Naturals in Indonesia - IFEAT Shanghai - By Sandeep Tekriwal

8/10/2019 Naturals in Indonesia - IFEAT Shanghai - By Sandeep Tekriwal

1/16

NATURALS IN INDONESIA

Sandeep Tekriwal

Van Aroma

Jl.Raya Bypass, KM 20, Padang, Indonesia

[email protected]

A very good morning to all the IFEAT Members & Delegates present today.

My name is Sandeep Tekriwal and I am from PT. Van Aroma, Padang, Indonesia. I

would like to take this opportunity to share some information on the World of

Naturals in Indonesia.

This lecture will highlight some of the major developments and concerns of the

essential oils industry during the past two or three years especially in regard to

violent price fluctuations in patchouli.

As is known within the industry worldwide, Indonesia is a major supplier ofpatchouli, nutmeg, vetiver, cananga, citronella, massoia bark, sandalwood, cajuput,

ginger, clove and its derivatives.

Almost 85 % of the volume / turnover comes mainly from three products i.e.

patchouli, nutmeg and clove.

But first and foremost some basic information on Indonesia, its location and a

SWOT analysis of the country relevant to the naturals industry worldwide.


2/16

Indonesia is the largest archipelago in the world with more than 17,500 islands,

located between India on the north western border and Australia on the south

eastern border giving it a width similar to that of Canada. It boasts a population of

235 million making it the fourth largest in the world after China, India and theUnited States of America, and has a tropical climate with temperatures ranging

from 22C to 32C all year round with plenty of rain and sunshine and a very

fertile land. Its the world biggest Moslem country with almost 88% of the

population following Islam and people are generally religious and tolerant with

many pockets of other communities following Hinduism, Christianity and

Buddhism living side by side peacefully. It is one of the shining examples of a

country moving to a complete democratic form of governance over a short period

of just 10 years. Recent national elections have provided the country with a stableand strong government with a dynamic president, and a professional team

delivering consistent GDP growth of 4.5-6% over the past 5 years, despite recent

economic meltdown in many western and developed economies.


3/16

SWOT ANALYSIS OF INDONESIA IN NATURALS

STRENGTHS

1) Supplying 90% of the world patchouli oil requirement. Exporting 1400

MT of the 1500 MT/year world consumption. Other countriesproducing patchouli are India and China, but the Indonesian quality is

more acceptable in the world markets.

2) Supplying 80% of the world nutmeg oil requirement. Exporting about

500 MT out of the total demand of 600 MT/Year. Other countries

producing nutmeg oil are Grenada, Sri Lanka, India, but the quality and

quantity are insignificant.

3) Supplying 50% of the worlds demand in crude clove oil & 75% of theworlds clove oil derivatives such as eugenol, iso eugenol, methyl

eugenol etc. Indonesia exports close to 2500 MT of the world demand

of 3500 MT/ Year of crude clove oil and its derivatives.

4) Having the 2ndhighest biodiversity in the world after Brazil, making it

suitable for the production of many other varieties of naturals.

5) Competitive labour costs for labour intensive industries makes it one of

the low cost production bases for naturals such as vetiver, cananga,massoi bark, ginger, sandalwood oil etc...

WEAKNESSES

1) U no rg an iz ed f ie ld

distillation industry and

product ion of raw

material with hardlya n y s i g n i f i c a n t

contribution from the

organized sector.

2) Crude field distillation

technology thereby

Current Patchouli Oil Supply Chain


4/16

giving poor and inferior quality and yield.

3) Long supply chain between farmers and exporters adding to the overall

cost of the end product.

4) Poor infrastructure facilities.

5) Lack of current international market information, demand and supply

situations for the farmer distillers.

6) Non availability of working capital from banks, forcing farmers to

borrow from the unorganized sector at very high interest rates, thereby

depriving farmers of their due share of profit margins.

OPPORTUNITIES

1) Develop partnerships between farmers and exporters and educate them

about modern distillation and farming techniques.

