.a. and by 3.2% p.a. between 1980 and 1985 (Table 21). The reason for higher increase in 1960s was due to a substantial price increase of robustas during that period due to the rapid increase in demand for soluble coffee. The increase in pro- duction mainly resulted from increased plantings by smallholders (Table 22). C Coffee is predominantly a smallholder crop and the increase in area planted 10/ J. deCraaff. The Economics of Coffee. Pudoc Wageningen, 1986. ANME 1 Page 25 was only in the smallholder sector in 1970s. Following frost in Brazil, a major expansion took place between 1976 and 1979 resulting in growth in pro- duction between 1979 and 1981 of 7.3S p.a. Indonesia's production of coffee during the Third Repelita averaged around 300,000 tons per year, of which more than 902 was produced in smallholder estates. So Indonesia's production capacity has increased substantially in the last eight years in response to the high prices in 1976 and 1977. The trees planted in the late 1970s are now mature and future production cap&-ity has to come from the new plantings of the last five years. Recent high prices are likely to lead to even higher production capacity. 34. Coffee producers adjust their production to changes in prices with some lags. As a perennial crop bearing only after a few years and fully prod,u ive after five to six years, the price elasticity of supply is low.,v This is particularly so for countries like Indonesia where production is mainly from smallholders. Table 21: INDONESIA: PRODUCTION OF COFFEE, 1967-1985 ('000 mt) Year -Smalholder Covernment Private Total estates estates 1967 140.3 7.4 5.8 153*5 1968 143.7 7.2 6.4 157.3 1969 160.8 7.9 5.0 173.6 1970 170.1 9.0 6.1 185.1 1971 162.0 10.9 8.0 180.9 1972 158.1 12.3 8.4 178.7 1973 140.3 5.6 4.2 150.2 1974 132.4 10.2 7.1 149.8 1975 155.4 9.6 5.4 170.4 1976 178.0 9.8 5.6 193.4 1977 177.9 10.3 5.8 194.0 1978 205.6 9.7 7.4 222.7 1979 256.8 11.3 5.6 273.7 1980 276.3 13.2 5.5 295.0 1981 290.4 16.2 8.3 314.9 1982 262.2 13.3 5.7 281.2 1983 287.2 10.1 8.3 305.6 1984 296.3 10.2 8.9 315.4 1985 320.5 14.6 10.2 345.0 Sources Directorate General of Estates. l1/ IbiJ. ANNEX 1 Page 26 Table 22: INDONESIA: DEVELOPMENT OF AREA PLANTED FOR COFFEE, 1967-85 ('000 ha) Year Smallhoders Government Prviate Total estate estate 1967 289.0 16.1 17.8 323.1 1968 299X4 22.3 17.8 339.4 1969 337.3 20.2 22.1 379.4 1970 351.1 20.4 23.4 394.9 1971 366.3 20.6 20.7 407.7 1972 356.9 29.3 19.0 395.1 1973 340.5 21.0 19.7 381.2 1974 346.7 20.4 19.4 386.6 1975 361,3 20.1 18.4 399.9 1976 402.0 19.9 18.2 440.0 1977 454.3 20.3 23.3 497.8 1978 477.1 21.8 21.7 520.6 1979 577.6 20.7 25.8 624.1 1980 663.6 20.9 22.9 707.5 1981 749.8 23.0 24.0 796.8 1982 759.2 23.6 20.2 803.0 1983 766.1 24.4 24.4 813.0 1984 782.6 24.4 23.0 830.0 1985 830.1 24.4 22.6 878.1 Source: Indonesia Directorate General of Estates. Average yields hardly increased during the 1970s. In 1981/82 average yields in Sumatra were about 600 kg/ha against 400 kg/ha on Java and even lower yields on the other islands. The dometic consumption of coffee remained stag- nant with consumption per person becoming less than 0.5 kg. Domestic coffee is usually made up of nonexportable produce. 35. The methods of processing and marketing depend on the commercial type of coffee produced (washed or unwashed arabica or robusta) and on the size and type of production units. In Indonesia the processing of coffee is largely decentralized. Coffee io hulled on the farm or in the village and then sold through traders to a large number of exporters and loosely super- vised by the government. The Directorate General of Estate Crops of the Department of Agriculture is responsible for planning, research and extension services within the coffee sector. The Association of Indonesian Coffee Exporters was established in 1979 to improve quality and trade practices in the coffee sector. In Indonesia neither marketing boards nor small farmer marketing cooperatives exist. Until 1982 a substantial portion of Indonesian coffee obtained export prices 5-20% lower than other exporting countries. In October 1983 a new quality grading system was introduced which specified six grades based on different moisture content and a maximum number of defects. ANNEX 1 Page 27 Price discounting then ceased. Farmers and exporters store coffee. Exporters store mainly in stores situated in the ports of shipment. The total capacity of warehouses in Indonesia is estimated at 330,000 tons or equivalent to about one years production, but the turnover is usually fast. 36. In 1979, with international coffee prices at peak, a new export tax was levied to bring prices more in line with other commodities and to keep down consumer prices of coffee. This tax was abolished in 1982. Local coffee prices fluctuate with prices on the world market. The wholesale price for coffee in Indonesia was about Rp 320/kg in the period 1973/75, in 1976 it went up to Rp 800/kg and was Rp 1,000/kg in January 1981. For coffee, there were the packages of the "Proyek Intensifikasi Kopi" (PIK) for the "rejuvenation" and "establishment" of coffee gardens for which credit could be obtained to a maximum of Rp 650x000 in 3 years (1979/80) at 6% interest and a grace period of 3 years. Because of low export prices since 1980, the expansion of the coffee area is no longer encouraged, and assistance is only provided for the intensification of existing coffee gardens. Indonesia is basically a low cost producer but marketing costs are high. Because of this the following domestic policies have been established: (a) control of production at a "safe" level; (b) improvement of the quality of coffee to export standards, especially that produced on smallholders' estates; and (c) arrangements for promotions in order to enhance domestic consumption. To meet the above objectives the government plans to (a) halt the expansion programs for coffee estatest (b) renew, rehabilitate and intensify coffee estates, and (c) construct coffee processing units at production centers within the framework of improving the quality of coffee. 37. Producing countries export the bulk of their coffee output to indus- trial markets. Most of the coffee exported is in the form of beans. Between 1961 and 1980 Indonesia's exports grew by 5.4% p.a. (Table 23). Between 1975 and 1985 Indonesia's exports increased by 5.8%. Indonesia, which has experi- enced a conflict between its plans to expand coffee capacity and the quota restrictions in the International Coffee Agreement, has made efforts to expand its market in nonmember countries. Major importing nonmembers are the cen- trally planned economies and many developing countries. Imports by these countries increased at about 5Z p.a. during the period 1979-84. The excess supply in the nonquota markets that has resulted from these efforts from producers - mainly Brazil, Indonesia, Mexico, Columbia and India -- has led to substantial discounts of up to 502 between rates to nonmembers and ICO members. The present International Coffee Agreement will last until September 1989 but quotas have been suspended since February 18, 1986. ANNEX 1 Page 28 Table 23: EXRTS OF COFFEE FROM INDONESIA, 1975-1985 ('000 bags) Year Total To To exports ICO members nonmembers 1975 132 127 5 1976 129 129 0 1977 160 160 0 1978 217 212 5 1979 223 220 3 1980 210 200 10 1981 207 159 48 1982 228 135 93 1983 262 146 116 1984 300 157 142 1985 283 146 /a 136 /b /a Actual exports April-September 1985 and quota October 1985-March 1986. /b Actual exports April-September 1985 and estimates exports to nonmembers, October 1985-March 1986. Source: International Coffee Organization 38. Major importers of processed coffee are the J3, the UK, Canada, Japan and France. Brazil is the only coffee-producing country with a large production of instant coffee. West Germany, Switzerland and the Netherlands have large coffee processing industries and export considerable amounts of unprocessed coffee. In most producing countries, the crop year starts in October. But in Brazil, Indonesiat Ecuador, Madagascar, Rwanda and Burundi it starts in April. These cropping years influence prices to some extent. During the coffee boom of the mid-1970s, net imports by the US, EEC and other Western Europe declined by 281, 121 and 302. since the world import share of the Unites States ha. declined from about 352 to 27X in the last 10 years, the totti reduction in world import demand is expected to be lower in 1986- 87, _ /World demand is expected to fall by 31 to 41 in 1986 and 1987 from the 1985 level. In the long run, world demand is expected to increase at about 1.31 p.a. The =ain contributors to the growth are Japan, USSR and EEC. 39. Japan's share of imports of coffee from Indonesia has increased from 2.4X in 1973 to 13.8Z in 1983 and US from 1.92 to 5.81 over the same period whereas, for the EEC it is around 21 which can increase if the quality of 12/ World Bank, Price Prospects of Major Primary Commodities, Report 814/86 (draft) August 1986. ANNEX 1 Page 29 exportable coffee is improved. Robusta accounts for 282 of Western Eurcpean imports, while French and UK robusta imports are over 50% of the total. Only 72 of West Germany's coffee imports are robusta. The ptojected high world prices in 1986 and 1987 are not likely to cause much reduction in West European consumption, mainly because of the recent sharp appreciation of their currencies. High consumption growth rates are expected to continue in Japan, the centrally planned economies, and Southern Europe. Since Japan, Spain and France import large amounts of robusta, Indonesia has a better chance in these markets. The market share of Indonesia's coffee imports during the last four years was 11.92 on average of South Korea's coffee import value. The demand for coffee in South Korea has been continuously increasing since the end of the Korean war. Indonesia's exports to the EEC are charged with a 5X import duty while African robusta exporters are exempt from that duty. 40. The ICA lifted its export quota in early 1986, effective until 1988. Because of the suspension of the export quota system, a US withdrawal would have no impact on the coffee market for the next year or two. High prices lead to a quota suspension under ICA Rules. Without further disruption of coffee supplies and in the absence of some price-supporting mechanis - prices are likely to decline rather sharply in late 1987 or early 1988.±31 41. However, there will be no difference for the next year or two as prices are projected to be high enough during that period for the quota system to be suspended. In the long run, prices will decline to previous levels, with the extent of decllt7 depending in large part on the planting response to the present Price boom_' It is likely that the collapse of the ICA will not lead to a "free" market in coffee. Judging from the past, attempts to form some control mechanism are likely to be undertaken once prices fall. Prospects 42. Coffee production, capacity, and exports have been estimated on the basis of the following equations: 13/ T. Akiyama, Short-Term Impact of a Collpase of the International Coffee Agreement (ICA) Export Quota Systemp January 8, 1986. 14/ Ibid. ANEX 1 Page 30 NEWPLCOF -34.0655 (-1.3394) + 0.0289 DEFCOFPRIN (-1) + 0.0394 DEFCOFPRIN (-2) (1.1212) (3.1118) + 0.0381 DEFCOFPRIN (-3) + 0.0250 DEFCOFPRIN (-4) (2.3105) (1.8015) R2 (COaR.) 0.412 SEE. 26-842 D.W. 2.29 PERIOD OF FIT s 1974-85 F (2, 9) : 4.857 DATE OF ESTIMATION : 2/18/86 VARIABLE ALMON LAG SUM DEFCOFPRIN (-1) (2, 4, FAR) 0.13 NEWPLCOF = NEW PLANTINGS OF COFFEE IN INDONESIA DEFCOFPRIN INDONESIAN PRODUCER PRICE OF COFFEE DEFLATED BY CPI IN RP/MT. COFFPRDIN -49.7128 + 0.6009 COFFCPIN (-2.3907) (14.4869) + 0.0120 DEFCOFPRIN (-2) + 0.0064 DEFCOFPRIN (-3) (6.5433) (3.6030) R2 = 0.95 SEE. 15.483 DW = 1.70 PERIOD OF FIT: 1973 1985 F (3, 9) : 7.546 COFFPRDIN - COFFEE PRODUCTION IN INDONESIA COFFCPIN = POTENTIAL CAPACITY OF COFFEE PRODUCTION IN INDONESIA DEFCOFPRIN = INDONESIAN PRODUCER PRICE OF COFFEE DEFLATED BY CPI IN RP/MT. ANNEX 1 Page 31 Table 24: SCENARUO 1 EXPORT PROJECTIONS OF COFFEE FROM INDONESIA 1986 1987 1988 1990 1995 Production ('000 tons) 348 373 400 410 460 Exports ('000 tons) 312 304 330 345 375 Export Price ($/ton) 2,626 2,295 2,244 2,482 3,000 Export, Value (million Us$) 819 698 741 856 1,125 Mission's Estimates. Table 24: SCEMARTO 2: PROJECTIONS OF COFFEE FROM INDONESIA 1986 1987 Production ('000 MT) 348 360 Exports ('000 NT) 312 294 Export Price ($/MT) 2,626 2,295 Export, (Value, Million US$) 819 675 1988 1989 1990 1995 Production ('000 mt) 372 372 372 420 Quota quantities ('000 mt) 148.6 150.5 152.5 162.7 Eport price ($/et) 2,468 2,596 2,730 3,300 Export (value, US$ mln) 367 391 416 537 Nonquota quantities ('000 at) 145.4 155.5 153.5 185.3 Export price ($Imt) 1,604 1,687 1,775 2,145 Export (value, US$ mln) 233 262 272 397 Total quota and nonquota exports volume ('000 mt) 294 306 306 348 Value, US$ mln 600 653 688 934 Mission's Estimates. 43. Two scenarios for coffee export projections are presented below: Scenario 1 is based on the assumption of no ICA export quota system. Produc- tion is expected to grow by 2.8Z p.a. between 1985-95 according to scenario 1 as compared to 7.31 between 1975-85, whereas under scenario 2, production is expected increase by only 1.91 p.a. between 1985-95. According to Scenario 2, up to first half of 1987, the figures will remain the same as Scenario 1, ANNU I Page 32 because ICA export quotas will not be in effect till then. Under Scenario 2 it has been assumed that the export quota system will become effective by second half of 197 and the quotas starting from the current level of 146,700 tons will increase by 1.3Z p.a. until 1995. Though the export price assumed for the period between 1988-1995 is 1OZ higher than scenario 1, the farmers will not get a higher farmgate price under the restrictions, which will have a dampening effect on production estimates and hence on exports. For non-quota quantities, the assumed price is 351 lower than the price for quota quanti- ties. Thus, both in terms of volume and value, Indonesia's exports will gain if there are no quotas, but Scenario 2 is most likely. D. Cocoa 44. Cocoa entered Indonesia from the Philippines via Sulawesi in 1560. In 1880 it was to be planted on Java as a substitute for coffee plants which had been destroyed by leaf rust. There are currently cocoa plantations in Central and East Java. There is a trend for the cocoa areas in Central Java to decline while in East Java, North and South Sumatra, South Kalimantan, South Sulawesi and other areas, plantations are expanding. Bulk cocoa comes from the Upper Amazon. It is a hybrid that is easy to maintain and yet is high yielding. 45. World production of cocoa is concentrated in a few tropical countries. Brazil, Cote d'Ivoire, Ghana, Nigeria and Cameroon account for about 751 of the total world production of cocoa. The production shares have significantly changed over the years. Ghana and Nigeria, with 251 and 21S, respectively, in 1970/71, held only 8.81 and 8.9Z, respectively, of the total by 1985, while Brazil and Cote d'Ivoire increased their share from 121 to 211 and 121 to 281, respectively, over the same period. Over the last ten years new producing countries with great potential are emerging, especially in Southeast Asia. Malaysia's production increased from 3,000 tons in 1969-71 to 100,000 tons in 1985 and Indonesia's went up from 1,800 tons to 30,000 tons over the same period. 46. In 1979 Indonesia's production of cocoa was 8,600 tons or 0.53X of total world production. Of this total production, 7,400 tons were produced by large estates. The share of Indonesia is at present about 1.52 of total world production but is expected to reach 1.91 by 1990. Indonesian Government's efforts for development of cocoa plantations include both yield-increasing and area-increasing actions by means of subsidies for fertilizer and other products. Indonesian cocoa production in 1967 was only 1,239 tons, increasing to 10,284 tons in 1980 and to 30,000 tons in 1985. Between 1973 and 1985 it rose by about 24Z p.a. (Table 25). Most of the cocoa is produced by state plantations. The total area increased by 10.61 p.a. between 1967 and 1985 from 12,839 ha to 78,386 ha (Table 25). The Government embarked on a massive development of cocoa plantations in the early 1980s thus making the country Asia's fourth largest cocoa producer after Malaysia, the Philippines, and Papua New Guinea. At present East Java and Southeast Sulawesi are the largest producers followed by North Sumatra. The Directorate General plans to develop in cooperation with state and private companies and smallholders, 40,000 ha of new cocoa plantations during the 1984-88 period. ANNEX I Page 33 Table 25t INDONESIA PRODUCTION AND PLANTATIONS OF COCOA, 1967-85 Year Production Plantations ('000 tons) ('000 ha) 1967 1.23 12.84 1968 1.21 12.86 1969 1.76 13.06 1970 1.74 12.11 1971 2.01 14.39 1972 1.80 17.13 1973 1.81 15.52 1974 3.19 17.56 1975 3.92 17.50 1976 3.91 15.34 1977 4.82 21.80 1978 5*63 25*76 1979 8.63 35.71 1980 10.28 37.08 1981 13.14 42.97 1982 17.26 48.43 1983 19.64 59.93 1984 23.30 68.68 1985 30.00 78.39 Sotnrce: Indonesias Directorate Geeral of Estates. 