Friday May 20, 2005, 3:43 pm JAKARTA (Dow Jones)--Indonesian palm fattyacid exports to China will likely rise 50% on year to 360,000 metric tonsin 2005.

That will account for around 60%-70% of China's annual fatty acids demandof 500,000 tons to 600,000 tons, said Kris Hadisubroto, chairman of theIndonesian Association of Oleochemical Producers, or Apolin.

The projected surge in exports is linked to China's decision last year tolower tariffs on stearic acid imports to 5% from 16% beginning January2005, Hadisubroto told Dow Jones Newswires in an interview.

Indonesia's fatty acids exports to China was estimated at 240,000 tons in2004, he said.

"Our exports to China have recovered since the new import duties tookeffect early this year," he said. "With lower import tariffs, we can leadthe Chinese market over Malaysia."

Stearic acid is a fatty acid derivative made from palm oil that is used inthe production of items such as toiletries and lubricants.

The reduction in import duty was the result of Indonesia's lobbyingefforts to include stearic acid in the Association of Southeast AsianNations-China trade liberalization program. The program is expected topave the way for a China-Asean free trade area between 2010 and 2013.

Hadisubroto said China's thirst for edible oils to supply the country'sballooning industrial production sector was a major driver behind therising demand for fatty acids and other oleochemicals from Indonesia.

China's fatty acids demand is likely to grow 5% to 10% annually as Chinesedetergent and plastic industries surge ahead, he said.

China has a seemingly insatiable appetite for raw materials to feed anindustrial engine that powered a 9.5% on-year economic expansion in thefirst three months of 2005. Chinese gross domestic product growth was atthe same high level of 9.5% in 2004.

To meet rising demand from China, Indonesia's oleochemical firms areexpanding their capacity to 750,000 tons by 2006, from around 600,000 tonsnow, Hadisubroto said.

China's emerging interest in edible oils as an alternative energy sourceis also fueling the rising demand for palm oil and its variousderivatives, he said.

PT Musim Mas, one of the largest palm oil companies in Indonesia, plans tobuild a bio-diesel plant in China with an annual capacity of 60,000 tons,Hadisubroto said.

Lack of Local Talent Slows Growth Of The Sector

Increasing global demand for edible oils, which consumers perceive ashealthier than animal fat in cosmetics and personal care products, willcontinue to boost Indonesia's output of oleochemical products such asfatty acids and fatty alcohol, Hadisubroto said.

"Cosmetic and personal care producers are turning to palm oil for itssafety and purity," he said.

Demand from U.S and E.U. cosmetic and personal care industry is expectedto help boost Indonesian output of fatty alcohol to 150,000 tons by 2006,from the current 120,000 tons, he said.

Indonesia exports around 95% of the fatty alcohol it produces.

But this bright outlook for Indonesia's oleochemical industry is damped bya lack of local skilled technical experts to work in the industry,Hadisubroto said.

Elaborate processing methods for making oleochemical products requirespecialized skills and proper training.

"It is a chemical industry, (so) one must make sure of the right formulaand composition if one wants to produce products that sell well in themarket," Hadisubroto said.

The lack of technical expertise has meant that Indonesia has mostlyremained a bulk exporter of crude palm oil while rival Malaysia hascornered a bigger slice of the processed and value-added products' market.

According to Apolin data, Indonesia's oleochemical industry accounted foronly 10% of the country's total palm oil production of 12.2 million tonsin 2004. Indonesia exported 8.66 million tons of crude palm oil tocountries with more advanced oleochemical processing industries.

Hadisubroto said Indonesian oleochemical companies are now hiring expertsfrom countries such as Malaysia, the Philippines and Japan to compensatefor the lack of local talent.

Malaysia exported 1.77 million tons of oleochemical products in 2004, up12.6% from 1.57 million tons in 2003.

"The oleochemical industry won't progress unless we have our localexperts," Hadisubroto said.