Pulp and Paper Industry Indonesia: Challenges and Opportunities
The pulp and paper industry of Indonesia is on the receiving end of plenty of criticism for its negative impact on the environment. However, the industry also plays a major role in the Indonesian economy, accounting for 6.7 percent of the country's processing industry's gross domestic product (GDP) and providing employment to 260,000 direct workers and 1.1 million indirect workers. Last year, in 2016, Indonesia's pulp and paper industry ranked seventh in terms of biggest foreign exchange earners (excluding the oil and gas sector) when it reaped USD $3.79 billion.
The success of Indonesia's pulp and paper industry comes on the back of ever-increasing global demand for paper. Despite competition from electronic devices (that reduce the need for paper), global demand for paper grows between 2 - 3 percent every year. Therefore, it is not surprising that the Indonesian government is eager to expand production capacity of the national pulp and paper industry. The current target is to raise capacity from 7.93 million tons per year to 10.53 million tons.
Recently, Asia Pulp and Paper (APP), one of the world's largest pulp and paper companies, opened a new (and rather massive) mill in South Sumatra that contributes to the expansion of Indonesia's pulp and paper industry. However, as usual, the project caused controversy as local residents (and Indonesian environmental groups) oppose to the mill and accuse the company of using intimidation to push through their plans. Protestors also argue APP violates the zero-deforestation pledge it had made in 2013.
The Indonesian Pulp & Paper Association (APKI) says most of national pulp and paper output is exported abroad. Approximately 60 percent of domestic production is shipped to Indonesia's export destinations. Araminta Setyawati, analyst at Bank Mandiri, adds that Indonesia ranks ninth in terms of biggest global pulp producers and sixth in terms of biggest paper producers. Moreover, she sees good potential for Indonesia's pulp and paper industry as demand for paper is expected to stay strong in Southeast Asian nations as well as in the USA. Furthermore, Indonesia's domestic paper consumption is still low at 32.6 kilogram per capita per year and therefore has much room for further growth. In Malaysia paper consumption stands at 100 kilogram per capita per year, while in Japan this figure is 242 kilogram. In fact, Indonesia's paper consumption is below the ASEAN average of 55 kilogram per capita, per year.
This is seemingly a positive context but what are the challenges for Indonesia's pulp and paper industry?
Firstly, and most importantly, there is the "environment factor". Due to the government's slowly increasing awareness of the importance to preserve the natural environment, there is increasingly limited room for expansion of local pulp and paper plantations. Through Government Regulation (PP) No. 57/ 2016 on Peat Ecosystem Protection and Management Regulation it has imposed a moratorium on land clearing in peatland areas. A solution to this situation would be that the industry uses alternative raw materials to replace the need for additional pulp and paper plantations. An alternative material is the empty fruit bunch of the oil palm. Considering there are 11.3 million hectares of palm oil plantations in Indonesia, the availability of this raw material is guaranteed.
Secondly, production costs are relatively high in Indonesia for the pulp and paper companies due to the expensive gas price. Whereas foreign counterparts in other ASEAN nations pay below USD $6 per million British thermal unit (mmbtu), Indonesian pulp and paper companies have to face gas prices that range between USD $9 - $11 per mmbtu. Setyawati advises producers to cut production costs by acquiring new machines that are more energy efficient such as the combined heat and power system (CHP), or use highly lignified wood (from waste) as a fuel to replace gas.
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