47. World consumption of cocoa is expected to grow at its historical rate of 1.81 p.a. from 1985 to 2000. However, Indonesian cocoa consumption is still low as the country's cocoa paste, powder and cocoa butter industries have not developed since their inception in the early 1970s. This sector has not developed significantly in recent years and in 1984 even had a decline of their exports from US$17.2 million to US$3.2 million. The reason for the drop was an in;reased demand for cocoa beas on the international market from US$26.3 million in 1983 to US$50.3 million in 1984 (see Table 26). ANNEX 1 Table 26: EXPORTS OF COCOA BEANS AND PROCESS CHOCOLATE, 1982-85 (Us$ min) Product 1982 1983 1984 1985/a Cocoa beans (whole and broken or roasted) 15.2 26.3 50.3 53.5 Processed 19.0 17.3 3.2 3.2 /a Estimate Source: Indonesia: Central Bureau of Statistics. 48. On the basis of available data projections of cocoa production in Indonesia, by taking vintage approach, and a yield profile based on the histo- rical productivity levels, is attempted. The results are based on supply estimates over relatively higher prices. The following are the equations which are used to project supply of cocoa in Indonesia. (1) NEWPLCOC - -3.8857 + 0.0007 DEFCOCPRIND (-4) + 0.5874 TIMETR (-2.077) (1.398) (2.3629) R2 (corr) 0.62 SEE: 2e5881 DW: 1.93 RHO (1): -0.386 Period of Pit: 1974-85 F(2t8): 9.204 NEWPLCOC = New plantings of cocoa in Indonesia DEFCOCPRIND = Indonesian producer price of cocoa deflated by CPI in RP/MT. TIMETR - Time trend. (2) COCPRDIN = -1.2911 + 1.1282 COCCPIN I 0.0003 DEFCOCPRIND (-2.3878) (38.2909) (2.2245) R2 (corr) 099 SEE: 0.674 DW: 2.63 Period of Fit: 1971 1984 l(211): 749.346 COCPRDIN Production of cocoa in Indonesia ('000 MT) COCCPIN - Potential production of Cocoa in Indonesia ('000 MT) DEFCOCPRIND Indonesian Producer Price of Cocoa deflated by CPI in (RP/MT). ANEX Page 35 49. Production costs in Indonesia are relatively low because of inter- planting with coconuts. The prospects for world cocoa output in the next 15 years will depend crucially on supply response and pricing policy adjust- ments during the next three years of low prices. Indonesian production is projected to be around 105,000 mt in 1995 which indicates an increase of 13.3X p.a. from 1985 level (Table 27),~ Total world production is expected to reach 2.3 million tons in 1990. Table 272 PRODUCTION OF COCOA BY SELECTED COUNTRIES ('000 tons) Country 1975 1980 1985 1990 1995 Brazil 258 349 415 534 534 Cote D'Ivoire 231 403 552 616 718 Ghana 397 258 173 239 278 Nigeria 216 155 175 163 154 Cameron 96 120 123 106 101 Malaysia 17 43 116 189 188 Indonesia /a 3 7 30 65 105 /a Mission's estimates. Sources: FAO Production Yearbook Tapes (Actual) World Bank Economic Analysis and Projections Department (Projected). Table 28: EXPORTS OF COCOA BEANS 1975-85 Year Volume Value ('000 tons) (US$ mln) 1975 1.1 1.4 1976 1.3 2.2 1977 2.0 5.1 1978 2.2 7.2 1979 3.6 9.9 1980 4.7 10.1 1981 6.8 11.3 1982 11.4 15.2 1983 15.9 26.3 1984 24.3 50.3 1985 /a 27.6 53.5 /a Estimate SourceS Indonesia: Central Bureau of Statistics AN1 Page 36 50. Between 1975 and 1985 cocoa exports rose by 381 p.a. Government's efforts to increase cocoa exports have been spurred by rising international cocoa prices averaging US$2,232/ton in 1983 as compared to an average of US$1,8915/ton in 1982. The reason for that was an extended dry season which adversely affected the Ivory Coast and Chana, the two largest producers of cocoa. Cocoa prices in the short run are expected to remain low. In 1984/85, there was a market surplus of 62,000 tons after 2 consecutive seasons of defi- cit. In addition to the current supply/demand conditions, the level of prices in the short run will be affected by the timing of the anticipated liquidation of the 100,000-ton buffer stocks held by the ICCO. Although Indonesia is a small exporter at present, the future of the International Cocoa Agreement is of some concern to the potential growth in exports of cocoa in Indonesia. 51. The Netherlands, Singapore and the Pederal Republic of Germany are the major importers of cocoa from Indonesia. In 1984, the Netherlands impor- ted 11,400 tons, Singapore 6,800 tons and Germany 4,200 tons. Indonesia also exports to Japan, Italy, Belgium, the US, FPrnce JQd several other European countries. Table 29 shows the forecast for cocoa export and production. Between 1985 and 1995 production and exports ar espected to increase by 12.51 p.a. and 12.61 pea., respectively. Table 29: COCOA FORUCAST FOR INDONESIA Growth rates (%) 1985 1990 1995 1975-85 1985-95 Production ('000 tons) 30.0 60.0 97.0 22.5 12.5 xport (volume, '000 tons) 27.6 55.0 90.0 38.0 12.6 Export (value, US$) 53.5 94.4 169.7 44. 12.2 Mission estimates Conclusions 52. In order to maintain and expand the lvel of exports of cocoa and to improve its competitiveness, the Governmet will need to improve the quality of its product. To this effect the Directorate General1f Exports announced on November 1, 1985, u system for export certification.- The certification system includes reguiation of the SPM (Certificate of Quality Standard) and SM (Certificate of Quality). According to this only those cocoa beans can be 15/ Indonesia, Business News, No. 4288/95. AUSX 1 Page 37 exported which fulfill trade standards. To implement this regulation the Government has appointed agencies and laboratories for testing. 53. Indonesia seems to have considerable potential for increasing its cocoa exports from 30,000 tons in 1985 to 90,000 in 1995, and export earnings are expeced to grow by 12.2% p.s. between 1985 and 1995. E. Tea 54. Jill Jacobson, a Dutch- tea expert established his first tea gardens in West Java in 1827. By 1930, there were a total of 329 tea estates in Indonesia, of which 286 were in Java. Before World War II the Indonesian tea industry comprised 138,000 ha of state owned estates snd about 75,000 ha of asaltholders. Exports amounting to 83,000 tons constituted 19X of the world export volume, Its value constituted 8X of total Indonesian exports and was the second largest foreign currency earner in the agricultural sector. Since 1966 intensification of plantations has been executed, Tea gardens located below the elevation of 800 m have gradually been converted to other more suitable crops. Table 30 shows the trend of development of tea estate area since 1950. Table 30: AREA AND PRODUCTION OF TEA IN INDONESIA Year Area Production Productivity '000 ha '000 tons kg/ha 1950 81.7 23.2 283 1955 80.3 38.5 480 1960 72.9 41.3 567 1965 1:9.8 79.8 614 1970 117.0 64.6 552 1975 100.7 70.1 696 1976 101.3 73.8 729 1977 95.4 82.9 869 1978 102.5 92.1 899 1979 108.0 97.2 900 1980 112.7 106.2 942 1981 106.5 109.1 1024 1982 111.4 92.7 832 1983 111.7 110.3 987 1984 116.6 118.7 1,018 1985 118.8 128.9 1,085 Source: Indonesia Directorate Ceneral of Estates. 55. This trend of development led the World Bank to fund a project in West Java, covering several thousand hectares of tea plants, rehabilitating many factories and constructing some new ones. Since 1971, the support given Page 38 by the World Bank has not been limited to state-owned enterprises but also to smallholders and private estates. In 1985 about 591 of production comes from state-owned enterprises, 221 from smallholders and 191 from private estates. (Table 31). Table 31: PRODUCTION OF TEA IN INDONESIA, 1967-1985 ('000 tons) Smallholders Government Private Total estates estates 1967 38.2 24.9 12.9 76.0 1968 33.1 30.5 12.1 76.1 1969 31.2 30.9 9.5 71.6 1970 20.6 43.4 9.3 64.2 1971 14.5 36.5 10.0 62.0 1972 11.9 37.4 10.5 59.9 1973 14.3 43.2 10.1 67.5 1974 ' 13.8 40,1 11.0 65.0 1975 14,1 46.2 9.8 70.1 1976 13.3 49.4 11.0 73.8 1977 17.3 51.4 14.2 82.9 1978 17.4 59.0 15.7 92.1 1979 19.1 61.2 16.9 97.2 1980 20.5 68.2 17.5 106.2 1981 23.8 71.9 13.5 109.1 1982 16.5 60.6 15.6 92.7 1983 22.9 70.4 17.1 110.3 1984 25.4 73.5 19.8 118.7 1985 28.4 76.2 24.2 128.9 Source: Indonesia Directorate Ceneral of Estates. 56. In 1979, vorld tea production was recorded at 1.8 million tons and experts at 822#000 tons. In the same year, Indonesia's production of tea was 97,200 tons or 5.51 of world total production. Of this Indonesia exported 53,600 tons of dark tea produced by large estates. The remaining was consumed dbmestically generally in the form of green tea produced by amallholders estates. 57. lTe large production increases in the last 15 years (5.61 p.a.) have come from yield improvements. Production increased by about 8X in 1984 and by about 9X in 1985 largely as a result of better extension services being pro- vided to smallholder tea plantations under the smallholder Nucleus Estate Project. Development of smaliholder tea under state guidance has resulted in yields increasing from 500 kg/ha to 700-1,000 kg/ha. Although further production increases are projected, the rate of increase is expected to be lower than in the past as yields are already at an optimal level. The ANNEX 1 Page 39 following equation has been used to project production of tea in Indonesia. A vintage approach could not be taken because of unavailability of data on yield profile and new plantings. LN TEAPRDIND * 2.4681 + 0.0425 Ln EXPTM (2.2868) (7.0224) + 0.19929 Ln DEFTEAPRDPR (-1) (1.5687) - 0.0954 Ln DUM82IND (-1.2327) a2 (corrected): 0.82 SEE: 0.69320E-01 DW: 1.64 Period of Fitt 1971-84 F(39 10): 20.356 TEAPRDIND K Production of tea in Indonesia. ('000 IT) EXPTM t Time trend. DEFTEAPRDPR Indonesian Producer Price of Tea deflated by CPI (RP/MT) DUM82IND Volcanic Eruption Dummy, 1982 58. World production of tea is expected to increase at an average rate of 2.7Z p.a. during the period 1985-2000. Indonesia's production of tea is expected to increase by 3.1% p.a. between 1985 and 1995, compared to the higher growth rate of 6.3% p.a. between 1975 and 1985. African te.p*'oducing countries and Indonesia are expected to help satisfy increating espott demand for tea. AX Page 40 59. Indonesia's consumption per capita is only 200-300 grams per year. The domestic consumption of tea in 1979-1984 period fluctuated between 28,900 and 35,400 tons a year. Most of the exports are of black tea, although domes- tic demand is for green tea. Domestic consumption of tea is greatly dependent on the growth of production as well as the price of tea relative to other beverages. Domestic demand has risen since PT Sinar Sosro (Indonesia) started producing ready-sweetened bottled tea. The company now produces around 500,000 bottles of its "Teh Botol" and is the country's major producer of alcohol-free drinks, 60. Export quality tea is sold mainly through auctions on offer samples in Jakarta. In addition, an effort is now being made to market the tea straight to client-packers and blenders abroad. Tea auctions are conducted by the joint marketing office every Wednesday, and are attended by leading tea buyers throughout the world. To be able to compete with the other tea producing countries, the Indonesian Government has issued general guidelines for tea quality standardization. 61. Black tea prices 1 which averaged 1980/kg in 1985 are expected to increase to 2050/kg and 230¢/kg in 1986 and 1987, respectively, as a consequ- ence of (a) increased purchases by blenders; (b) the expected slowdown in the growth of production; (c) the sustained increases in coffee prj5ys; and (d) the appreciation. of the pound sterling against the dollar. - 62. Indonesia is the world's fifth largest tea producer and exporter behind India, Sri Lanka, China and Kenya. Between 1975-1984 exports of tea increased by about 4.81 p.a. (Table 32). Major importers of Indonesian tea are US, Pakistan, Australia, Singapore, the Netherlands, Egypt, Canada, West Germany and the UK. EEC share of imports of tea from Indonesia increased from 3.7X in 1973 to 4.31 in 1983 and US from 14.31 to 19.11 over the same period. In 1984 about 171 of Indonesian tea exports went to Pakistan, 191 to the US and 141 to the UK. Green tea is exported largely to Singapore, Hong Kong and Malaysia. Consumption is expected to stay strong in Pakistan, India and Egypt. Developing countries share of imports is expected to increase from 451 to 551. Indonesian black tea has been subject to quality standards developed by the Ministry of Trade which stipulates the requirements that must be fulfilled regarding quality control and packaging. 16/ Represented by the average of all tea sold at London auction. 17/ World Bank, Price Forecast for Major Primary Commodities, Report No. 814/86 (Tea Draft). ANNEX I Page 41 Table 32: EXPORTS OF TEA FROM INDONESIA, 1975-1984 Volume Value '000 tons (US$ min) 1975 60.4 53.1 1976 60.3 55.0 1977 66,1 121.0 1978 61.6 92.3 1979 65.9 91.7 1980 75.8 94.9 1981 83.2 95.5 1982 76.3 116.8 1983 75.1 119.3 1984 91.6 220.0 Source: Indonesia, Directorate General of Estates. 63. Indonesia is expected to increase its export quantities by 3.71 p.a. between 1985 and 1995 (Table 33), while exports from Sri Lanka are expected to be statnant and India's e2ports are projected to decline rapidly mainly due to increasing domestic consumption. So Indonesia should be able to capture larger market shares in Singapore and Malaysia. Over 70X of total consumption of tea in Malaysia is met by imports. Table 33: PROJECTIONS FOR TEA Growth Rate 1975 1985 1990 1995 1975-85 1985-95 Production 70.1 129 145 175 6.3 3.1 ('000 tons) Exports 60.4 89 110 128 4.0 3.7 ('000 tons) Exports, Value 52 117 220 324 8.4 10.8 (US$ mln) Mission estimates ANEX 1 Page 42 Indonesian exports in value terms are expected to increase by 10.8 y.a. between 1985 and 1995 compared to 8.42 p.a. between 1975 and 1984.8 Malaysia imports tea from different countries each year, such as Indonesia, Peoples' Republic of China, Sri Lanka, as well as through Singapore and Hong Kong. In Malaysia, tea production is not a priority in the agricultural program. In the last 5 years, tea production of Malaysia has been less than 3,000 tons p.a. while in the previous years it was always more than 3,000. On the other hand, tea consumption in Malaysia has grown to 6,000 tons p.a. recently. Production costs of tea in Malaysia are estimated as being high compared with production costs in other tea producing countries. The share of Malaysia's imports of tea from Indonesia has increased from 12.9Z to 44.52 between 1973 and 1982. Indonesia should strive to capture a larger share especially in tea black dust and leaf to Malaysia and for green tea to Singapore where the market share has gone up from 102 in 1982 to 36Z in 1984. F. Palm Oil 64. The Indonesian oilseeds economy has been characterized in recent years by a rapid increase in domestic demand due to high rates of growth in population, per capita income and a high income elasticity of demand for oilseed products. The edible oil sector is dominated by coconut oil and palm oil with each accounting for over 40% of total consumption. Ten years ago, coconut oil provided about 902 of total oil consumption, but since then per capita consumption of coconut oil has fallen while that of palm oil has risen rapidly. The change in consumption shares of coconut oil and palm oil is largely explained by differences in the growth of production in the two sectors (Table 34). About 982 of palm oil production is accounted for by 20 public and private estates. This production structure has encouraged the rapid adoption of high yielding planting materials, In contrast, coconuts are almost entirely a smallholder crop. It is only in recent years that coconut rehabilitation, replantings and new plantings have benefited from the use of higher yielding materials. In Repelita IV the emphasis is to raise substan- tially the area of coconuts and oil palm through new plantings, replantings and rehabilitation. Palm oil has been designated by the Government as the "Prima Donna" of all the non-oil exports from the estate crop sector. 65. The area of coconut estatbs has seen a substantial increase between 1979 and 1983, but a much lower one since then, making the total average growth rate of 9.22 p.a., most growth being in smallholder estates. 18/ These projections are based on August 1986 price projections by EPDCS. ANNEX 1 Page 43 Table 34: INDONESIAN PRODUCTION OF COCONUT OIL AND PALM OIL ('000 mt) Year Coconut oil Palm oil 1961 511 146 1965 439 157 1970 525 217 1975 601 411 1980 712 721 1981 665 742 1982 762 838 1983 679 950 1984 508 1,044 Source: FAO Table 35: ACREAGE OF PLANTINGS AND PRODUCTION OF PALM OIL Year Area Production ('000 ha) ('000 tons) 1970 134 217 1975 189 397 1980 295 721 1981 319 800 1982 330 887 1983 406 983 1984 440 1,044 1985 469 1,147 Source: Indonesia Department of Agriculture 66. About 78Z of Indonesian palm oil production comes from North Sumatra. In 1985 Indonesia was the world's second palm oil producer after Malaysia whose total production was 4.1 million tons. From Table 35, it can be seen that between 1970 and 1984 the area under production grew at an aver- age annual rate of 91 while total production was rising at around 12%. this implies that productivity grew at around 3%. This growth in productivity was due primarily to the increase in the number of trees reaching maturity. In 1983 almost 70% of the area was under state plantations which have been the primary source of growth in production (Tab.e 36). The Government is making efforts to encourage private enterpreneurs, smallholder and state companies to continue with new plantations. The GOI is continuing to give priority to the AN= 1 Page 44 oil palm sector, which is being developed particularly under the Nucleus Estate and Smallholder Scheme (PIR). In June 1985 a new PIR program designed to encourage private investment was begun. Under the program new plantations have to adopt the PIR pattern and conform to the regulations such as (a) the ratio of nucleus estate to smallholder area must be 20:80; (b) the nucleus estate company finances investment for smallholder oil palm planters which is to be rupaid by government banks when the plants are 4 to 5 years old and then debted to the farmers who are participants in the PIR scheme; and (c) the nucleus estate company will develop food crop areas and housing for the farmers under contract with the Government. Although 18 companies have obtained permits for new plantations or extensions to existing plantations, little progress can be seen. The incentives given to private investors are insufficient. Specific disincentives includes (a) the 20s80 nucleus estate:smallholder ratio, which has been relaxed as part of the May 6 package, is too restrictive; (b) the high absolute levels and volatility of export taxes in the past concerns investors; (c) the requirement that the nucleus estate provide initial (4-5 years) financing of the sallholder areas is financially burdensome; (d) the domestic quota system that restricts export licenses to private estate companies is a problem; and (e) the general disinclination to invest in tree crops because of their long start-up times and long payback periods, especially in a smallholder scheme with its associated social and financial obligations for the nucleus estate. 