2) Develop partnerships between local and

overseas buyers so as to encourage new

investments, latest technical know-how

and better market access.

3) Increasing trend in developed countries

for shifting high cost production base to

low cost economies like China, India and

Indonesia.

4) Develop local Indonesia flavor &

fragrance industry like China and India.

5) Increase in purchasing power of theIndonesian middle class.

6) Shift in the trend from synthetic to

naturals.


5/16

THREATS

1) Global warming and changing weather patterns- El Nino/La Nina

weather effects.

2) Violent price fluctuations - Viz. patchouli can kill a products long-term

prospect.

3) Competition from other plantation products like palm, cacao, coffee

etc... This can easily grab the arable farmland if prices of these

commodities move up.

The total value of exports of natural essential oils (HS-3301) from Indonesia has

been estimated to be about USD 105 Million, while imports of essential oils stand

at USD 380 million.

Table 1: Indonesia: Imports and Exports of Essential Oils 2003-2008 (US$)

Source: Indonesian Bureau of Statistics


6/16

Indonesia exports the basic raw naturals without much value addition while it

imports the flavor and fragrance formulations and compounds after value addition

from overseas. The top 5 countries/regions accounting for almost 80% of the total

exports of naturals from Indonesia are:

1) United States of America

2) EU- France/Germany/Italy/Spain

3) China

4) Japan

5) India

PATCHOULI OIL

Traditionally patchouli had been cultivated predominantly in the island of Sumatra

and recently Java, these together accounting for 90% of the production, mainly

coming from areas such as Aceh, the Nias Islands, the Mentawai Islands,

Bengkulu, and Jambi in Sumatra and Kuningan, Malang, Blitar and Garut area in

Java. Over the past couple of years, there has been a significant development in

patchouli oil production in Java and it would be safe to say that in the very nearfuture Java may overtake Sumatra in total production. Other areas which have been

developing fast are some pockets of Sulawesi and Kalimantan. Most of the

patchouli produced in Sumatra is of the dark variety, while Java produces the light

iron free patchouli, basically due to the use of stainless steel distillation vessels,

while in Sumatra, the traditional small Iron drums are still in use. Sumatra quality

patchouli is still much preferred due to its superior odor value.

We are all aware of the violent price fluctuations which have taken place in

patchouli oil over the past three years (Diagram No: 1).


7/16

As one can see from Diagram 1, illustrating patchouli prices during the last 5

years, the prices bottomed to a level of USD 22 in Nov2006 and then peaked to a

level of USD 170 in January 2008 falling to USD 95 in April 2008. Prices fell

further to USD 65 by November 2008 and came close to bottoming out at USD

32-35 in August 2009. Nobody will disagree that this is not a healthy phenomenon

for the industry and we all wish to see a more stable and sustainable price, both for

the producers and the consumers. Most of us are probably still not convinced about

the exact reasons why such fluctuations took place, and we at the Indonesian

Essential Oil Council tried to study some of the probable causes and the effect of

these fluctuations. Some of them are as follows:

PROBABLE CAUSES

1) Global warming/ El Nino weather patterns in the middle of 2006 when

a long dry spell affected the plantation and distillation activities and

supplies dwindled drastically while demand remained consistent.


8/16

2) The speculative trading mentality of

some of the players in the market

including some of those in the

middle who look for short term

profits, thereby damaging long-termprospects for the product.

3) The very poor state of farming

techniques being followed in

Indonesia, thereby making it

unsustainable for farmers.

4) The very steep jump in production

costs for farmers because of thesteep increase in energy prices,

thereby increasing the overall cost

of production.

5) Crop damage due to the spread of a

new disease in farming areas affecting patchouli leaves.

6) The nomadic farming system in Sumatra whereby no one particular

area is used permanently for cultivating patchouli.

7) The production system- perennial crop farming where the farmers plant

crops which give better returns.

