Vincent Lingga
Senior Editor at The Jakarta Post
Jakarta / Wed, January 23, 2019 / 10:08 am
A man collects raw rubber on the banks of the Subayang River in Riau in this file photo. Rubber is currently selling for Rp 6,500 (44 US cents) per kilogram down from a high of Rp 20,000 per kg. (The Jakarta Post/Tarko Sudiarno)
A man collects raw rubber on the banks of the Subayang River in Riau in this file photo. Rubber is currently selling for Rp 6,500 (44 US cents) per kilogram down from a high of Rp 20,000 per kg. (The Jakarta Post/Tarko Sudiarno)
The liberalization of foreign investment in the crumb rubber industry is an example of misguided policy-making, which instead of achieving the objective of attracting investment could adversely affect the whole industry.
As natural rubber is Indonesia’s seventh-largest export commodity with an annual income of about US$5.5 billion, it was included in the latest economic reform package last November that focused on wooing more foreign direct investment.
But the Indonesian Rubber Producers Association (Gapkindo) has strongly opposed the new policy, arguing that the crumb rubber industry has been suffering from acute raw material shortages and most plants have been operating mostly at 60 percent of their installed capacity as a result of a lack of raw materials.
“The crumb rubber industry has a capacity of 5.6 million tons while the upstream sector [plantations] is able to supply only about 3.6 million tons of raw rubber,” noted Widyantoko Sumarlin, a senior executive of Gapkindo and chief sustainability officer of Kirana Megatara, one of the country’s largest crumb rubber producers.
Widyantoko said most crumb rubber plants had been operating far below their installed capacity because of the acute lack of raw materials and low rubber prices overseas.
Indonesia is the second-biggest natural rubber producer and exporter in the world, with a total area of around 3.5 million hectares but with an average yield of only 1 ton per ha, compared to 1.6 tons in Thailand, the second-largest producer, and Malaysia as the third-largest.
Different from oil palm plantations and the industry, which is dominated by big business groups, most (85 percent) rubber plantation areas belong to smallholders, private companies (9 percent) and state firms (6 percent).
The government apparently thought that increasing the number of crumb rubber factories would automatically make the competition for latex much keener and this would help raise producer (smallholder) prices.
But this premise seems to be wrong. Gapkindo has said that because crumb rubber producers export more than 80 percent of their production, they use international prices that are quoted at the futures commodity exchanges in Singapore, Tokyo and Shanghai, as their main references for the domestic procurement of latex.
True, the price of rubber, like most other commodities, has been very low over the past six years, falling from as high as $5 per kilogram in 2011 to as low as $1.20 in 2017 and $1.70 early this month.
But this price decline was caused mainly by the sharp fall in demand in China, which accounts for more than 40 percent of global demand.
The price will not likely rise this year because of the cascading effect of the slowdown in global growth, especially in China, and the downward trend in the price of crude oil, the basic material for synthetic rubber.
What is badly needed instead, according to Widyantoko, is more farm extension services to help smallholders increase the yield of their plantations through the best farming practices and planting high-yield seedlings to replace their old trees.
However, smallholders simply cannot afford the replanting costs, which could reach as high as Rp 3.5 million ($240) per ha for clearing land and uprooting old trees and high yield seedlings, while the government’s budget is severely limited.
According to data at the Agriculture Ministry, 400,000 ha of smallholder rubber plantations require replanting, while the
local production of certified seedlings is way smaller than the demand.
Partnerships between rubber processing companies and smallholders under government oversight, as widely implemented between big oil palm plantations and smallholders, could be a highly effective collaborative model to solve the problems of low yields and poor quality because they depend on each other for their survival.
But different from the oil palm estates and palm oil industry, which are controlled by big plantation companies, rubber plantations are dominated by smallholders who are not only poorly organized but also financially weak and lack competence in best farming practices.
“We in Kirana Megatara have been expanding our partnership programs to empower smallholders, but only on the basis of good faith. We need a better designed regulatory framework for NES [nucleus estate-smallholder] programs,” Widyantoko noted.
Even though the 2014 Plantation Law specifically requires all big plantation companies to implement NES partnerships, there is no government regulation on the technical details on how the NES scheme should be implemented. Moreover, the NES program is compulsory only for new plantations.
Without comprehensive regulations on technical details, there seems to be legal uncertainty as to the identification of the smallholder target, standard NES contract and other issues related to land titles and permits from local administrations.
Additional investment is truly needed in the rubber industry, but not specifically in crumb rubber, an intermediate (mid-stream) material with low added value.
The government should instead stimulate new investment in downstream plants to manufacture higher added-value products as components of automobiles and electronic goods, medical gloves, carpets, footwear and asphalt.