67. The world distribution of palm oil production has changed markedly over the last decade. In 1965, 731 of world palm oil output was produced in Africa, 23% in Asia and 31 in Latin America, whereas in 1984 almost 741 was produced in Asia, 201 in Africa and 41 in Latin America. The major factor for the change in the geographical distribution of palm oil production was the tremendous increase in Malaysia's production. Malaysia's production has increased at about 191 p.a. since 1961 and is now more than 502 share of world outpute ANNEX 1 Page 45 Table 36: PALM OIL AREA PLANTATIONS, 1979-85 ('000 ha) Smallholder Large private State-owned Year plantations estates plantations Total 1979 3.1 81.4 176.4 260.9 1980 6.2 88.8 199.5 294.5 1981 5.7 100.0 213.3 319.0 1982 5.9 100.7 259.3 365.9 1983 6.9 101.9 261.0 368.8 1984 37.4 107.2 294.9 439.5 1985 /a 37.8 107.2 324.0 469.0 /a Estimate Source: Indonesia: Directorate G6neral of Estates Table 37s PALM OIL PRODUCTION BY MAIN COUNTRIES (5000 tons) Year Malaysia Indonesia Nigeria World 1961 95 146 538 1.277 (0.7) (11.4) (42.1) 1965 150 157 574 1,378 (10.9) (11.4) (41.7) 1970 431 217 540 1,982 (21.8) (11.0) (27.3) 1975 1,161 411 640 3,195 (36.3) (12.9) (20.0) 1980 2,575 721 675 5,098 (50.5) (14.1) (13.2) 1981 2,821 742 363 5,398 (52.3) (13.8) (6.7) 1982 3,510 838 329 6,277 (55.9) (13.4) (5.2) 1983 3,017 950 348 5,870 (51.4) (16.2) (5.9) 1984 3,717 1,044 750 6,810 (54.6) (15.3) (11.0) Note: Figures in parenthesis are Z share of world Source: FAO ANNEX 1 Page 46 68. The domestic requirement for vegetable oil in Indonesia is largely for coconut oil. The increase in area during Repelita III averaged only 3.91 per annum and production rose by only 0.11 of the 2.1X target. Crude palm oil and palm kernel ril were used as substitutes for coconut oil. Most of the palm oil on the domestic market goes to cooking oil factories, Other uses of palm oil are the fractionation, refinery margarine, soaps, chemicals and cattle feed industries. Fully 76X of the available palm oil is used in the cooking oil industry. In the 1970s the domestic allocation reached only about 29.5% of total production, and by 1985 it has gone up to about 601 of total production for reasons given below. 69. As palm oil production was increasing, domestic consumption was also rapidly increasing at an average annual rate of 281 between 1970 and 1984. A rapid increase in domestic consumption occurred after 1976. Between 1976 and 1984 domestic consumption grew at an average annual rate of 601. This rise has occurred as a result of palm oil being increasingly used as a substitute for coconut oil. Following COI's recognition of the growing deficit of coconut oil and the fact that coconut oil prices generally command a premium to oil palm in the international market, a policy was instituted in November 1978 to substitute palm oil and palm kernel oil for coconut oil for domestic consumption. The policy operates through a system by which a large per- centage, averaging about 601 of output, is allocated to the domestic market at a controlled price, usually below world market prices. This policy is rein- forced by export measures designed to stabilize domestic edible oil prices and secure regular supplies of oil for the local market. The allocation quota of palm oil to be supplied to the domestic market by each producer is set twice a year by the Joint Marketing Office. 70. The domestic selling price for palm oil is fixed by the Government based on palm and palm kernel production costs with an allowance for profit. It has generally been fixed between 30-501 below the export price. The export tax applicable to palm oil and palm kernel oil exports has been such that the domestic retail price has also been well below the export price. At the end of March 1983, the rupiah was devalued from Rp 970 per US dollar. This caused the export price of crude palm oil to rise to Rp 310/kg (fob Belaman), com- pared with an allocation price of Rp 250/kg. Consequently, GOI raised the allocation price to Rp 295/kg in order to reduce the difference between domes- tic and export price and to assist in securing domestic supplies of edible oils. With the retail market price of palm oil being priced below that of coconut oil in the market, it is apparent that substitution between these two oils occurs. Given adequate price differentials and time for adjustment, palm oil could increase its relative share to 50-601 of the refined oil market. In the past producers of palm oil have preferred to export their production than to sell on the local market as the price on the export market was significant1.y higher, sometimes twice as high. Export restrictions and domestic price controls are a major problem to investors in oil palm. 71. Coconut and palm oil are subject to a system of minimum export prices through the operation of both an export duty and export surtax. The revenue from these taxes is used to finance research and expansion programs* The export duty is fixed at 5% ad valorem. The surtax is a variable element ANNEX 1 - Page 47 determined as a percentage of the minimum export price which GOI now reviews monthly, on the basis of both movements in world market prices and the rela- tive price changes between coconut oil and palm oil. Changes in the export surcharge have been frequent in recent years, especially with the devaluation of the rupiah. For example, the surtax for crude palm oil as a percentage of the export price was 14Z, 2.52 and 02 in 1980, 1981 and 1982, respectively. The policy of taxing exports of oil palm products forms an important element in GOI's pricing strategy to ensure prices and plentiful supplies of palm oil for the domestic market in line with the coconut oil/palm oil substitution programs, but it does so at a great cost in terms of reducing the profitability and increasing the uncertainty of oil palm production to private investors. Alternative schemes to achieve the same ends such as targeted subsidies on consumption, should be explored if the full production potential of private activity in oil palm production is to be realized. The fall in 1982 exports was due to the policy of the Government which limited the exports of palm oil to secure adequate supply for the domestic market. This limita- tion was executed through, among others, the raising of the level of export tax as well as the imposition of additional export tax (PET) on palm oil and stearin. In July 1984 Indonesia reduced its export tax on crude palm oil from around 302 to 102 and removed entirely the 302 export dut- on crude and RBD palm stearin. In July 1985, to encourage exports, the 5Z export tax was removed. Manipulation of prices to this degree is a powerful disincentive to private investment. 72. Although production of palm oil has increased over the years, exports had been tending to decline. In 1981 exports dropped to 196,300 tons from the level of 503,000 tons of 1980. The reason for the drop was the government policy to sell part of production on the domestic market. Between 1982 and 1983 exports increased and in 1984 the increase was disrupted by the imposition of additional export tax. 73. Imports of coconut and palm oil made by the state trading agency (BUL0G) are free of duty or tax whereas an import duty of 30X and an import sales tax of 52 are levied on imports by private traders. Consequently most imports are handled by BULOG. There is no apparent rationale for providing BULOG with this monopoly. 74. The major importing countries have also changed dramatically since 1975. In 1975, industrial countries absorbed about 702 of total imports of palm oil products, while developing countries imported 302. By 1980, these ratios were reversed, with the largest import growth occurring in Asia, par- ticularly in India and Pakistan and other countries like Iraq, Saudi Arabia, etc. The developing countries' imports increased from 304 in the early 1970s to 682 in 1984. 75. The industrial countries with the exception of Japan currently have high levels of consumption of fats and oil: (30 kg per capita is seen as the saturation point). Imports of Japan are expected to increase by 3.02 p.a. between 1985-1995 whereas US imports will increase by 2.82 p.a. over the same period. Therefore, market growth is projected to occur in the developing countries, especially in Asia where incomes should increase relatively rapidly for the remainder of the century. For example India's imports are expected to ANNX 1 Page 48 increase by 4.42 p.a. between 1985 and 1995. Moreover, in the industrial countries, especially the EEC and other Western European countries, soybean oil and palm oil are expected to increase their market share by substitution for other oils due to their lower relative prices. Imports of potential markets are given in Table 38. 76. The development in the market for palm oil is growing fast, parti- cularly in Africa and the Middle East. Among developing countries, Asia and Africa are the important palm oil consuming continents with Asia accounting for 43Z of total world consumption in 1980 and expected to increase its share to 501 by 1995. The system of subsidies and tariff protection that prevails in the EEC and the US will tend to make it harder for potential exporters of palm oil to penetrate these markets. Table 38: IMPORTS OF PALM OIL ('000 tons) Country 1978 1980 1982 1983 1984 India 400 722 417 647 571 Pakistan 132 211 253 372 345 Saudi Arahia 56 52 95 122 125 Bangladesh 0 14 82 79 79 Singapore 321 692 527 408 748 Netherlands 158 204 151 192 166 Source: FAO. 77. In line with the pace of development, the palm oil processing indus- try in Indonesia has in the last five years experienced tremendous increases in the area of fractionation and refining as is evident from Table 39. As a result of the government's coconut oil/palm oil substitution policy, invest- ment in palm oil processing and refining has been made attractive and con- trolled prices have ensured the supply to processors and refiners. The capa- city has increased from 486,000 tons in 1979 to 1.9 million tons in 1983. Policies that are more neutral with respect to domestic processing capacity should be pursued in order to avoid uneconomic investment in processing facilities. ANX I Page 49 Table 39: DEALOPHENT Of PALW OIL PROCESSING INDUSTRY ('000 tons) Average 1979 1980 1981 1982 1983 increase (%) Fractionation and refining 250.0 725.0 810.0 911.1 1,556.0 46.25 Refining 116.0 116.0 116.0 116*3 135.0 4.0 Shortening and margarine 30.0 42.0 60.0 66.7 109.0 39.25 Soap 80.6 80.6 80.6 80.6 103.0 7.0 Others 9.6 9.6 9.6 9.6 26.0 42.75 Total 486.2 973.2 1,076.2 1,164.3 19929.0 46.0 Sources Indonesia Directorate General for various industry. Prospects 78. As palm oil is a tree crop, a vintage approach is followed in estimating future production levels. Potential production values were calculated using new/replanting data. The yield profile asoumed and the areas planted are given below. Since the yield profiles do not depend on the type of enterprise, only one figure for total planted area is shown (Table 40). Table 40: PAhIX O1L PRESENT AND EXPECTED PLANTINGS ('000 ha) Year Area Year Area Year Area 1965 1 1976 14 1987 65 1966 4 1977 30 1988 65 1967 0 19T6 12 1989 65 1968 10 1979 20 1990 65 1969 1 1980 29 1991 65 1970 15 1981 34 1992 65 1971 6 1962 12 1993 65 1972 6 1983 12 1994 65 1973 6 1964 45 1995 65 1974 24 1985 52 1975 8 1986 60 AM 1 Page 50 (1) CPOQACTIN - 11.1807 + 0.8998 CPOQPOTIN (28.4562) 4 55.1250 PRRT3 (1.9415) R2 (corrected) 0.997 SEE: 16.658 DW:2.0 RHO (1): 0.73 Period of Fit: 1965-84 F (2, 16): 2575.197 CPOQACTIN - Palm oil production in Indonesia CPOQPOTIN = Palm oil production capacity in Indonesia PRRT3 = Ratio of palm oil unit value and rubber unit value in Indonesia On the basis of equation No. 1 production of palm oil in Indonesia has been projected (Table 41). Table 41: PRODUCTION OF PALM OIL IN INDONESIA ('000 mt) Actual Projected 1970 1975 1980 1985 1990 1995 217 411 691 1,150 2,000 3,400 Between 1970 and 1980 production grew by 12.3% p.a., and between 1980 and 1990 it is expected to grow by 11.21. This annual growth rate is expected to be sustained through 1995. 79. The projections of domestic consumption are based on equations (2) and (3). Income elasticity from equation (2) is 1.29 and price elasticity of demand is -0*05. Elasticity of ratio of palm oil and coconut oil consumption with res ect to real palm oil price is -2.08 and to real coconut oil price is 1.44 (Equation 3). Page 51 (2) LN PCVOTCINO -32f547 + 1.2883 LN PCDFGDPIND (-4.7485) (14.0242) - 0.05273 LS DFVOPRIN (.1.1014) R2 (corrected): 0.958 SEE: 0.08478 DW: 2.67 Period of Fit: 1966-1983 F (2, 15): 196.883 PCVOTCIIO = Per capita consumption of palm oil and coconut oil in Indonesia PCDFCDPIND - Per capita GOP in Indonesia DFVOPRIN - Weighted ratio of p1lm oil and coconut oil (consumption is used as weights) (3) RINO a -0.2497 - 0.0002 DFPQPRINO (-2.1166) (-2.9251) + 0.0001 DFCOPRINfO + 0.0349 TIME (2.9952) (6.8285) - 0,1523 D76 (-2.1145) R2 (corrected) 0.853 SEE} 0.0722 DW: 1.92 RHO (1): 0.298 Period of Fit: 1968-1984 F (4, 11): 22.834 RINO - Ratio of palm oil to coconut oil consumption in Indonesia DFPOPRINO = Palm oil price deflated by CPI in Indonesia DFOOPRINO a Coconut oil price deflated by CPI in Indonesia Time = Time trend D76 - Dummy variable for 1976 ANNX 1 Page 52 Table 42: PAIX OIL CONSUNPTIOI An POTs ('000 at) Year Domestic consmption Exports 1970 32 159 1975 94 386 1980 206 353 1985 650 500 1990 1,140 860 1995 1,400 2000 Sources: PFA (historical) mission estimtes (projections) 80. Latest growth rate of real CDP and population from GDP base case are used. Based on above production and demand projections, the exportable surplus was projected. Domestic conoumption grew 221 p.a. between 1970 and 1985 and is expected to grow by 82 p.a. between 1985 and 1995. Exports increased by 7.92 p.a. betwee 1970 and 1985 and are expected to increase by 14.92 poa. between 1985 and 1"5. Table 43: EXUORT PROJECTIOVS Year Price of pals oil /a FOB price Volum of exports Value of exports ('000 Mt) (US$ mln) 1985 SOO 411.7 S00 206 1986 275 224 557 125 1987 270 219 620 136 1990 453 374 660 322 19"5 64S 535 2,000 1,070 /a Malaysian, 5X bulk, CZ? N.V. Iturope. Projections by EPDCS as of ,Atiust 1986. S>~urce: mission Estimates. ANNEX 1 Page 53 Conclusions 81. While the prospects for consumption of palm oil in domestic markets and foreign markets are good, production may not keep pace as government plantings can be expected to drop because of budget limitations and private plantings are unlikely to be vibrant given the present inadequate incentive structure. With technological developments, the uses of palm oil are widening whether it be as raw material for oleochemicals industry or as fuel diesel. Palm oil has increased its market share with only a limited fall in its price relative to the major competing oils. But all oils are facing poor price prospects at the moment. The factors that have enabled this performance include the acceptance of palm oil as a high quality oil suitable for food use, the greater variety of forms of palm oil resulting in a widening of end uses, its modest price, and a relatively stable increase in output and export availabilities. 82. The total installed yearly capacity of palm oil processing plants in Indonesia as of end 1979 was 1,150 thousand tons of palm oil. In fact, there is excess refining capacity, whereas, milling capacity is low. An integrated and consistent policy between agencies which are connected with the efforts to develop the palm oil industry in terms of trade and infrastructure for the enlargement of estates is very important. In order to stimulate exports, taxes, surcharges or any other compulsory charges influencing price should be replaced with alternative measures which stabilize the domestic market (if deemed necessary) without crippling exports. 