8) During the boom times, prices of all commodities kept moving up

sharply while patchouli prices were still quiet, resulting in farmers

moving to other crops, and thereby reducing production.

9) Global economic meltdown resulted in severe reduction in demand for

patchouli.


9/16

EFFECT

1) When prices peaked out at levels of USD 170, the actual users

drastically slashed the % consumption of patchouli in theirformulations, thereby reducing demand and the sudden drastic fall in

prices.

2) New product development based on patchouli formulation does not

take place due to very high uncertainty, resulting in demand not

keeping pace with production.

3) Confidence of global consumers is shaken and they shift the

formulations to more stable supplies.

4) Extreme shifts of production take place during severe fluctuations

thereby creating unstable market conditions.

We feel that both exporters and importers of patchouli need to play a joint and

responsible role so that possible this situation can be reduced in future. We had

started to address this problem during the IFEAT Budapest Conference in 2007

where Mr. Gunawan mentioned about the Cultiva system of cluster farming and

developing partnerships between international buyers and Indonesian exporters.

This concept of Cultiva has

been implemented initially in 5

potential areas (Aceh, North

Sumatra, West Sumatra, West

Java, and East Java) and we are

seeing a good level of success

because of the support from the

Indonesian government and the

Indonesian Essential Oil

Council (IEOC).

Cultiva Patchouli Oil Supply Chain


10/16

IEOC would like to propose some steps which have been discussed during its

meetings, and we believe that this may help in bringing a sense of stability in themarket. More than 75% of the consumption of patchouli is done by the top 10

players in this industry, and similarly more than 85% of exports by volume are

concentrated in the hands of the top 10 exporters from Indonesia. Their role in this

product is crucial for ensuring stability, and that can probably be achieved by

taking the following steps:

1) Determine sustainable price levels at both ends. This can be achieved

if both concerned parties are willing to study the production process and

cost of production by making field trips in major production areas so as to

understand the ground realities. Both parties must enter into a meaningful

and open dialogue on pricing so that farmers, exporters and importers can

have a continued and sustainable supply of patchouli. We at IEOC are of

the view that a price ranging between USD 40 - USD 55 CNF shall be a

long term sustainable price.

2) Develop partnerships so as to know the actual supply and demandscenario and developments taking place in the world market.


11/16

NUTMEG OIL

Unlike patchouli oil, price, demand and supply of

nutmeg oil have been pretty stable, ranging

between USD 40 to USD 55 per kg, but recently

prices have started firming upwards towards

levels of USD 65. Farming and distillation

methods for nutmeg oil are far more organized

and concentrated in few pockets in Aceh and west

Java.

Traditionally, prices for nutmeg oil have always

been higher than patchouli, but during the past

couple of years, the price of nutmeg oil has beenlower than patchouli, thereby discouraging

farmers from distilling nutmeg oil. Prices are

expected to further firm in coming months

because of an expected shortfall in crops for the following reasons:

1) Decreasing yields from nutmeg trees in producing areas of Aceh and West

Java.

2) Deadly disease, attack by stem borer bug

(Batocera) destroying the nutmeg trees in the main

producing areas of Aceh.

3)Smaller number of new plantations for nutmeg

trees coming up, thereby reducing the supply of raw

material available for distillation.

4)Strengthening of the Indonesian currency.

5) Increase in demand by consumers of almost 15%.


12/16

6) Higher prices for

nutmeg and mace

a s a s p i c e

discourage farmers

from producingraw material for

distillation, as only

tender nutmegs are

u s e d f o r

distillation oils.

Nutmeg stainless steel distillation unit

CLOVE OIL & ITS DERIVATIVES

Indonesia is the worlds biggest producer and

consumer of clove bud and most of the production

is used in the clove cigarette industry. Most of the

time, demand for clove

b u d i s m o r e t h a np r o d u c t i o n s o

Indonesia needs to

import clove buds from

M a d a g a s c a r a n d

Zanzibar.