Thus far the biggest industrial user of natural rubber has been tire manufacturers, which have to compete fiercely with synthetic rubber producers.
Thailand’s and Malaysia’s rubber industries also depend mainly on the international market.
But their domestic raw rubber prices have always been much higher than Indonesia’s because of the high demand from their downstream rubber factories, which manufacture a wide variety of rubber goods, besides tires and medical gloves.
As natural rubber is Indonesia’s seventh-largest export commodity with an annual income of about US$5.5 billion, it was included in the latest economic reform package last November that focused on wooing more foreign direct investment.
But the Indonesian Rubber Producers Association (Gapkindo) has strongly opposed the new policy, arguing that the crumb rubber industry has been suffering from acute raw material shortages and most plants have been operating mostly at 60 percent of their installed capacity as a result of a lack of raw materials.
“The crumb rubber industry has a capacity of 5.6 million tons while the upstream sector [plantations] is able to supply only about 3.6 million tons of raw rubber,” noted Widyantoko Sumarlin, a senior executive of Gapkindo and chief sustainability officer of Kirana Megatara, one of the country’s largest crumb rubber producers.
Widyantoko said most crumb rubber plants had been operating far below their installed capacity because of the acute lack of raw materials and low rubber prices overseas.
Indonesia is the second-biggest natural rubber producer and exporter in the world, with a total area of around 3.5 million hectares but with an average yield of only 1 ton per ha, compared to 1.6 tons in Thailand, the second-largest producer, and Malaysia as the third-largest.
Different from oil palm plantations and the industry, which is dominated by big business groups, most (85 percent) rubber plantation areas belong to smallholders, private companies (9 percent) and state firms (6 percent).
The government apparently thought that increasing the number of crumb rubber factories would automatically make the competition for latex much keener and this would help raise producer (smallholder) prices.
But this premise seems to be wrong. Gapkindo has said that because crumb rubber producers export more than 80 percent of their production, they use international prices that are quoted at the futures commodity exchanges in Singapore, Tokyo and Shanghai, as their main references for the domestic procurement of latex.
True, the price of rubber, like most other commodities, has been very low over the past six years, falling from as high as $5 per kilogram in 2011 to as low as $1.20 in 2017 and $1.70 early this month.
But this price decline was caused mainly by the sharp fall in demand in China, which accounts for more than 40 percent of global demand.
The price will not likely rise this year because of the cascading effect of the slowdown in global growth, especially in China, and the downward trend in the price of crude oil, the basic material for synthetic rubber.
What is badly needed instead, according to Widyantoko, is more farm extension services to help smallholders increase the yield of their plantations through the best farming practices and planting high-yield seedlings to replace their old trees.
However, smallholders simply cannot afford the replanting costs, which could reach as high as Rp 3.5 million ($240) per ha for clearing land and uprooting old trees and high yield seedlings, while the government’s budget is severely limited.
According to data at the Agriculture Ministry, 400,000 ha of smallholder rubber plantations require replanting, while the
local production of certified seedlings is way smaller than the demand.
Partnerships between rubber processing companies and smallholders under government oversight, as widely implemented between big oil palm plantations and smallholders, could be a highly effective collaborative model to solve the problems of low yields and poor quality because they depend on each other for their survival.
But different from the oil palm estates and palm oil industry, which are controlled by big plantation companies, rubber plantations are dominated by smallholders who are not only poorly organized but also financially weak and lack competence in best farming practices.
“We in Kirana Megatara have been expanding our partnership programs to empower smallholders, but only on the basis of good faith. We need a better designed regulatory framework for NES [nucleus estate-smallholder] programs,” Widyantoko noted.
Even though the 2014 Plantation Law specifically requires all big plantation companies to implement NES partnerships, there is no government regulation on the technical details on how the NES scheme should be implemented. Moreover, the NES program is compulsory only for new plantations.
Without comprehensive regulations on technical details, there seems to be legal uncertainty as to the identification of the smallholder target, standard NES contract and other issues related to land titles and permits from local administrations.
Additional investment is truly needed in the rubber industry, but not specifically in crumb rubber, an intermediate (mid-stream) material with low added value.
The government should instead stimulate new investment in downstream plants to manufacture higher added-value products as components of automobiles and electronic goods, medical gloves, carpets, footwear and asphalt.
Thus far the biggest industrial user of natural rubber has been tire manufacturers, which have to compete fiercely with synthetic rubber producers.
Thailand’s and Malaysia’s rubber industries also depend mainly on the international market.
But their domestic raw rubber prices have always been much higher than Indonesia’s because of the high demand from their downstream rubber factories, which manufacture a wide variety of rubber goods, besides tires and medical gloves.
***
The writer is a senior editor at The Jakarta Post.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.
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