83. * Potential export markets exist. They are India, Pakistan, Middle East, North Africa, the USSR and Eastern Europe. India has started importing from Indonesia. Enhancing credibility of Indonesia's palm oil exports in world markets is crucial. Government policies should rely on lauric oil imports during times of shortages instead of cancelling exports of palm oil. This will be the factor for establishing a good image in the world market. But unless domestic policies are made more attractive for production of oils, Indonesia will not be able to supply and develop these markets. C. Shrimp The Product 84. Physical Description. Shrimp are crustaceans. They are mostly to be found in the coastal waters of tropical and subtropical countries. Cold- water and freshwater species account for only a small part of world shrimp production. 85. Varm-water shrimp mature rapidly and often grow large in size. Cold-water species, which inhabit temperate oceanic waters, grow more slowly and are small in comparison to warm-water shrimp. Freshwater shrimp live in rivers and lakes, principally in tropical areas, and often grow to large sizes. They are referred to as either shrimp or prawns, depending upon local usageo AUNEX 1 Page 54 86. Tropical marine shrimp, the main focus of this review, are the principal species entering world trade channels. They represent the major part of the shrimp market in Japan, the US and Southern Europe. Cold-water shrimp are preferred in Northern Europe and are a major factor in the European market, whereas in Japan and the US these species enjoy only a small share of the market. Freshwater species are of minor importance in world trade. 87. Methods of Harvesting, Culture and Processing. Shrimp are harvested principally by fishermen. A small but increasing percentage of world produc- tion is cultured. 88. The world catch of shrimp in 1983 was 1.76 million tons, live weight (Table 44). Of this amount, probably less than 0.1 million tons came from culture operations. The remainder was caught by fishermen, principally by trawling, with smaller quantities taken by canoes, traps, weirs and other fishing gear. 89. The world shrimp fleet expanded rapidly between 1960 and 1980. The fishing effort in most countries is at or exceeds optimum levels. In most fisheries there are now too many boats and there is little or no investment in the shrimp fleets at the present time. 90. Shrimp culture is now a commercial reality and has shown rapid growth in some countries in Latin America and Southeast Asia. It presently accounts for less than 7Z of world supply. Any growth in the supply of tropical shrimp must come from culture operations, since boat catches are not expected to show any substantial increase. 91. In world trade shrimp is marketed principally in frozen form. Smaller quantities are traded live, fresh, canned and dried. The primary product form is raw headless with the shell on. Other forms include whole with the head on and peeled, both raw and cooked. 92. Although cultured shrimp undoubtedly represents the primary new source of supply, consideration should also be given to imitation or substi- tute shrimp products, manufactured from pollock or other low-priced fish. They are beginning to enter the world's markets and are capable of extremely rapid growth. While substitute crab products have achieved considerable penetration in, for example, the US market, shrimp has so far had little success there for reasons of technology and price. Since both the manufacturing techniques and the development of the market for shrimp substitutes are in the early stages, it is too soon to predict the eventual position that these products will have in the world's markets. 93. End Uses of the Product. In Japan the major part (75X) of shrimp is consumed away from the home. In the US an even higher share (80-851) of consumption is estimated to take place in restaurants and institutions. The remainder is marketed through retail outlets such as supermarkets, grocery stores and fish shops. ANNEX 1 PaZe 55 Production 94. Major Producing Countries and their Share. In 1983, the most recent year for which catch data are available, the major shrimp producing countries were India, PRC, Thailand and Indonesia (Table 44). It should be noted that these statistics provide no individual figures for Taiwan, whose production would probably place that country among the top ten producing countries. Table 44: CATCHES OF SHRIMP BY MAJOR PRODUCING COUNTRIES, 1983 Production Country ('000 metric tons, Share of world catch live weight) (X) 1. India 207 11.8 2. People's Republic of China 186 10.6 3. Thailand 174 9.9 4. Indonesia 138 7.8 5. USA 120 6.8 6. Brazil 79 4.5 7. Malaysia 76 4.3 8. Norway 74 4.3 9. Mexico 66 3.7 10. Japan 64 3.6 Subtotal 1,184 67.3 Rest of world 576 32e7 World total 1,160 100.0 Source: FAO Yearbook of Fishery Statistics; Catches and Landings. 95. The ten major producing countries accounted for over two thirds of total world catch. The six leading Indo-Pacific countries--India, People's Republic of China, Thailand, Indonesia, Malaysia and Japan--between them caught nearly half of the world's shrimp production. 96. Recent Growth in Production. The world supply of shrimp increased rapidly and steadily at 6.3X per year from 1.08 million tons in 1970 to 1.66 million tons in 1977, live weight. Catches then remained relatively stable until 1983, when they increased to 1.76 million tons: ANNEX I Page 56 Table 45: WORLD CATCHES OF SHRIMPS 1970-83 (mln mt live weight) Annual growth 1970 1975 1977 1978 1979 1980 1981 1982 1983 rate (X) 1.08 1.32 1.66 1.67 1.57 1.65 1.63 1.70 1.76 3.8 Source: FAO Yearbook of Fishery Statistics; Catches and Landings. There are no separate statistics for aquaculture production, which is included in the above statistics. It is thought unlikely that shrimp farming, at this time, accounts for more than 71 of total world supply. 97. World catches by fishing boats are thought to be close to their upper limits, since most major fisheries for shrimp have been discovered and are presently being harvested to full or nearly full capacity. There have been wide fluctuations in the catches of individual countries from year to year (Table 45). Over the years the top 20 producing countries have usually accounted for over 80X of total world catch. 98. In Indonesia, catches more than tripled from 52,000 tons in 1970 to 160,000 tons in 1981. Since then catches have been adversely affected by restrictions on the use of trawlers. In 1983, the catch was 138,GO0 tons, which put the country into fourth place. 99. Price Elasticities of Supply. The major part of world production of shrimp is caught by fishermen working on wild resources. At the fishermen's level the quantity supplied is less influenced by price than by other factors, such as abundance of shrimp on the fishing grounds. A fall in prices and/or an increase in operating costs may lead a vessel owner to decide that it is preferable not to send his boat out to fish, thus causing a reduction in sup- ply. An increase in prices can bring vessels temporarily laid up back into the fishery quickly, providing that they have been properly maintained during lay up. 100. Similarly, shrimp farmers may decide not to seed their ponds in a situation of low prices and/or increased costs. If increases in prices lead to a decision by the farmer to start production again, the time needed will depend to a great extent on the availability of postlarvae. Even in the event that postlarvae were immediately available, shrimp supplies would not show any increase for about six months, which is the time needed to grow out the shrimp from postlarvae to marketable sizes. Once committed to seeding a pond, then supply will be influenced by price only to the extent that the farmer may be able to time the harvests to put his production onto the market at the sizes which give him the best return. ANNEX 1 Page 57 101. Sustained high prices, or the perception that prices will remain at high levels, attract new investment into the industry. Construction of shrimp boats may take 6-24 months and building of culture facilities takes 12-24 months. 102. Indonesia'a Role in World Production. Indonesia has been one of the major producing countries of shrimp for many years (Table 46). 103. Up to 1975 Indonesia's shrimp production fluctuated between 52,000 tons and 68,000 tons, accounting for 4.3% to 5.3X of world catch. This level of landings kept Indonesia between 6th and 8th among the world's shrimp producing countries. From 120,000 tons in 1976 catches increased steadily, with the exception of a drop in 1980, to 160,000 tons in 1981. In 1982 and 1983 catches declined to 131,000 tons and 138,000 tons, respectively. In the period 1976-83 Indonesian production has accounted for 8X to 101 of world catch and, with the exception of 1979 when it was in second place, the country has been fourth in the ranking of shrimp producing nations. Table 46: INDONESIIN SHRIMP CATCHES, 1970-83 Indonesian production Share of Indonesia's position Year ('000 metric tons, world catch in world ranking live weight) (2) 1970 52 4.8 7 1971 52 4.6 7 1972 65 5.3 6 1973 60 4.7 8 1974 58 4.3 8 1975 68 5.1 6 1976 121 8.1 4 1977 146 8.8 4 1978 150 9.0 4 1979 155 9.9 2 1980 136 8.2 4 1981 160 9.8 4 1982 131 7.7 4 1983 138 7.8 4 Annual growth rate (2) 703 104. Supply Outlook to 1995. World landings from capture fisheries, which have shown no increase in recent years, will continue to fluctuate from year to year, but no substantial increases can be expected. Future catches by fishing boats will be affected by factors such as market prices; the manage- ment of resources; access to fishing grounds; changes in coastal areas due to pollution, land reclamation and the destruction of mangroves; the availability and cost of capital; vessel operating costs, especially fuel and labor; and increasing competition from cultured shrimp. ANNX I1 Page 58 105. On the other hand, a rapid expansion of shrimp aquaculture projects is being undertaken, especially in Latin America and the Indo-Pacific region. Factors which will affect the future development of cultured shrimp are the scarcity and cost of wild postlarvaet which is leading to increased develop- ment of hatcheries; market prices; the shortage of trained and experienced farm and hatchery managers; the supply of risk capital and of long term loans; and the availability of feed of acceptable quality and cost. 106. It is expected that total world supply--boat catches and aquaculture--will show a gradual increase over the next ten years. Boat catches are expected to fluctuate about their present level. Increases will come from cultured production, starting from a small base. 107. Indonesian catches of marine shrimp have been affected adversely by a ban on trawling, which was imposed by the government to eliminate competition between commercial trawlers and traditional coastal fishermen for the scarce resources of the coastal areas. This was first applied in 1980 and by 1983 was in force in all areas west of 1300E longitude. The total catch of marine species dropped from an annual average of 128,000 tons in 1977-79 to 107,000 tons in the period 1981-83. Brackish-water pond culture production, on the other hand, averaged 22,000 tons in the period 1977-79 and increased to 29,000 tons in 1981-83. Inland open-water fisheries have shown no growth. Overall$ the increase in brackish-water pond production has not been sufficient to compensate for the decline in marine catches, since the 1977-79 annual average total shrimp production was 161,000 tons as compared to 147,000 tons in 1981-83, a drop of nearly 9X. 108. Assuming that the limitation on the use of trawlers remains in force, then growth in shrimp production must come from increased catches by small-scale fishermen and expansion of brackish-water pond culture. 109. The government has assigned high priority to increasing shrimp production from tambaks (brackish-water fish ponds) (World Bank, Draft), the majority of which are used for the culture of milkfish. Culture techniques largely follow traditional practices, so that yields are low. There are about 212,000 ha of brackish-water ponds. Increased production can be expected to come as more are converted from milkfish to shrimp, as well as improved yields resulting from better management. A substantial increase in postlarvae produced in hatcheries will be needed to supplement wild stocks. 110. Attempts have been made to predict growth in supply to 1990. The US Government (NMFS, 1984) projected that world cultured shrimp production would increase from 78,000 tons in 1982 to 242,000 tons in 1990, giving an estimated total world production in 1990 of 2.01 million tons, live weight. It was pointed out that estimates of growth in cultured production were subject to considerable uncertainty. The industry is in its infancy and potential exists for economic, technical, political and environmental difficulties to upset the estimates. It was estimated (Shrimp Notes, 1985) that cultured marine shrimp production was 103,000 tons in 1983 and 111,000 tons in 1984. Growth to 1990 was projected at between 160,000 tons and 267,000 tons, live weight, equivalent to average increases of between 6.31 and 15.7X per year. World production in 1990 would range between 1.81 million tons and 1.93 million ANNME I Page 59 tons, live weight. Given the wide variation observed in the attempts to forecast world supply to 1990, any extension of these projects to 1995 would be highly speculative. Perhaps the level of world production will lie between 2.0 and 2.3 million tons, live weight, in 1995. In both cases it was assumed that production from capture fisheries will remain essentially stable. 111. For Indonesia too it is probably reasonable to assume that there will be no growth in production from capture fisheries. Brackish-water aqua- culture production has grown at the rate of about 5% per year in the period 1977-83. If this is maintained, total shrimp production in 1995 would be about 1629000 tons, live weight. In view of the government's expressed encouragement of the development of brackish-water shrimp culture, growth in this sector may be faster than we have projected, perhaps to 178,000 tons in 1995. Consumption 112. Major Consuming Countries and Their Share. The leading country in which shrimp was consumed in 1983 was USA, closely followed by Japan. The Peoples Republic of China was a distant third (Table 47). Consumption of shrimp is dominated by USA and Japan, which between them account for over one third (36.3%) of world catch. The six leading consuming countries absorb almost two thirds (65.7%) of world production. Indonesia's consumption in 1983 amounted to 5.4% of world catch and put the country into sixth place among countries consuming shrimp. Table 47: MAJOR SHRIMP CONSUMING COUNTRIES, 1983 ('000 tons) /a /a Net exports/ Consumption Production Epiorts Importy- imports (live (as share (live (product (product (approx. weight of world Country weight) weight) weight) live weight) basis) catch) USA 120 8 135 212 332 18.7% Japan 64 /b 149 248 312 17.6% PRC 186 10 /b (16) 170 9.6% Thailand 174 20 1 (32) 142 8.0% India ,207 54 /b (93) 114 6.4% Indonesia 138 26 T_ (43) 95 5.4% /a Trade statistics given by FAO do not always coincide with figures from other sources. 71 Not quoted; presumably of little or no importance. Source: FAO Yearbook of Fishery Statistics, Fishery Commodities; volume 57. ANNEX I Page 60 113. Recent Growth in Consumption. World imports of shrimp in 15 major markets rose by 41X from 342,000 tons in 1977 to 482,000 tons in 1983. In terms of value the increase was from $1.7 billion in 1977 to US$3.4 billion in 1983, equivalent to 971 or an average annual growth rate of 121 (Table 48). Table 48: WORLD IMPORTS OF SHRIMP INTO 15 MAJOR MARKETS, 1977-83 Quantity ('000 metric tons Value product weight) (Us$ mln) 1977 342 1,731 1979 403 2,814 1980 405 2,622 1981 418 2,756 1982 456 3,198 1983 482 3,415 Annual growth rate (1) 5.9 12.0 Source: ITC, 1985. 114. Indonesian Consumption. Some shrimp produced in Indonesia is of a species and/or size which makes it unsuitable for export. Such shrimp is sometimes processed into dried form or into shrimp paste or crackers, chiefly for domestic consumption. 115. Shrimp consumption in Indonesia is derived by converting exports to an approximate live weight equivalent and deducting this from total catch. This is shown in Table 49. Table 49: INDONESIAN APPARENT DOMESTIC CONSUMPTION OF SHRIMP, 1977-83 ('000 mt, live weight) Production Exports Apparent domestic consumption (Z) 1977 156 53 66 1978 161 54 66 1979 165 58 65 1980 147 53 64 1981 151 42 72 1982 142 43 70 1983 149 44 70 Annual growth' rate (X) -0.8 -3.0 1.0 Source: Derived from Directorate General of Fisheries' Sta:istics. ANNEXI Page 61 It has been assumed that Indonesia is not an importer of shrimp, since the quantities imported are negligible (1984: 5.4 tons). 116. Demand Outlook to 1995. Import requirements in the three major markets were projected up to 1990 (FAO, 1983). Production from capture fish- eries was thought to be close to its upper limit. Production from aquacul- ture, on the other hand, is increasing rapidly, although from a very small base, and was expected to provide most of the additional supplies required. Of the major markets, Europe presented the likelihood of the fastest growth in usage of tropical species, while growth in the much larger markets of Japan and the US was expected to be slower. However, in 1983 and 1984 heavy European catches of cold-water species, combined with the weakness of the European and Japanese currencies in relation to the US dollar, caused a shift in exports away from Europe and Japan to the US market. 