INDONESIA: Indonesia's Commodity Boom Is a Mixed Bag

Indonesia's economy is riding the recent wave of high global commodity prices as it feeds China, India and Japan with coal, palm oil and natural gas.

The economy -- Southeast Asia's largest -- is growing at its fastest pace in a decade. The influx of cash from commodity exports is financing the construction of posh malls and housing complexes across the capital of Jakarta and in a number of resource-rich provinces.

Yet the majority of Indonesia's 230 million people are being left behind as the export boom is leading to unintended shortages of select foodstuffs and other key commodities like coal, economists say.

Some businesses are moaning about the focus by Indonesia's miners and plantation owners on exports, which fetch higher prices than in the domestic market. Local cement companies and textile producers say they are suffering from unreliable electric power supplies, and they blame steel makers and power producers in China and India who have diverted coal supplies abroad by locking in 20-year supply contracts with Indonesian miners.

"It is an irony that Indonesia is one of the largest exporters of gas, coal and crude palm oil, and yet our industries have problems to get reliable supply," says Rizal Ramli, an economist and former economic affairs minister.

Indonesia's coal and palm oil industries have been leading the export surge. Coal exports stood at around 150 million metric tons last year, or 75% of its total production, according to data from the Energy Ministry, and exports are expected to grow to 180 million tons this year. Indonesia is also the world's largest exporter of crude palm oil, with shipments reaching 12.4 million metric tons in 2007, 50% higher than in 2004, according to data from producers. Exports last year accounted for about 75% of total Indonesian production.

But those figures don't mean much to many Indonesians. Thousands of the country's poor in January protested rising cooking oil and soybean prices -- a consequence of strong overseas demand and higher energy prices. In response, Indonesia's government stepped in last month with a plan to raise export tariffs on crude palm oil, which is refined to make cooking oil, to 15% from 6.5% and increase the supply of subsidized oil and rice for poor families.

Those measures have yet to stem the rising food costs, however. Given the strong demand for vegetable oils from China, prices for crude palm oil have almost doubled in the past year, meaning Indonesian producers can pass on the higher export tariffs to overseas buyers.

And soaring prices for another product -- fertilizer -- are hurting rice and vegetable farmers, who complain they can't get any fertilizer because state-owned factories prefer to either export it or sell it for a higher price to palm oil plantations in the provinces. The result: lower yields for food crops.

Worried About the Harvest

On the outskirts of Jakarta, Ibnu Koeri, a rice farmer, is fretting the coming harvest won't produce enough to feed his family. Mr. Koeri's village farming cooperative was unable to get any fertilizer between December and February, just after the crucial planting season. Now, fertilizer is selling at 15% above past levels. "We're worried about the harvest," he says.

Indonesia's consumer price index jumped 7.4% year-on-year in January up from 5.8% in June 2007. The index is expected to hit double digits by year's end, raising concerns the central bank will have to raise interest rates, economists say.

Meanwhile, Indonesia's overall economy continues to post strong growth. Gross domestic product jumped 6.3% last year, its fastest rate since before the 1997-98 Asian financial crisis. The government has trimmed forecasts for this year to 6.5% from 6.8% due to U.S. economic woes, but its economy is still one of the fastest growing in the world.

Indonesia, which has the world's largest Muslim population, faces the risk that uneven economic development could spark social instability and give a louder voice to a small but active group of Islamic hard-liners, some observers say. In recent months, Islamic political parties have been stepping up an antipoverty campaign across Jakarta in an attempt to win support ahead of next year's presidential elections.

Industrial groups based in Java are being hit by commodity shortfalls. Executives at PT Indorama Synthetics, a polyester and yarn producer that employs 7,000 people in factories near Jakarta, complain that the company has to scramble monthly to find coal to power its 60-megawatt electricity plant because its regular suppliers are selling their coal overseas instead.

Locking In Commodities

V.S. Baldwa, corporate secretary at Indorama, points to a deal last year in which India's Tata Power Ltd. bought a 30% stake in two Indonesian coal mines for $1.1 billion, ensuring future coal supplies for the Indian company. "They've been able to lock in commodities at our expense," Mr. Baldwa says.

Patrick Walujo, a director of PT Northstar Pacific Partners, a private equity firm with a stake in coal mine PT Adaro Indonesia, explains that local coal mines prefer overseas sales because foreign customers are willing to pay a premium to ensure supply.

The government says it will continue to protect the most vulnerable Indonesians through subsidies on fuel, electricity, rice and cooking oil. Fuel and electricity subsidies will total 74.5 trillion rupiah ($8.1 billion), or 9% of total government expenditures in the 2008 budget. And Jakarta is putting pressure on coal and gas producers to reserve more of their output for local use.

To make more coal available locally, the government is considering limiting annual exports to 150 million tons. The government itself is currently dependent on expensive imported fuel oil to generate power; it plans to build 10,000 megawatts of new coal-fired plants in the next few years. It also wants to use more of Indonesia's own large natural gas resources for power generation and has warned big buyers like Japan, South Korea and Taiwan to expect lower amounts when their current contracts run out over the next couple of years.

"We might require more natural gas domestically," says Mahendra Siregar, a deputy minister for economic affairs. "But we are trying to ensure the overseas interests at the same time."

AMP Section Name:Natural Resources
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