13/16

Clove leaf and clove stems are mostly used for distillation of clove oil and its

derivatives and the leadership of Indonesia in this is bound to continue in times to

come.

Prices are quite stable and the majority of production

is centralized in the Java and Sulawesi regions.

Because of the strengthening price of cloves recently,

prices of clove oil and derivatives have started

firming up and are expected to go up further in

coming months.


14/16

SOME NEW DEVELOPMENTS IN NATURALS IN INDONESIA

1) Alpinia Malaccensis Oil

This oil is grown mainly in the

wild areas of Java and Malukuislands. The annual production

of this oil is approximately

12-15 MT per annum and

international prices are ranging

from USD 35-40 per kg world

ports.

It is used to produce Methyl Cinnamate

crystals which are used in cosmetics and

pharmaceutical industries.

Since Alpina

Malaccensis is grown in the wild, it has

tremendous potent ial for organic

certification if the demand can be

generated.

2) Aetoxylon Sympetalum Oil

This oil is mainly grown again in the wild in the

Kalimantan islands of Indonesia and distillation

takes place in Kalimantan and Java islands.

Annual production of this oil is about 5-6 MT

per annum and international prices range from

USD 130-140 per KG world ports.


15/16

Aetoxylon Symetalum is mainly

used in the fragrance industry and

the main component is Alfa Eudesmol, which has a sweet woody note like

that of agarwood oil.

3) Sandalwood Papua ( Santalum Macgregorii) Oil

Papua Sandalwood oil is mainly produced

and distilled in west Papua.

The international

price for this oil ranges between USD 300-350 and

is mainly used in the fragrance industry. Production

of this oil is 2-3 MT per annum but it can easily be

scaled upwards if additional demand can be

generated. It has good potential for growth as it is

much cheaper than the other varieties of

Sandalwood oils.


16/16

MAIN ISSUES RELATED TO ORGANIC CERTIFICATION OF

NATURALS IN INDONESIA

Unlike other developing countries viz.: Egypt, Sri Lanka, India, and China, exports

of organic certified naturals have not been able to make significant growth in the

international markets because of the following issues:

1) Total lack of education and information on the benefits of organic

certification within the naturals industry in Indonesia, both to the farmer

distillers and exporters.

2) Very high cost of certification, especially when the majority of plantations do

not exceed few hectares/acres of land and the distillation units are small

scale.

3) Very few local companies are internationally accredited to certify organic

products unlike India, China and Egypt.

4) Lack of focus on the part of big exporters in educating the farmers on the

benefits of organic certification.

5) Non availability of supporting organic certified material for farming, viz.:

fertilizers, pesticides, composts etc...

Keeping in mind all the above issues related to naturals in Indonesia, I can

confidently state that the future for naturals in Indonesia is wide open with

unlimited opportunities for future growth. With the support and guidance from

major industry players worldwide, and active participation by local exporters, thereis no reason why Indonesia cannot be one of the top five players in the world of

naturals.

Thank you.

!"#$%%& (%)*+,"- +. /0% 1*%.+$%#/ 23 1(4 5"# 6*27"8 0"9+#: 72*% /0"# ;/%#.+9%-= +# /0% .2@/0 %"./ 6.+"# ?2@#/*+%.

%.&%?+"--= B#$2#%.+" /*=+#: /2 ?"*9% " #+?0% #"7% 32* /0% ?27&"#=H.&2*I2-+2 23 &*2$@?/. +# +#/%*#"A2#"- 7"*)%/.4 C% +. ,2*)+#: ?-2.%-= ,+/0 /0%

B#$2#%.+"# J..%#A"- 2+- 6..2?+"A2# KL6BM /2 +7&-%7%#/ .@./"+#"F-% 3"*7+#:

/%?0#+N@%. +# 1"/?02@-+ +# B#$2#%.+"4

Naturals in Indonesia - IFEAT Shanghai - By Sandeep Tekriwal

Documents

Transcript of Naturals in Indonesia - IFEAT Shanghai - By Sandeep Tekriwal