117. In recent years the markets have been affected by high inflation and the general economic slowdown; high interest rates; and fluctuations in exchange rates. All these factors are expected to continue to affect demand in the years to come. 118. Assuming an annual growth rate of consumption of 1% in Japan and USA and 5Z in Europe it was calculated (PAO, 1983) that an additional 55,200 tons, product weight, would be needed by the three major markets in 1990 as compared to 1981. Since domestic catches in the market countries were not expected to show any growth, the increase in demand would have to come from imports. Additional imports of 55,200 tons, product weight, correspond to about 84,000 tons, live weight. It was assumed that about 50% of world catch is consumed in producing countries or exported to the minor markets, which meant that an increase of 168,000 tons, live weight, in world production would be needed in order that the major markets obtain the additional 55,200 tons, product weight. However, it was thought that consumption in the producing countries and some of the minor markets might well increase at a faster rate than in the major markets, owing to more rapid growth in population and in number of potential consumers. If that proved to be the case, a proportionately greater increase in world catch-possibly in excess of 200,000 tons, live weight-- would be needed to achieve the desired level of additional imports to the three major markets. 119. From 1981 to 1983 world imports into the 15 major markets increased by 64,000 tons, product weight, and so in 1983 were already at a higher level than that predicted as needed for the three major markets for 1990 (ITC, 1985), (FAO, 1983). Additional production, chiefly of cultured shrimp, has reached the markets and, especially in the medium sizes, has tended to hold down prices, which have not risen to the extent predicted. As a result demand has increased and the major markets have been able to absorb the additional supplies. 120. In Indonesia any expansion in shrimp production is likely to be oriented towards exports. Increased production of cultured shrimp will be primarily of those species and sizes suitable for export. Production of the species and sizes not suitable for export is not expected to show any substantial growth. Total domestic consumption can be expected to remain at about current levels over the next ten years, NNX I Page 62 121. Apparent annual consumption in Indonesia in 1972 was 0.46 kg per capita, which may decline to about 0.36 kg per capita in 1995, if there is no increase in supply for domestic consumption, in view of the projected increase in population to about 194 million people from 153 million in 1982. Prices can be expected to rise. Trade 122. Major Exporters and Importers. The principal countries exporting shrimp in 1983 are shown in Table 50. Mexico is the leading exporting country in terms of value, although India exports a greater tonnage. Mexico exports chiefly shrimp of large sizes, which have a high unit value, whereas India's exports consist largely of smaller sizes of shrimp with a much lower unit value. Table 50: SHRIMP EXPORTS BY MAJOR EXPORTING COUNTRIES, 1983 Country Quantity exported Value Share of value of /a ('000 mt, product weight) (US$ million) world exports (Xi 1. Mexico 42 437 12.5 2 India 58 -45 9.9 3. Ecuador 25 k40 6.9 4. Indonesia 27 239 6.8 5. Thailand 32 175 5.0 6. Taiwan 22 152 4.3 7. Australia 13 144 4.1 8. Norway 24 142 4.1 9. Denmark 34 130 3.7 10. Hong Kong 15 124 3.5 /a Estimated at US$3,500 million. Source: ITC, 1985. 123. The major importing countries in 1983 are shown in Table 51. The two principal importing countries--Japan and the US--accounted for almost three quarters of the total value of world imports of shrimp in 1983. In 1984 both countries had record imports. In 1985 Japan is expected to exceed the previous years' record imports and imports into USA have also continued strongly, further emphasizing the dominant position of these two countries as importers of shrimp. A 1 Page 63 Table 51: IMPORTS OF SHRIMP BY MAJOR IMPORTING COUNTRIES, 1983 Country Quantity imported Value Share of value of /d ('000 mt, product weight) (US$ million) world imports (IT_ 1. Japan /a 150 1,280 36.6 2. USA 155 19265 36.1 3. United Kingdom /b 32 178 5.1 4. France 32 145 4.1 5 Hong Kong /c 24 119 3.4 6. Canada 13 108 3.1 7. Federal Republic of Germany /b 12 66 1.9 8. Italy /b 13 58 1.7 9. BLEU 10 57 1.6 10. Sweden 14 53 1.5 /a Includes lobsters. 7- Includes all crustaceans other than crabs. 7T Excludes preserved or prepared products. 71 Estimated at US$3,500 million. Source: ITC, 1985. 124. Marketing and Distribution. Trade tends to flow from the producing countries to the nearest of the three major markets. The Indo-Pacific region is the primary supplier to Japang producers in North and South America are the major sources of product shipped to the US market; and Western Europe is supplied chiefly by countries in the North Atlantic and Africa. 125. Geographical proximity not only facilitates communications and the transportation of product, but also reduces exposure to market fluctuations during the time shipments are in transit. 126. Imports of shrimp into Japan (Table 52) increased by almost three times from 57,100 tons in 1970 to 169,100 tons in 1984, product weight, with a value of US$1,271 million. During the years 1970-81 imports of shrimp into the US (Table 53) fluctuated between 87,000 tons (191.3 million lbs) and 104,000 tons (229.8 million lbs), product weight. By 1983 imports had reached 155,000 tons (341.4 million lbs), an increase of 53Z over imtports in 1981. In 1984 there was a further small increase. Imports into the European market, excluding the not inconsiderable quantities traded between European countries, increased by 511 from 64,800 tons in 1977 to 98,100 tons in 1983 (ITC, 1985), much of which was cold-water shrimp. Table 52: JAPAN rITS OF SWUM N COUNTRY OF ORlGIIN, 197044 ('0000 etric tows, product weight) Country of origin 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 India 6.4 9.7 12.8 21.9 19.9 29.9 26.9 25.8 31*6 38.8 35.2 40.0 39.8 36.9 38*5 China 6.2 5.0 3.5 4*5 9.5 9.8 5.6 3.7 9*2 12*1 14*5 15*0 7.3 58 10.3 Thailand 6.0 7.1 7.5 9.9 6.3 8.8 9.8 2.8 8.4 9.3 8.9 10.3 e.2 7.5 6.7 Pakistan 2.3 3.2 2.6 4.2 2.3 3.0 3.9 3.9 3*7 4*2 3.6 6.4 4.2 3.3 3.2 Viet Nam - NA 1.2 0.7 2.2 1.6 2.4 2.8 2.4 1.8 1.7 1.8 2.9 3.5 5.1 Korea, Rep. of 0.4 NA 0.5 2.6 3.1 2*9 4*7 2.6 2*5 2.2 2.5 2.0 2.2 2.5 2.3 Hong Kong 3*1 4*0 3.5 3.1 4.1 4*1 4.6 6.0 4.6 4.4 3.7 3.3 2.7 2.2 2.1 Indonesia 3*7 8*2 13.8 18.8 19.4 21.1 25.5 25.7 28.3 29*6 27.6 24.2 23.6 21.8 24.1 Taiwan 2*5 4.8 4.6 5.0 3.2 3.4 3.2 4.4 5.6 6.0 5*0 7.8 7.8 11.1 16*5 Malaysia 2.1 5.2 5*8 5.2 2.6 2.4 3.9 3.4 2.8 3.1 1.7 1.6 1*4 1*3 0.5 Phillippines 0.4 11 1.7 2.3 1.5 1.1 2.1 2.4 2.8 3.7 2.4 2.7 3.7 4.3 5.1 Sabah 1.0 1.1 1*3 1.3 1.7 1.5 2.3 2.5 2.3 2.7 2.4 2*7 2.7 3.7 3.9 Australia 3.7 4.0 4.1 4.8 5.2 4.7 6.2 7.7 7.5 11.0 8.1 11.5 11.8 11.1 10.2 Mexico 7.2 6.5 5.4 8.8 4.6 4.1 5.2 4.2 7.9 4.7 3.4 3.1 3.9 3.1 2.2 Brazil 0.7 NA 1.9 1.2 0.9 0.4 0.8 1.6 2.6 2.9 2.7 1.9 2*5 1.5 1.8 Guyana - NA 0.8 0.8 0.8 0.9 0.9 lo1 1.2 0*9 1.0 0*7 0.8 0.8 0.4 Cuba 2.0 1.5 1.7 2.0 3.2 3.5 1.7 14 0.9 1.1 0.6 0.5 0.7 0.6 0.2 Others 9.4 17.5 15*4 20.4 12.8 10.5 13.6 22*8 19.7 20.2 18*3 26.2 24.2 27.6 36*0 Total 57.1 78.9 88.1 117.5 103.3 113.7 123.3 124.8 144.0 158.7 143.3 161.7 151.4 148.6 169.1 Soarce: Japan Finance Ministry and United States Department of Comsmrce. Table 53: UNITED STATES SHRIMP IMPORTS, BY COUNTRY OF ORIGIN, 1970-84 (Millions of pounds, product weight) Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 The Americas Mexico 72.0 74.6 80.7 76*1 78.1 75.0 80.4 76.3 72.5 71.9 76.1 70.9 80.2 84.6 81.7 Ecuador 6.0 5.3 6.9 7.5 6.2 8.1 9e4 8.6 10.9 13.7 20.2 24.7 36*1 51.4 46.6 Panama 11.6 9*3 10.1 10.4 10.1 9*8 11.6 10.1 9.2 12.2 13.7 15.9 17.6 16.3 16.3 Brazil 2.1 4.4 8.9 4.3 3.0 1.4 2.0 3.5 3.9 9*7 8.8 10.9 12.7 14.6 19.8 El Salvador 6.4 6.7 5.7 5.9 6.1 6.8 5.6 5.4 5.0 6.3 6.2 6.6 7.3 4.7 8.5 Honduras 2.6 3.9 4.8 3.4 3.4 3.6 3.9 4.7 3.5 3.1 4.6 6.2 6.6 7.0 5.4 Guatemala 2*9 2*3 1.3 3.0 2.9 3.6 2*7 3.8 4*2 3*6 3.6 4.6 4.4 3.2 4.5 Other 50.6 41.6 39.6 40*0 36.5 32.2 34.0 37.4 23.5 26.4 32.0 24.4 32.2 38.6 41*4 Subtotal 154.2 148.1 158.0 150.6 146.3 140.5 149.6 149.8 132.7 146.9 165.2 164*2 197.1 220.4 224*2 Asia India 33.6 22.8 33.5 20.6 31.4 29.6 41.6 41.1 39.2 30.8 13*0 19.0 26*9 30.1 23M1 China NA 0.0 0.1 0.4 3.0 1.3 5.1 NA 0.0 3.O 0.9 So 2*8 1.9 T32 Thailand 3.6 200 4.0 2.9 3.7 2.7 3.2 4.5 3.9 10.6 88 6.5 7.8 19.3 18.2 Taiwan 0.9 0.9 6.0 5.4 5.3 5.6 5.1 3.3 3.2 7.9 5.4 -5. 9.3 19.9 18.3 Pakistan 7.1 2.9 2.6 1.4 NA NA NA 0.8 0.8 1.0 3.4 4.5 5.3 6.8 10.8 Other 12.9 6.5 13*8 16.2 30.7 17.2 20.2 22.9 16.4 19.9 14.6 10.9 t6.7 17.7 18.7 Subtotal 58.1 35.1 60.0 46.9 74.1 56.4 75.2 72.6 63.5 73.2 46.1 51.4 68.8 95.7 92.3 Europe 1.0 1.1 1*2 1l1 0.9 1*5 1*5 2*2 Oo7 1.9 4.6 4.8 3.3 17.4 19. Australia and Oceania 1.6 3.1 1.5 0.6 4.8 0.9 0.8 0.8 0.2 1.2 1.5 1.2 2.0 3*0 3.9 Africa 3*9 4*0 2.5 3*4 2.8 2.3 2.7 2.5 1*3 1.4 1.9 1.1 1.9 2*3 2.2 Total 218.7 191.3 223*2 202.6 228.9 201.5 229.8 228.0 198.2 224.5 219.3 222.8 273*9 341.4 342-5 Source: National Marine Fisheries Service, United States Department of Co_irce. U~~~~~~~~~~~~~ " i ' ' ANNEX i II3ls In addition to the three itajor markets, there are four minor \",ma ts-Hong Kongv Wada, Singapore and Australia--which are important importers of shriRp; _ t*8. There are ormally no quantitative restrictions on imports of shrimp Lnto the market countries, except that import licenses are required for France aind Spain. No import duties are charged by the US or Hong Zi.g on imported shripmp. The other market countries charge duties at rates which vary with the species, form of preser--ation and country of origin. Preferences are granted to 4e4eloping:countries, which in some casess, have duty free access. Gover4ments in the market countries provide varying degrees of protection to consAmers from uwsafe or harmful foods and unfair or deceptive packaging or labeling., 129. Ifternational Prices. Prices of shrimp depend upon the size of the individual shrimp, the species, quality, country of origin and product form. In general, the larger the shrimp the higher the price it sells for. There can be substantial differences in price between sizes, which fluctuate accord- ing to the supply of and demand for each size. Prices reflect market prefer- ences for colors or species. In the US market, for example, white shrimp generally command a small premium over other colors. In both the US and turope a substantial price differential exists between freshwater and marine snpcies of shrimp. The same species and size of shrimp, when packed in two different countries, may command quite different prices in the markets thus ,reflecting the producers' reputation for good weight and quality, accurate taunts and uniformity of size and color. The price relationship between product forms depends theoretically on the quantity of shrimp meat, so that the price of peeled shrimp should be higher than headless shell-on to the extent of weight lost in removing the shell and the additional cost of laEor. In practice, this relationship is often overridden by the supply of and demand far specific products and sizes. 130. In the market countries there are no organized shrimp markets or marketing exchanges and so no set mechanism for determination of prices. In Japan market activity is at its peak in the last quarter of the year and prices tend to rise during this period. Other high points are April-May and July-August. In the US, shrimp prices used to follow a distinct seasonal pat- tern. Prices were low during the summer when domestic production was at its peak and high during the winter and spring when both domestic landings and imports were low. The recent rapid growth in imports has reduced the influ- ence of domestic production on prices. Supplies of cultured shrimp, grown all year round in Ecuador and other tropical countries, are providing a more even flow into the market, which has tended to counter the fluctuations in supply from seasonal capture fisheries. As a result, prices appear to have fluc- tuated less (Figure 2), especially .n the medium sizes which form the major p4rt of Ecuadorts production, than they did previously. 19/ These countries are both importers and exporters. Australia, for example, exports large shrimp and imports small ones. Canada exports cold-water species and imports warm-water species. ¾ ANNEX 1 Page 67 131. Although it can be seen that the long term movement of prices for all sizes is generally in the same direction, in the short term prices for individual sizes may not move together. In 1984, for example, the larger sizes were moving up at the same time as the medium sizes declined. Shrimp prices in the US have shown an overall upward trend (Figure 3) in current terms. They have tended to follow the upturns and downturns in the economy, with an apparent cycle of abouzt three years. 132. Special Aspects of Indonesian Trade. Shrimp accounts for a major part of Indonesian seafood exports, nearly 79X by value in 1984, when it amounted to over 3X of total exports, excluding oil and gas. 133. Exports of shrimp reached 34,700 tons in 1979, declined to 25,000 tons in 1981 and recovered to 28,000 tons in 1984. The principal market for Indonesian shrimp is Japan. Lasser quantities are exported to Hong Kong, Singapore, Netherlands and the JS. Recent exports are shown in Table 55. Table 34: INDONESIAN EXPORTS OF SHRIMP, 1978-84 Quantity ('000 metric tons Value product weight) (US$ mln) 1978 32.6 162.0 1979 34.7 200.5 1980 31.9 180.9 1981 25.0 162.8 1982 25.6 181.6 1983 26.2 194.4 1984 /a 28.0 195.6 Annual growth rate (X) -2.5 3.2 /a Temporary figures. Source: Central Bureau of Statistics. 134. Exports to the US are hampered by the fact that, with only a few exceptions, Indonesian shrimp exi8yters have been blacklisted by the US Food and Drug Administration (USFDA).- In 1984 Indonesia accounted for only 0.5X of total US imports of shrimp. 20/ USFDA normally inspects imports infrequently and at random. The ship- ments of blacklisted producers are automatically detained and inspected, until such time as USFDA is satisfied that quality is being maintained at the appropriate standard. Failure to pass inspection normally results in the obligatory re-export of the product. Figure 2 WHOLESALE PRICES OF GULF BROWN SHRIMP AT NEW YORK, 1981 1985 700 D_j&> 16-20 Cl) L GM 26-30 z ~490 0~~~~~~~~~~~~~~~~~~~11 300 JF J SNJF JSNJF J SNF J SNJF J SNJ I8a1 1882 1883 1984 1 86 18 86e MONTH X I . Source: National Marine Fisheries Service Figure 3: S'Il6 Lu14 TEM TRID OF NW YORK WHOLEALE PRICES (MuoIy Avmu GULF BROWN SHRIMP *11~~~~~~~~ -~~8 Cmwt Sim Fromm Iltomim 3-YEARCYCLES 1.0_ 14 9 on 1J l I 2e1 1 1114 17 197 1 11 197iCYlj8 17 90 16 9 916 1" I~~~~ AM I Page 70 135. Links to the Japanese market, on the other hand, are very close. Transportation and communications are easier and quicker than to the other major markets. Many of the Indonesian shrimp producing companies have received financial and/or technical assistance from Japanese buyers. Further- more, over the years, Japanese buyers have normally been able to pay higher prices than their US and European counterparts, partly at least because the relatively short shipping time reduces the risk of market price fluctuation during the days that the merchandise is in transit. In 1984 Indonesian shipments accounted for 14.22 by quantity and 16.31 by value of shrimp imported into the Japanese market, in each case second only to India amongst exporting countries. Prices in Indonesia. Since the primary market for Indonesian shrimp is Japan, examples of prices taken at six-month intervals from that market are shown in Table 55. Table 55: WHOLESALERS' PRICES OF INDONESIAN FROZEN HEADLESS WHITE SHRIMP IN THE JAPANESE MARKET (yen per 4 lbs block) Count 1982 1983 1984 1985 per lb June December June December June December June December 8-12 7,500 8,600 7,000 6,600 5,750 6,600 7,050 7,150 13-15 7,500 89600 7,000 6,600 5,750 6,600 7,050 7,150 16-20 7,500 8,600 7,000 6,300 5,500 6,150 6,250 6,100 21-25 6,300 7,900 7,000 6,200 3,350 5,450 59500 5,100 26-30 5,500 6,900 6,000 5,500 4,750 4,750 4,500 4,150 31-40 4,500 5,400 4,600 4,200 3,750 3,800 3,400 3,150 41-50 3,550 4,400 3,700 3,400 2,900 3,000 2,750 2,750 51-60 3,100 3,400 3,200 3,200 2,650 2,600 2,550 2,350 61-70 2,700 3,000 2,600 2,800 2,550 2,500 2,350 2,050 71-90 2,300 2,600 2,000 2,0100 2,100 2,20C 2,150 1,950 Source: INFOFISH Trade News; mid-June and mid-December issues. 136. By and large, the prices of shrimp from Indonesia in the Japanese market fluctuate in concert with prices of shrimp from other origins. As in the US, prices in Japan peaked at the end of 1982, tended downward in 1983-84 and have recovered to some extent in 1985. Production from Indonesia is, in general, well regarded in the Japanese market and Indonesian shrimp receive a premium price compared to shrimp from other origins. 