22/02/2011 (Daily Times) - Rising food prices and a government drive to develop Indonesia’s commodity processing sector will lure more firms to invest in palm oil products in the world’s top maker of the oil, despite erratic power, bad roads and aging ports that complicate the task of processing and moving goods.

Record food prices may have thrown many emerging market nations into a tizzy, but Indonesian producers of the edible oil, used to make everything from biscuits to ice cream, have seen margins rise and are giving the green light to more investments.

Government plans to spend nearly a third more funds this year to refurbish power and transport facilities are also a potent draw, say analysts. Firms such as the world’s biggest food group, Nestle , and top listed palm producer Wilmar are also eyeing growing domestic demand in Southeast Asia’s biggest economy and government tax incentives to attract manufacturing. The new investments, which amount to around $1.2 billion so far, will slowly cut Indonesia’s exports of crude palm oil to a market already at three-year highs, and boost profits at firms in Indonesia as they snatch a greater share of processing from main player Malaysia. “It’s a trend we’re seeing,” said Andreas Bokkenheuser, an analyst at UBS. “It follows high crude palm oil prices, which have increased the profitability of the plantation companies significantly, and a lot of that money is being re-invested.”

The benchmark May crude palm oil contract on the Bursa Malaysia Derivatives Exchange hit a near three-year high at 3,967 ringgit last week, on worries about the impact of rains on output, with demand robust. Prices have gained about 50 percent over the last six months, and analysts see further gains in the short term.

Indonesia has stepped up food imports to ensure food security after global food prices hit a record high in January, and is seeking greater foreign direct investment in manufacturing to stabilise its long-term finances.

Indonesia plans to offer fiscal incentives and restructure its export tax policy on crude palm oil, after it steadily hiked the tax to 25 percent in February from just 3 percent a year ago, to do more to spur downstream processing in the country.

The government said this month that Singapore’s Wilmar would invest $900 million to build factories in Indonesia to produce palm products such as soap and margarine. Wilmar has a total area of more than 235,000 hectares under palm oil in the country and also plans to develop a 200,000-hectare sugar plantation in Indonesia’s Papua.

Nestle will put $100 million into a new factory to make Milo beverages and infant cereals to tap an emerging middle class in the world’s fourth largest population, while Germany’s Ferrostaal will invest $100 million to $150 million in downstream palm oil.

“These plans have likely been in the works for quite some time, but a combination of factors could have triggered the investment decision, including the recent spike in prices,” said Chen Xin Yi, analyst at Barclays Capital.

Analysts said other candidates for downstream investments in Indonesia were palm producers Indofood Agri Resources and PT Sinar Mas, as well as food firms such as Unilever , which uses palm to make Dove soap and Stork margarine. Such moves reflect increasing confidence by investors in Indonesia, where the economy grew an annual 6.9 percent in the fourth quarter of 2010, the strongest pace in six years, led by domestic consumption, state spending and investment.

Total investment grew by 54 percent last year, with foreign direct investment rising 52 percent as firms — particularly from Asia — put money into plants to make goods or to extract mineral resources. The country is still reliant on exports of raw materials, and is aiming to move up the value chain. Rival palm producer Malaysia sells mostly higher-value refined products.

Infrastructure hopes: Indonesia exported 15.6 million tonnes of palm oil products in 2010, with byproduct exports at 6.8 million tonnes, and crude palm oil at 8.7 million tonnes, according to the Association of Indonesian Palm Oil. Global palm output is 45 million tonnes.

Indonesia outpaced Malaysia to become the top palm oil producer in 2007, though the move towards the downstream comes as firms may now face slower upstream expansion as a planned two-year moratorium on forest clearance aims to curb greenhouse gas emissions from rampant deforestation. reuters