137. Trade Outlook to 1995. World production from capture fisheries has stabilized and no growth can be expected. Continued growth in shrimp culture is predicted, especially in Latin America and in the Indo-Pacific region. Aquaculture is seen as the principal source of increases in production required to satisfy additional demand in the major markets up to 1995. ANNEX 1 Page 71 138. Supply from domestic sources in the three major markets will fluctuate from year to year, but with the possible exception of coldwater species in Europe, cannot be expected to yield any substantial increases. The balance required must continue to come from imports. 139. Fluctuations in supply occur as a result of the seasonal avail- ability of shrimp caught by fishing boats. Cultured shrimp, which in some tropical countries can be grown all year round, will tend to provide a more even flow into the markets. However, a limiting factor for cultured shrimp is the range of species and sizes produced. Not all species cultured at present are immediately acceptable in all the market countries. With current tech- nology (1986), the best economic results have been achieved by producers in Central and South America by growing shrimp to medium sizes (21-25 to 41-50 count per lb). Heavy shipments of medium sized shrimp to the US market since 1983 have tended to hold down prices for these sizes. There has been a similar experience in the Japanese market with cultured shrimp from South East Asia. 140. Price Outlook to 1995. Historically real shrimp prices have followed an overall upward trend. In 1950 the real price of 26-30 count Gulf of Mexico brown shrimp wholesale in New York, expressed in 1967 dollars, was US$0.72 per lb and by 1983 had reached US$2.10 per lb. 141. An estimate was made of the effect of increased supplies on prices in 1990 in the US market (NMFS, 1984). It was assumed that domestic supplies of tropical shrimp had reached maximum levels and would remain at those levels until 1990; that demand for shrimp would increase between 1983 and 1990 at the same rate as it had increased in the past; and that imports from capture fisheries had stabilized and in 1990 would be at about the same level. 142. The effect of four different levels of imports in 1990 was considered. If imports of cultured shrimp in 1990 were no higher than in 1983, then the real wholesale price for 26-30 count Culf of Mexico brown shrimp would rise from US$2.10 per lb in 1983 to US$2.83 per lb in 1990. In view of the increasing production of cultured shrimp this situation will not occur. At the other end of the scale, if imports of cultured shrimp increased by 450 million lbs in 1990 over 1983, the real price would drop to US$1.40 per lb. Since this would imply that virtually all the estimated increase in world cultured production would flow only into the US market, and none to Japan, Europe or other markets, this is highly unlikely. If one third of tho increased supply was shipped to the U8, then the real price in 1990 would be US$2.36 per lbp 122 higher than in 1983. If about half of the increase in supply reached the US market, the real price in 1990 would be the same as in 1983. 143. Both the US and Japan are in the process of adjusting to increased supplies of cultured shrimp. Total imports into both markets have been running at record levels in 1985. At reduced prices the markets are absorbing the additional imports. 144. Although possible, the estimated increase (NMFS, 1984) of 450,000 lbs, headless weight, is unlikely to be achieved by 1990. In view of ANE 1 Page 72 the lack of statistical information on current farm production and the uncer- tainties of the estimate of future cultured production, it is not possible to predict the effects in 1990 of this production on the markets with any degree of accuracy. Furthermore, there are factors which affect prices, such as inflation, interest rates and exchange rate fluctuations, which are difficult to predict. 145. The total supply of shrimp in the years to come is expected to show growth, probably at a rate which will tend to hold down prices, especially for sizes produced by shrimp farmers. There will be the usual cyclical price fluctuations, with an overall trend showing little or no increase in real prices. Conclusions 146. Trade Prospects for Indonesia to 1995. Investments in shrimp farming are increasingS especially in the Indo-Pacific region and in Latin America. Production from capture fisheries appears to have levelled off. Indonesia exhibits the same tendencies with little or no increase expected in landings from fishing vessels and growth coming from aquaculture. 147. Cultured shrimp have been well accepted in their penetration of the major markets. Since the product is normally processed, packed and frozen within a few hours of harvesting, it is usually of excellent quality. In general, there is no difference in prices between boat-caught and pond-raised shrimp of the same species, size and origin. 148. However, not all cultured species have achieved the same degree of acceptance in world markets. The most successful species cultured in Latin America are white shrimp (p. vannamei and p. stylirostris), both of which were known in the US market from boat production and so were immediately accepted. In the Indo-Pacific region the Black Tiger (p. monodon), the principal species which is expected to provide additional production in Indonesia, had started to reach the Japanese market some years before culture production became important. Entry of cultured product into this market was consequently made easier. In the US market, on the other hand, the Black Tiger was virtually unknown until increased culture production, in Taiwan and Philippines especially, caused exporters in those countries to ship to the US, where there had long been a general prejudice against striped shrimp. Priced lower than other species, the Black Tigers have achieved some penetration and are starting to establish a place in the US market. 149. Indonesia's traditional shrimp products can be expected to continue to be exported principally to the Japanese market, which is normally able to pay the highest prices, as well as enjoying the advantages resulting from geographical proximity. Since Indonesia's incremental production is likely to be chiefly of Black Tiger shrimp, this too can be expected to find its principal market in Japan. 150. Price Prospects for Indonesia to 1995. The prices for Indonesian shrimp products in the world's markets will follow the general pattern. Factors affecting future production and prices include the supply of shrimp; ANNEX 1 Page 73 the cost of production of boat and farm operations in Indonesia and in competing countries; exchange rates; trends in disposable personal income, growth in population and the prices of substitute products in the market countries. It is anticipated that the total supply of shrimp to the world's markets will show growth at a rate which will tend to hold down real price increases with the usual cyclical fluctuations, with a trend overall of little or no increase in real terms. 151. Increases in shrimp production in Indonesia can be expected to be chiefly of cultured Black Tiger shrimp and the primary market for it will be Japan. In this market Taiwan plays the major role, followed by Philippines, India, Bangladesh and Indonesia. Taiwan's production of this species increased from about 10,000 tons in 1982 to a projected 20,000 tons in 1985. Since Taiwan is the principal source of Black Tigers to Japan, Indonesian exporters will be well advised to follow closely production and price trends in Taiwan. 152. Policy Action Required to Maximize Indonesia's Trade. Japan has traditionally beon the principal market for shrimp from Indonesia. Owing to its geographical proximity, and the close connections of many Indonesian companies with Japanese buyers, this situation is unlikely to change. Never- theless, exporters should be encouraged to ship to other markets as well in order to reduce the risks associated with depending to a great extent on any one market, 153. Exports to the US market are hampered by blacklisting by USFDA of all but a few Indonesian exporters of shrimp. It is suggested that a new approach be made to USFDA with a view to discussing ways to alleviate this problem and so increase shipments to the US market. 154. Commercial shrimp farmers in Indonesia are tending to concentrate on the production of Black Tiger shrimp (R. monodon). Although there is an established market for this species in Japan, acceptance in the US is still limited and it is rarely seen in Europe. White shrimp (p. indicus and P. merguiensis) ore both cultured to a lesser extent in Indonesia but, with current technology, cannot be grown out to the larger sizes. Nevertheless, shrimp farmers should be encouraged to diversify their production of species as far as possible, in order to provide the markets with white shrimp, which are widely accepted, as well as Black Tiger shrimp. H. minerals 21/ 155. The mineral sector is a major source of Indonesia's nonoil exports. The sales of nonfuel minerals contributed 3.62 to total foreign 21/ Information has been drawn from IMDI)I, Nonoil Export Mission, Nonfuel Minerals Review, Back-to-Office Report, November 18, 1985. AMx I Page 74 exchange earnings in 1984. Between 1975-80 export earnings 221 grew by 301 p.a., reaching nearly US$900 million in 1980 and since then have declined by an average of 16.5X p.a. to the level of US$561 million in 1984, although production has been maintained (Table 56). The decline in recent years was primarily due to a general weak price in international prices and impact of export quota restrictions imposed on tin. In 1984, export earnings of tin fell by 16.3%, copper concentrates by 13.11, and nickel matte by 3.21 despite a 33.81 increase in its export volume from 1983 levels (Tables 47 and 58). Nickel export earnings (including nickel ore ferronickel and nickel matte) declined by 1 p.a. from 1980 level of US$205 million to US$144 million in 1984 and copper concentrates by about 10.51 over the same period (Table 58). Table 56 NONFUEL MINERAL PRODUCTION ('000 tons unless otherwise noted) 1975 1980 1981 1982 1983 1984 1985/a Tin in conc 25.34 32.53 35.39 33.87 26.55 27.91 25.47 Copper conc 201.27 186.09 188.47 233.70 205.02 190.35 182.00 Nickel ore 801.07 1,537.44 1,543.22 1,640.92 1,278.03 1,066.81 985.00 Ferro nickel - 18.31 19.88 21.55 20.71 22.73 22.00 Nickel in matte - 20.53 19.94 13.14 18.57 22.81 29.94 Bauxite 992.56 1,249.12 1,203.38 700.25 777.87 1,003.09 922.25 Iron sands conc 352.99 62.91 86.62 144.49 132.89 82.97 136.00 Manganese 12.68 4.32 14.75 17.89 8.32 24.51 n.a. Gold (kg) 331.00 248.00 183.00 223.00 260.00 220.00 230.00 Silver (kg) 4,755.00 2,196.00 2,000.00 3,058.00 1,794.00 1,720.96 1,800.00 Granite 636.35 925.97 l,810.91 2,130.43 2,465.11 1,583.44 2,172.50 Kaolin 25.13 75.56 80.90 77.21 60.15 51.67 n.a. Asphalt 115.68 173.02 276.50 330.84 533.19 471.24 n.a. Quartz sand 69.42 260.10 155.73 977.29 362.94 544.49 n.a. /a Planned. Source: Ministry of Mines and Energy, Annual Statistics 22/ Export earnings are defined by the Ministry of Mines and Energy as receipts from export sales. Government revenue from private sector operations, are the recipients of revenue from the sale of their mineral exports and contribute to government export earnings by the payment of royalties and corporate taxes. ANNEX 1 Page 75 Table 57: NONFUEL MINERAL EXPORTS ('000 tons unless otherwise noted) 1975 1980 1981 1982 1983 1984 1985/a Tin in conc 22.19 32.12 33.72 26.83 25S33 22.49 22.57 Copper conc 193.44 193.51 197.15 228.80 202.82 181.14 185.00 Nickel ore 849.65 1,287.43 1,185.38 19055.09 737.02 829.98 855.00 Ferro nickel - 16.01 21.73 18.65 24.19 21.92 21.42 Nickel in matte - 21.16 18.62 15.37 17.41 23.30 29.91 Bauxite 1,031.16 1,197.23 1,030.72. 731.33 847.41 991.70 850.00 Iron sands conc 305,61 24.11 25.52 11.00 10.25 12.00 20.00 Mangaaese 7.94 0.01 5.50 8.75 19.70 16.80 34.00 Silver (kg) 2,250.00 - - - - - - Granite 92.71 518.87 941.49 698.22 1,329.21 1,266.88 1,795.00 Kaolin - 1.03 1.26 - - 11.90 11.70 Quartz sand - - - 10.30 22.81 24.68 24.00 Construction sand - 19.23 224.19 273.42 1.44 1.71 1.70 Marine sagd (mill m ) - - 1.73 8.16 9.28 6.80 20.00 /a Planned. Source: Ministry of Mines and Energy, Annual Statistics ANNEX 1 Page 76 Table 58s NONFUEL MINERAL EXPORT EARNINGS, 1975-85 (US$ mln) 1975 1980 1981 1982 1983 1984 1985/a Tin 142.39 519.41 458.74 356.60 321.68 269.26 249*02 Copper concen- trates 77.87 153.00 130.34 120.01 126.09 109.60 114.00 Nickel ore 20.90 39.44 29.73 23.29 12.84 14.65 14.65 Ferro nickel - 24.12 30.69 22.47 25.41 22.51 23*28 Nickel matte - 141.00 122*71 97.41 110.32 106.82 115.73 Bauxite 5097 13.70 13.41 9.82 11.35 13.08 12.37 Iron sands conc 1.92 0.22 0.24 0.11 0.12 0.12 0.17 Mantanese 0.42 - 0.47 0.52 0.69 0.52 1.00 Granite 0.35 3.72 10.96 6.13 12.99 10.39 18.83 Sand - n.a. n.a. n.a. n.a. 13.75 33.77 Kaolin - n.a. n.a. - - 0.65 0.70 Others 0.30 2.74 0.18 -- - /a Planned. Source: Ministry of Nines and Energy, Annual Statistics. 156. The basic philosophy of the Indonesian Government towards the mining of natural resources, as laid down in the 1945 constitution and through subse- quent legislation, is essentially one of state control. "Strategic" minerals like fuel and radioactive minerals, nickel, cobalt and tin, may be mined only by state organizations. However, contractual arrangements have been made for foreign or local companies to enter joint ventures with state mining com- panies. The exploitation of "vital" minerals which include iron, manganese, bauxite, copper, lead, zinc, gold, silver, may, in principle only be under- taken by state enterprises and Indonesian private enterprises. The primary role of the Directorate General of Mines and the Directorate for Development of the Mining Industry in relation to the nonfuel mineral sector is to super- vise the operations and efficiency of the state mining organizations and to promote and negotiate foreign involvement in the sector. In the nonfuel minerals sector there are two state mining companies, P.T. Timah, which is mainly responsible for tin operations both mining and processing and employs 29,000 people and P.T. Aneka Tambang (ANTAN) which, with 6,000 people, operates a nickel laterite mine, ferronickel plant in Pomalaa, a nickel later- ite mine on Gebe Island, a bauxite mine on Bintan Island, an iron sands mine and concentrator at Cilacap, a gold/silver mine at Cikotak with gold/silver smelting facilities at the Logan Mulia. Table 59 summarizes metallic mineral producers/operations in Indonesia. Page 77 Table 59: NONFUEL MINERALS sECTOR COMPANIES AND OPERATIONS/MINERAL EXPORTS Company Shares Location Products/exports P.T. Timah 100% GOI Bangka, Bellitung, Tin metal Sinkep, Riau-Lingga P.T. Aneka lOOX GOI Pomalas (Sulawesi) Nickel ore, ferronickel/a Tambang Gebe Island Nickel, ore /a Bintan Island Bauxite /a Cilacap (Java) Iron sands concentrates /a Cikotak (Java) Gold/silver /b P.T. Freeport 100% Freeport Tembagapura (Irian Jaya) Copper concentrates /e P.T. Inco 100% Inco Soroako (Sulawesi) Nickel-matte /a P.T. Koba tin 751 Kijuara Bangka Tin metal (Australian) 253 P.T. Timah Preussag /c 1001 Preussag Bangka Tin metal P.T. Riau tin /d 901 Billiton Bangka Tin metal 10% P.T. Timah /a All to Japan. 7- Now entirely to domestic markets. 7i Transferred from P.T. Broken Hill in May 1985, 71 Operations suspended and concession relinguished in 1985. 7e 70% to Japan, 30% to Europe. 157. Within the next five-year period, prospects for major new mine development in the nonfuel mineral sector are not bright. As a result of declining metal prices major mine and smelting schemes contemplated in recent years like a proposed threefold expansion of ferronickel production by P.T. Aneka Tambang at Pomalaa, the development of nickel laterite operations on Gag Island and the development of low grade bauxite mining operations and alumina refining operations on Bintan Island, are now shelved. In the tin sector, although Indonesia may be in a better position than other producers in Malaysia, Bolivia, and UK to survive the tin crisis, substantial growth is unlikely until a stable free market price system develops. The only prospects for any long-term growth appear to be in the gold subsector where many contracts of work were signed in 1984 and many more under review by the Ministry of Hines. A primary tin deposit has been located by BPCM (France) in Northeast Kalimnatan and interest is being focused on joint lead-zinc mineral- ization. Page 78 Tin 158. Export earnings of tin fell by 15.32 p.a. between 1980 and 1984. In 1980 tin was Indonesia's biggest foreign exchange earner after oil but by 1984, it had become fifth after oil, natural gas, timber and rubber, with export earnings of only US$269.3 million in 1984 compared to US$519 million in 1980. The decline in the contribution of the tin industry to the nation-s economy in the past few years is due to both failing prices and export quotas agreed in the international tin council. 159. World tin mine production grew steadily until the early 1970s, from 189,000 tons in 1960 to 230,000 tons in 1972 implying an annual average growth rate of 1.7%. World production recovered as a response to the net world supply deficits and to higher tin prices after the 1973-75 economic down- turn. Since 1980 tin mine production has been uuffering from poor overall economic conditions and in 1983, world output fell to its lowest level since 1966. Brazil tripled production in the period 1980-84 while Bolivian produc- tion declined by 25% in the same period. Indonesia's production was at its highest level of 35,000 tons in 1981 and has declined by 9.9X p.a. between 1981 and 1985. Indonesia's main production areas contain ore reserves suffi- cient t 2upport mining activities over 40 years, at the present rates of mining. Indonesia is the second largest tin producer in the world, after Malaysia, with about 18% of world supply. Its ores have a tin content about 25Z higher than Malaysian ores but significantly lower than Brazilian ores. 160. The country's main producer of tin is the state mining company P.T. Timah which is state-owned and accounts for about 75X of the country's output. The others are P.T. Koba Tin (owned 75% by Australian interests and 25X by P.T. Timah), Preussag from the Federal Republic of Germany (1002 equity holding) and P.T. Riau Tin (902 Billiton and 102 P.T. Timah) operated a con- cession until May 1985, when it was relinquished due to existence of only "patch" ore reserves. Tin production by company is given in Table 60. 23/ Messrs. Wardell, Lloyd and Maraboli, INDDI Back-to-Office Report, November 18, 1985. ANNEX 1 Page 79 Table 60; INDONESIA TIN PRODUCTION, 1978-1984 '000 Tons Total P.T. Timah P.T. Koba Tin P.T. Broken Hill P.T. Riau Tin production 1978 24.07 2.92 0.38 - 27.37 1979 25.16 3.81 0.47 - 29.44 1980 26.12 5.26 0.51 0.64 32.53 1981 27.28 6.62 0.55 0.94 35.39 1982 26.24 5.49 0.67 1.47 33.87 1983 19.95 5.25 0.65 0.70 26.55 1984 17.61 4.22 0.47 0.93 23.23 Source: Ministry of Mines Annual Statistics and P.T. Timah Annual Statistics* ibid. 161. Al' tin concentrates except P.T. Broken Hill X are delivered to the Mentok smelter, which is fully owned and operated by P.T. Timah. The smelter produces two qualities of tin. Mentok tin, which contains 99.85% Sn and is both traded and registered in the London Metal Exchange; and Bangka tin, which is marketed directly to consumers with a minimum content of 99.92X Sn and cannot be resold. 162. At present, P.T. Timah's proven reserves ore about 750,000 tons of recoverable tin of which 62X are located in Bangka, 29X on Bellitung and the balance in Singesep and other islands. In addition to this, probably reserves are estimated at about 200,000 tons of recoverable tin. P.T. Koba Tin, with its ample ore reserves, estimated to be 62,000 tons of recoverable tin operates efficiently and'profitably. Finally for Preussag ore reserves were estimated at 250,000 tons of proven ore. Although substantial reserves have been identified, due to declining international prices and particularly recent suspension of tin trading, everything is uncertain. 163. Production costs for the tin sector are not officially available but discussions with P.T. Timah officials and extensive historical operating cost statistics made available to the mission enable approximate production costs to be computed as follows (Table 61): 24/ P.T. Broken Hill exported its concentrate production directly. I ~~~~~~~~~~~~~~~Page 80 Table 61: TIN PRODUCTION COSTS Location Mining System Average production cost (US$ per ton metal) BRangka Island Sea dredges 6,870 Land dredges 9,800 Gravel pump 8,590 Bellitung Sea dredges 12,100 Gravel pump 12,070 Sinkep Sea dredges 11,780 Gravel pump 12,570 Average 1983 production cost, all P.T. Timah operations 9,000 Average 1984 production cost, all P.T. Timah operations 9,710 Current production cost P.T. Koba Tin gravel pump operations 7,770 164. In relation to the floor price of tin--US$11,680 (h8,140)-- imediately prior to the recent suspension of tin trading. Only the Bangka operations of P.T. Timah appear able to operate at a profit. However, as the table indicates, the Bangka operations subsidize the noneconomic operations of Bellitung and Sinkep (yielding an average 1984 production cost of US$9,710) with the result that P.T. Timah have continued to show an annual profit. Of course the level of profitability would be substantially increased if operat- ions were focused on Bangka and a large number of noneconomic and marginal operations on Bellitung and Sinkep suspended. There is little doubt that ample reserves and offshore and onshore equipment exists on Bangka to sustain present production levels. 165. The gravel pump operations of P.T. Koba Tin, which is 25Z owned by P.T. Timah and 75 by Australian private sector interests, are more profitable than all P.T. Timah gravel pump operations, and Koba's gravel pump production costs are almost as competitive as P.T. Timah's lowest cost sea dredge opera- tions. Koba tin is a highly profitable organization, having reportedly paid some US$90-100 million in royalties and corporation taxes to the Government in the last ten years and maintained a multimillion dollar profit after tax. Koba tin maintains a very skilled and experienced Australian/Indonesian management team and has clearly established a very successful operation, whose efficiency and profitability outstrip the public sector P.T. Timah operations. 166. Earnings from tin declined since April 1982, because of export quota imposed by the International Tin Council. But in 1984, tin exports decreased to about 22,500 tons with earnings of only US$269 million (Table 62). ANNEX 1 Page 81 Table 62: INDONESIA TIN EXPORTS, 1980-85 Volume Value Year '000 tons US$ mln 1980 32.53 519.41 1981 33.72 458.74 1982 26.83 356.60 1983 25.33 321.68 1984 22.49 269.26 1985 /a 22.57 249.02 /a Estimate. Source: Ministry of Mines Annual Statistics and P.T. Timah Annual Statistics. In 1983, based on volume, 17.6X of US tin metal imports, 29.61 of EEC, 20.91 of Japan, 21.41 of Poland and 30X of Czechoslovakia's imports came from Indonesia. According to statistics of the International Tin Council, in 1983 the volume of trade in tin in concentrates represented about 151 of world min- ing production and that of tin metal about 701 of world tin metal produc- tion. Due to strong concentration in production and consumption, trade flows in tin are concentrated within the limited number of countries, between devel- oping country exporters on one side and developed country importers on the other side. The developed countries accounted for 771 of total world tin metal imports. In 1980-83, the major developing country importers were Argentina, Chile, Colombia, Egypt, Turkey and Yugoslavia. 167. World consumption of tin metal increased by 1.81 between 1960 and 1973, after a sharp decline in 1914/75, and recovery in 1976/79, world tin consumption has been decreasing since and in 1982 fell to the 1960 level. Consumption during 1972-83 declined by 1.11 p.a. This sluggishness of demand has been the fundamental problem of the tin industry. Technological changes and high tin prices have contributed substantially to weakening of demand. Between 1979-81 production exceeded demand which led to increase in inventor- ies. Although, buffer stocks and export controls have been acting as the price stabilizers, their effectiveness is frequently questioned. Even during the general raw materials slump during 1982 and 1983, the prices scarcely fell below the lower price limit. On the other hand higher prices have contributed to a dampening of consumption. This adverse demand trend has also confronted the tin agreement with problems in the longer term. High tin prices have stimulated production by countries that are not members of the ITC like Brazil and China. Brazil was able to expand its share of world primary tin produc- tion from 2.41 to about 81 in the past decade. Brazilian tin proluction jumped from an estimated 13,000 tons in 1983 to 20,000 tons in l984 and 24,900 tons in 1985, i.e., an increase of about 54X in 1984 and about 251 in 1985. Brazil, which was a net importer of tin four years ago, became the leading tin ANNEX 1 Page 82 exporter to the United States last year. The ITC's difficulties in keeping down new supply in order to bring about a reduction in surplus tin stocks were made worse by a sharp rise in exports from China. At the same time the export control program of the .ITC has been undermined by smuggling, which t .a reached a volume of about a tenth of total tin trading. In 1984 metal trade shares held by producing members of ITC dropped to 53% from 78% in 1970. 168. Tin prices have been fluctuating considerably over the past few years. After a peak in 1980 of $16.78/kg prices started to decline to $14.16/kg in 1981, $12.83/kg in 1982, $12.99/kg in 1983, $12.23/kg in 1984 and $11.95/kg in 1985. Tin trading was suspended at the London Metal Exchange on October 24, 1985. This was caused by lack of financing for the ITC to buy and stock pile the quantity of tin required to maintain the support price. Attempts made to solve the tin crisis by forming a new company which will dispose of the ITC's reported 85,000 tons of tin inventory over a period of 3 years, failed. Negotiations collapsed on March 10, 1986, and the LME terminated permanently. The outstanding contracts were settled at a settle- ment price of US$9,050/ton. It resdiSt4d in a reported loss of just over US$250 million to brokers on the LME. So the International Tin Council Agree- ment and traditional marketing arrangements are terminated. The implication of the collapse of the Tin Agreement is that there is an inventory overhang of about 100,000 tons of tin which includes 85,000 tons of ITC stockpile (equiva- lent to over 6 months of world consumption),, mostly in the hands of banks, brokers and nonproducers which if released rapidly could overpower the mar- ket. There is no well-established tin market price. In December 1985 Metal Bulletin free market tin price was US$9,400/ton and in January US$8,480/ton. Kuala Lumpur, settlement prices are now reported in the range of US$5,000- 5,500 per ton, indicating that prices are falling further than expected. 169. The Southeast Asian producers believe that their tin industries are capable of competing with the Brazilian producers now freed from export restrictions. The export controls, which have limited ITC producer members to about 60% of their capacity have not only affected the earning ability of the mines but must have had P adverse impact on the efficiency and cost of the reduced unit production. - 170. Although Indonesia may well be in a better long-term position than producers in Malaysia, Bolivia, the UK and other countries to survive such a crisis (due to its low production costs in Bangka), a substantial growth in Indonesian tin production is unlikely. Future government policies will undoubtedly have a great impact on future prices. The prices could even go down if Brazil decides to increase its production in the ne.t few sears. Under these uncertain circumstances Indonesian tin production is expected to show a modest increase in 1990 as a result of upward trend of prices by 1995 (Table 63). 25/ Mining Journal, London, March 14, 1986. ANNEX 1 Page 83 Table 63: TIN PROJECTIONS FOR INDONESIA 1985 1990 1995 Production 23.0 /a 25.0 25.0 '000 mt Exports (volume) 22.5 /a 23.7 23.8 '000 mt Export (value) 249.0 /a 189.0 235.0 US$ mn /a Estimate Source: Mission estimates Indonesia's first tinplate plant has been completed this year with an initial capacity of 120,000 tons per year. This would absorb 1,000 tons per year of Indonesian tin. 171. The prospects for tin are very uncertain. According to the mis- sion's evaluation, the level of profitability would be substantially increased if operations were focused on Bangka and a large number of noneconomic and marginal operations on Bellitung and Sinkep suspended. It will be necessary for Indonesia to produce more efficiently, minimizing its costs of produc- tion. Its efforts should aim to make existing capacity competitive when operating in a free market. Though Indonesia plans to expand production to a level of 27,000 tons in 1986, that seems optimistic. This undoubtedly implies a major expansion of low cost Bangka dredge operations, restructuring or closure of high cost operations, and manpower reductions. Even if the Govern- ment relaxes present levels of export taxes and corporate taxes, enough consideration should be given to attract participation of the private sector in the high cost operations which otherwise would have to be closed. The recent devaluation once again makes domestic production of tin profitable. Nickel 172e Indonesia has one of the world's largest reserves of nickel, esti- mated at about 824 million tons of nickel bearing material in otides, or about 15% of total world nickel reserves. The nickel laterites are found princi- pally in central and southeastern Sulawesi and on the islands of Gebe and Gag between Sulawesi and Irian Jaya. P.T. Aneka Tambang and P.T. Inco Indonesia, a subsidiary of Inco Ltd of Canada, are the only two nickel producers in Indonesia. ANNEX 1 Page 84 173. P.T. Aneka Tambang (ANTAM) is mining from two areas, at Pomalaa and at the Cobe Island. Production is on the order of 300,000 m tpy for shipment of nickel ore to Japan and about 300,000 tpy for the ferronickel smelter. Shipping ore averages about 2.5% Ni and smelting ore about 2.2X Ni. Due to reduced sales of ore to Japan, the mine is operating below its capacity. In 1984, P.T. Aneka Tambang produced 1,067,000 tons of nickel ore, a decline of 16.5% from 1,278,000 tons produced in 1983. Of tha'.. amount the Pomalaa mine produced 572,000 tons and the Gebe Island mine 495,000 tons. 174. Antam with Japanese assistance built a ferronickel smelter at Pomalaa in 1975 which processes nickel ore into ferronickel in the forms of ingot and shot. In 1984, the plant produced 22,700 tons of ferronickel, an increase of 9.6% from the 1983 production of 20,700 tons. The plant operates at near capacity, producing about 2,600 tons of nickel in ferronickel ingots (17-25X Ni) and 2,200 tons of nickel in ferronickel shot (20.251 Ni). There are plans to expand (300%) smelter capacity to 16,000 tons per year of nickel in ferronickel, but not in Repelita IV. The expansion of ferronickel plant, which was initially scheduled for completion in 1985, has been delayed because of unfavorable world market for the plant's product. Antam management believes that when this expansion takes place, the expanded output would find a place in the Japanese market. At present the plant requires about 30 MWh to produce 1 ton of nickel as ferronickel, comparable to Japanese plants. Japan is very likely to phase out these high power consuming operations in favor of importing semifinished nickel metal. 175. INCO Ltd of Canada first committed to a mine and smelter in 1973. The three-line plant was commissioned in 1978. The project is designed to produce approximately 33,000 tons of nickel in matte per year. Ore processing capacity to date has only approached 701 but it is hoped to increase through- put to 90X capacity. In 1984, the company produced 23,000 tons of nickel matte, the highest ever achieved, but still below capacity. 176. Recently Antam made an agreement with the Canadian group Northern California Nickel (Ni-Cal) to study a hydrometallurgical project to extract nickel from Gebe Island laterites. Preliminary studies indicate a plant pro- cessing 750 tons of ore per day of Gebe ore would yield 5,000 tons of nickel per year as hydroxide and would cost about US$800 million (excluding mining equipment). They believe such an investment would be economical even at a price of $2.20/pound. 177. Japan is the only market for the Indonesian nickel ore production. Although exports to Japan have increased in recent yearss, they are still below the levels of the early 1980s. Because of the importance of the Japanese market, this dependence, any weakness in Japanese demand directly affects the profitability of Indonesia's nickel projects. Most exports of nickel matte (882) go to Japan while the remaining 121 go to Inco Ltd's facility in Vales. Since between 1985-95 steel production in Japan is expected to decline by 0.51 per annum, and demand, however, is expected to remain unchanged, Indonesia may switch exports to other markets such as Australia, India and China for its exports. The average growth rate of the developing countries' demand is projected to be 4.51 p.a. from 1985-2000. As a result of expected increase in the production of specialty steel in Indonesia, in the 1990s, part NX I Page 85 of nickel matte production might be absorbed there. And finally, since demand for Indonesia's ferronickel is high at present, and Antam claims to receive requests for ferronickel which they cannot fill, it seems advisable to increase to more production and exports of ferronickel. 178. Between 1961 and 1984, world production of refined nickel grew at 3.4X p.a. The industrial countries' production grew at 1.9X and the develop- ing countries' production at 9.7X p.a. The developing countries' share in world refined nickel production increased from 5.42 in 1961 to 19.71 in 1984 ind their share of nickel ore supply has also increased in the last 25 years from 5.4Z of the world market in 1960 to 34.61 in 1984. Indonesia production of nickel increased by 14.11 p.a. between 1975 and 1984 and exports by 13.81 p.a. over the same priod (Table 64). Table 64: TRENDS OF NICKEL PRODUCTION AND EXPORTS 1975-84 Exports /a Production /a Volume Value '000 MT '000 MT US$ mil 1975 14.6 12.8 21.1 1976 13.8 11.7 29.2 1977 16.1 14.2 35.3 1978 30.2 23.7 35.9 1979 35.8 38.4 86.7 1980 40.5 48.2 200.8 1981 45.5 48.9 183.7 1982 48.5 39.4 141.3 1983 41.2 39.1 148.5 1984 47.8 41.2 143.9 /a Includes nickel ore and nickel matte in nickel content. Source: UNCTAD. 179. Nickel prices declined from US$5,953/mt ($2.70/lb) in 1981 to U8$4,673/mt ($2.12/lb) in 1983. The average for 1985 increased by 3.11 from 1984 average of US$4,752/mt ($2.16/lb). But prices are still weak. This weakening of prices has caused some producers to cut back their production for 1986. INCO will extend the summer shutdown at its Clydack refinery in Wales from five to ten weeks. It will take one furnace out of action at P.T. Inco, Indonesia for about six months. London Metal Exchange (LNE) price of nickel is expected to decline to US$4,040/mt ($1.83/lb) in 1986 from US$4,899/mt ($2.22/lb) in 1985. In nominal terms prices are projected to increase to US$5,758/mt ($2.61/lb) by 1995 i.e. by 1.61 p.a. ANNEX I Page 86 180. Table 65 shows the projections of nickel production, and exports by volume and value up to 1995. Production is expected to increase by 4.3Z p.a. between 1985 and 1995 as compared to 12.21 p.a. growth between 1975 and 1985. Exports are projected to grow by 4.31 p.a. between 1985 and 1995 as compared to 13.1% p.a. between 1975 and 1985. Table 65: PROJECTIONS FOR NICKEL PRODUCTION AND EXPORTS /a 1985-1995 Growth Rate I 1985 1986 1990 1995 1975-1985 1985-1995 Production 46 44 53 70 12.2 4.3 ('000 mt) Exports (volume, 44 42 51 67 13.1 4.3 '000 mt) Exports (value, 143.4 121 186 275 21.0 6.8 $ mln) /a Includes nickel ore and nickel matte in nickel content. Source: Mission estimates. Aluminum 181. P.T. Aneka Tambang (Antam) is the only bauxite mining company in Indonesila. High grade (511 alumina) bauxite is mined on Bintan island and is exported (under a long-term contract) for processing in alumina plants in Japan. Production and exports of washed bauxite have fluctuated in the past few years as a result of low demand due particularly to the closing of several aluminum plants in Japan. Production fell from an annual average of 1.2 mil- lion tons during 1977-1981 to 700,000 tons in 1982. There was a considerable improvement by 1984 with a total production of 1 million tons and exports of 992,000 tons. A scheme to construct an alumina plant on Bintan island to process low grade (451) bauxite for shipment to the Asahan smelter has been shelved due to depressed world aluminum prices, the availability of cheap alumina from Australia, and the low grade nature of Indonesian bauxite reserves. 182. In 1975 Japanese aluminum producers formed a consortium and signed a "Master Agreement" with the Indonesian Government to build the Asahan power project. In 1976 P.T. Inalum (Indonesian Asahan Aluminum) was formed. 751 of its equity is held by a Japanese consortium and 251 by Indonesian govern- ment. The plant was built in three stages between 1982-1984. It produces ANNEX 1 Page 87 aluminum, utilizing alumina imported from Australia, for shipment to Japan (75% production) and domestic use (25% production). The Japanese investment consortium of aluminum smelters are obliged to take 75X of aluminum production at London Metal Exchange prices. During the last two years, the international price of aluminum has dropped over 50% and although the project has cheap power and the price of alumina imports from Australia is also declining, the price of aluminum has not enabled the project to cover capital charges of the initial Iavestment. Current contract terms establish a price for material based on an LME cash price, f.o.b., less a discount of 2.5%. Indonesia not only wants the discount abolished, but is also asking for a premium higher than that currently prevailing in Japan. 183. Since present plans require all motorcycle engine blocks to be manu- factured domestically, the domestic consumption of aluminum is expected to grow by about 5% p.a. 184. In 1985 the productica of aluminum was 206,000 tons, the smelting capacity is 225,000 tons and is operating at about 90% capacity and the operating rate is expected to increase up to 95% (Table 66). Table 66: PROJECTIONS FOR ALUMINUM EXPORTS 1985 1990 1995 Production 206 207 214 ('000 tons) Export volume 175 170 165 ('000 tons) Export value 182 263 334 ($ mln) Source: Mission estimates. If the expansion plans materialize which are scheduled this year, it may be possible for new capacity to come on stream. Copper Concentrates 185e Copper is an important part of the Indonesi;- mineral sector. In 1984, Indonesia produced 190,300 tons of copper concentrates as compared to 205,000 tons in 1983 which is about 7% decline from 1983 levels. Based on copper content figures the output of 1984 increased by about 9% from 1983 level of 78,600 tons. Exports in 1984 fell by 11% from 202,800 tons in 1983. For 1985 production has declined by about 161 from 1984 levels in terms of metal content and based on copper concentrates output it declined only by 4.61 from 1984 levels. ANNE 1 Page 88 186. There is only one significant copper mine operating in Indonesia -- Freeport Mineral Company's project in Irian Jaya. Freeport Indonesia, a US- based company, mines at two sites, Gunung Bijih and Gunung Bijih Timur, in its contract block at Temhbagapura, Irian Jaya. Freeport began mining in 1973 at Gunung Bijih with a proven reserve of 33 million tons of ore. In 1981, production began from an underground mine, Gunung Bijih Timur, on an ore body estimated to contain 45 million tons of a lower grade (2.4% versus 2.5-3% in the original ore body). In order to exploit additional copper reserves beneath the original ore deposit, Preeport Indonesia has begun construction of two huge underground tunnels. The construction is expected to be completed by 1987 at a cost of about US$20 million. The older open pit mine produces between 1,000 and 3,000 tons daily and reserves are expected to run out in 1987. Owing to the phasing-out of the open pit section of Freeport's Ersberg mine in Indonesia, the country's capacities, which wer! 1,000 tons at end- 1984, are expected to decrease to 84,000 tons in 1987.6 187. The copper mining and concentration operation 271 of Freeport remains one of the few worldwide operations that is profitable at a time when copper prices are at an all time low. In 1982 the company averaged $0.84/lb of payable copper from its copper, gold and silver sales hedging activities, when the London Metal Exchange (LME) price of copper was $0.67/lb. Freeport has, since its initial development, proved a profitable operation and although specific annual profits vary considerably, total profits during the 1982-84 period have totalled some US$25 million, after tax. Freeport Indonesia has long term sales contracts with Japanese metals and trading companies for about 70% of the concentrates. The rest goes mostly to Europe. 188. Between 1980-85 Indonesia had been receiving a higher price for its exports than the UME price (Table 67). 26/ CIPEC - QUARTERLY REVIEW, October-December, 1985. 27/ Traces of gold and silver are associated with the copper sulphide and are sold as an integral part of the copper concentrates. ANEX 1 Page 89 Table 67: COPPER CONCENTRATES /a PROJECTIONS FOR INDONESIA 1980 1982 1984 1985 1990 1995 Production ('000 MT) 59.0 75.1 85.6 72.0 70.0 70.0 Exports (volume) ('000 tons) 58.7 76.9 78.0 73.2 70.0 70.0 Export price ($/ton) 2,606 1,561 1,405 1,549 1,713 2,296 LME price (WIton) 2,182 1,480 1,378 1,417 1,713 2,296 Export (value, US$ million) 153 120 110 114 120 161 /a Metal content. Source: Mission estimates. The smelti g refining charges for copper (metal content) are in the range of 11-13C/lb - plus 2¢/lb Cu for freight from Indonesia to the terminal market. These charges are expected to go up. Japanese smelters are setting the floor price for smelting charges for the whole world. Smelting companies will not be able to offer these smelting charges in future years because of the appreciation of the yen. Assuming the exchange rate remains at the present level, smelting charges are assumed to be at level of 20¢/lb in real terms for the future years. 189. Copper concentrates contain by-product credits of 20¢/lb. These credits will offset the expected increase in smelting/refining and freight charges in the future years and bring unit value of exports from Indonesia in line with the LME price. The unit value was higher than LME price before but for pr #cted years the exports are expected to get the projected LME price,1- which is not expected to increase in real terms. 28/ U.S. Metals'Economics Group, prime Development Bimonthly, April, 1986. 29/ World BSank, Price Prospects for Major Primary Commodities 814/86 (Copper- Draft). ANEX I Page 90 J. Fertilizer 190. In the past, Indonesia has been a net fertilizer importer. Despite rapid development of large fertilizer capacity, mainly aimed at meeting domestic requirements, supply remained generally insufficient to meet fully the fast growing fertilizer demand. 191. The Government of Indonesia has long favored increased levels of fertilizer application as one of the key means to achieve increased food production aimed at self-sufficiency. The Government, therefore, successfully exploited the country's abundant gas reserves for nitrogenous fertilizer pro- duction, and in a few years not only met the country's nitrogenous fertilizer demand, but also exported the product in 1977-79 to other Asian countries. Because of its geographical proximity to these countries Indonesia enjoys a competitive advantage over suppliers from Western Europe, the United States and even the Middle East. 192. However, as domestic consumption increased sharply (32% in 1980) following government policy measures to increase agricultural production, Indonesia again became a net importer in the early 1980s. To respond to these consumption incres:. , the Government undertook substantial additions to the domestic fertilizer Lapacity. Four new plants with combined annual capacity of 2.3 million tons of urea were completed and commissioned during the period 1983-85. As a result, the country will have surplus urea until 1989, with urea production in excess of projected domestic requirements expected to reach 680,000 tons in 1983 and then to decline as demand expands. It is expected that, in the absence of further investment in capacity, a deficit of 150,000 tons would be experienced by 1990, rising to 1.2 million tons by 1995. In anticipation of such deficits, GOI plans to build two additional urea plants by 1988/89 with a combined annual capacity of 1.1 million tons, which will meet the deficit and provide urea for export until 1994. The Indonesian Fertilizer Industry 193. At present, Indonesia has 13 fertilizer plants, with a total installed capacity of 5.9 million tons per year (tpy) of product, of which 4.5 million tons is dedicated to urea production. There are currently six fertilizer producers; five are owned by the Government, and the sixth, P.T. ASEAN Aceh, is a joint venture between Indonesia and other ASEAN countries. The Indonesian nitrogenous fertilizer industry has demonstrated over the years that it can operate at high capacity utilization and efficiency rates. In addition, it benefits from the availability of relatively low cost feedstock and is overall one of the cheapest producers in the world. The industry is now embarking on a dynamic program of debottlenecking, rehabili- tation and energy efficiency improvement, as well as strengthened staff training, which would further enhance its international competitiveness. Prospects for Nitrogenous FertiLizer Exports 194. An extensive review of the Indonesian fertilizer sector is now needed, including evaluation of future government plans, examination of agricultural policy, implications and preparation of detailed regional (East ANNEX 1 Page 91 Asia) supply/demand balances, so as to formulate a medium- to long-term export strategy for nitrogenous fertilizers. Our preliminary assessment has identi- fied Indonesia, the largest fertilizer producer in East Asia (excluding China), as a strong candidate for sustained nitrogenous fertilizer exports to East Asia. Some of taie factors that give Indonesia this privileged position in the international nitrogenous fertilizer market are: (a) Natural Gas. Indonesia has considerable gas resources with estimated recoverable reserves of about 80 trillion ft (tcf), compared to an annual production of 1.5 tcf in 1984. The Government has so far given priority to the use of gas for liquefied natural gas (LNG) export projects, but other important uses of gas include fertilizer and as energy source in steel production. In 1983, gas consumption for LNG, fertilizer and steel accounted for 55%, 7% and 3%, respectively, of total gas output. With continuing gas discoveries, but limited additional opportunity for export of LNG, the Government will need to review its policy regarding priorities in gas utilization. A study conducted by BEICIP in 1985 shows a aetback value of gas in urea production of US$2.8/MMBTU, assuming (a urea price of US$208/ton, which is the long-term equilibrium price projected by EPD). Taking into account the future oil price projected by EPD at US$18/bbl (in constant 1985 prices) by 1995, the gas value on a fuel oil equivalent basis would be about US$2.7/MMBTU. After deducting an estimated regasification and transport cost of about US$1.0/MMBTU, this would3 'eld a netback value for gas in LNG export of at best US$1.7/MMBTUV i.e,, well below that obtained in urea production at long-term equilibrium prices. With oil markets and LNG export projects and prices at best uncertain (due to the near- saturation of the Japanese import market), there is a clear need for Government to examine alternative gas utilization possibilities. In the context of possible urea exports, there is also a need tc, evalu- ate more closely the economic cost of gas to be made available for ammonia/urea production. (b) Capital Cost and Operating Efficiency. Energy and capital costs are normally the two most important components of total factory-gate cost of producing ammonia and urea. Because of the combination of abundant availability of gas (which is the cheapest feedstock) and relatively low capital investment costs, Indonesia can achieve cost levels comparable to other potential exporters, such as those in the Arab Gulf, With tlhe implementation of a relatively large number of fertilizer plants during the last 22 years, the Indonesian ferti- lizer industry has successfully built up valuable experience in engineering, project management and implementation, all of which can contribute to minimizing capital costs. The two recent Bank-assis- 30/ Excluding liquefaction cost. A 1l Page 92 ted urea projects, PUSRI III and PUSRI IV, were completed ahead of schedule with considerable cost savings and have reached higher than expected capacity utilization. The average capacity utilization in the Indonesian industry is now close to 1002 in most plants, and exceeds this level in some, in marked contrast to the experience of some other such projects in developing countries. The actual proj- ect cost of PUSRI III and PUSRI IV per installed ton of urea capa- city, at US$337 and US$313, respectively, were at the low end of the range of such project costs (US$280 to US$420) in urea projects in the mid-1970s. (c) Tarset Markets. A preliminary analysis of the comparative cost of delivering urea to selected markets from various potential urea exporters and of projected supply/demand balances in the region has identified countries such as Thailand, Philippines, Singapore, Malaysia, Japan, Taiwan, Oceania, South Korea, and possibly some Centrally Planned Economies in Asia (such as Vietnam and North Korea) as prime target markets for Indonesian urea exports. The likely export competitors in this market besides Indonesia, would be from the Arab Gulf. Indonesia's geographical proximity to these markets, with a concomitant freight advantage, as well as its competitive production costs, would provide its nitrogenous fertilizer industry with a marked advantage over other competitors. (d) Trade Arrangements. In view of the uncertainty surrounding the future of oil markets, Indonesia is likely to continue to face a tight and uiicertain financial resource outlook over the next few years, with constaints on funds available for future investments. Thus, taking into account the increasing need for new capacity towards the end of the decade, prospects for joint ventures and trading arrangements in the nitrogenous fertilizer sector should be considered. Such arrangements could be similar to the existing ASEAN-Aceh joint venture with other ASEAN countries, or could involve firms from other overseas countries. Such arrangements could contributes (i) easier access to export markets; (ii) minimum claims on scarce government resources; (iii) technical assistance, manpower and training (as found in the joint venture engineering firm between PUSRI and Kellogg) and easier iccess to up-to-date technological development. Attracting private investors in the sector will, however, require feedstock price arrangements which not only take into account the opportunity cost of gas, but which can also help such investors bear the risks related to fertilizer price volatility. Such arrangements should be provided not by offering a long term assurance of the very cheap gas they might need to compete in the short term, but by more sophisticated gas pricing formulae of the kind adopted in other parts of the world where the arrangement ties the gas price to the ANEX 1 urea price (via the company's financial results) providing a low minimum gas price in the case of depressed fertiliser markets, but with escalation under more buoyant product markets. i~~~~~~~~~~~