Jitters over Jakarta’s land seizure

THE Indonesian government is moving to confiscate palm oil plantation land parcels that was either illegally developed or linked to corruption investigations. And Malaysian plantation companies operating there are having the jitters.

Industry insiders and analysts say Malaysian plantation companies face the risk of losing some of their estate land as Jakarta’s forestry task force has set a target of confiscating three million hectares by August.

The three-million-hectare target would amount to 19% of the 16 million hectares under palm oil in Indonesia, which is now the world’s biggest crude palm oil producer.

News reports say Indonesia has so far seized more than two million hectares of illegally-run plantations – including other crops – in forest areas across the archipelago.

The largest confiscation was 221,000ha of oil palm land in Sumatra from PT Duta Palma Group by the country’s Attorney’s General Office, which is pursuing a money laundering case against the company, according to news reports.

In the process, a new palm oil goliath has emerged.

PT Agrinas Palma Nusantara, a state-owned company established in March this year and helmed by retired Indonesian army officers, has become the custodian of 833,000 ha of the confiscated lands, making it the largest palm oil company in the world by acreage.

Its acreages lie in protected areas of forest in Kalimantan, Riau and Sumatra. Agrinas could be handed more confiscated lands in the near future.

“The bulk of the land confiscation so far has been from local Indonesian companies. I think the government will also do the same with foreign plantation groups next to ensure some level of fairness.

“Many of the Malaysian planters there have a significant presence and would be anticipating that some of their acreages could be next,” said a plantation industry supply chain player who did not wish to be known.

His contact on the ground in Indonesia says the acreages being confiscated are estates with producing age palms/trees.

How the companies are judged to have broken the law is unclear. This is what worries planters.

“Simply put, it all depends on who defines the legality or illegality – and in this case, it’s the Indonesian government that calls the shots. Goalposts change. Ambiguity on the processes and boundaries become subjective.

“The real question is whether foreign entities would choose to fight on and risk having their broader assets subjected to scrutiny,” said a former CEO of a local plantation company.

The chance of the companies taking the fight to courts in Indonesia could depend very much on how Wilmar International fares with its alleged corruption case tied to palm oil export permits issued during a national cooking oil shortage in 2022.

The Singapore-based edible oil heavyweight and two other companies have been accused of bribing officials to obtain the permit. Wilmar has handed over US$726mil as a “security deposit” in the legal case against it.

The company was cleared by an Indonesian court earlier this year but the ruling is in doubt as the judges involved have been arrested on graft charges.

“I think many of the planters will likely prefer not to go on the legal route as the bulk of the land cultivated in Indonesia is leasehold land. Nevertheless, this event shows how complex and challenging the business environment has become for the companies,” he added.

The Indonesian government has framed the confiscations of lands as President Prabowo Subianto’s fight against corruption and a strategic initiative to manage the confiscated land parcels as part of a national food and energy security effort.

The country currently has a mandatory B40 biodiesel mix, which is set to rise to B50 by as soon as 2026, driven by a desire to reduce dependency on imported fossil fuel.

The bulk of Agrinas Palma’s palm oil is intended for the production of biofuel, specifically biodiesel.

CIMB Securities, in a recent report, noted that Indonesia’s Forestry minister has identified 436 oil palm companies as operating without forestry permits, covering over one million hectares.

Of this amount, 790,000ha are under the legalisation process, while 317,000ha were rejected owing to non-compliance.

A retired planter who spent years living and working in West Kalimantan said the illegal plantations are not random land grabs, but rather planned developments carried out with the knowledge of provincial and local government officials.

“The problem is corruption and enforcement. Many illegal promoters would usually approach the Ketua Desa or Ketua Wilayah and get their cooperation to develop lands of 1,000ha to 2,000ha. If you have support at governor level, the acreages could be larger,” he said.

Local planters like SD Guthrie Bhd, United Plantations Bhd, Kuala Lumpur Kepong Bhd (KLK), Genting Plantations Bhd, Chin Teck Plantations Bhd, United Malacca Bhd and IOI Corp Bhd are among Malaysian plantations with acreages under oil palm across Indonesia.

Genting Plantations has about 78,452ha (178,000ha if the Plasma scheme growers are included) in Indonesia and 64,850ha in Malaysia.

The company is the first to undertake an impairment of RM66mil in the first quarter of this year for loss of income from its biological assets in Indonesia in case of confiscation of land. How much land is at risk – or where – was not disclosed.

KLK has some 171,000ha in Sumatra and Kalimantan while SD Guthrie has about 240,000ha.

CIMB Securities noted Malaysian planters like Genting Plantations had applied to legalise 18,448ha, with 13,365ha under the legalisation process, while 4,464ha were rejected.

KLK applied for 4,368ha, of which 1,800ha are under process and 1,368ha rejected, while SD Guthrie’s Indonesian subsidiaries applied for 3,045ha, with 1,874ha under process and 1,171ha rejected.

IOI Corp’s 32%-owned, Indonesian-listed associate Bumitama Agri had applied for 30,115ha, with 29,975ha under process and 5,570ha rejected.

“While the threat is real for Malaysian companies, the potential financial impact of Indonesia’s forestry land status issue on their planted oil palm estates is unlikely to be significant.

“Some continue to see Indonesia as an opportunity to invest in, with United Malacca moving to acquire full control of its Indonesian plantation subsidiary PT Lifere Agro Kapuas for US$10mil,” said Ivy Ng, head of Malaysia research and regional head of agribusiness research at CIMB Investment Bank Bhd.

Despite the land confiscation risk factor, she retains a “neutral” outlook on the plantation companies.

With crude palm oil prices averaging RM4,000 a tonne, plantation companies with upstream operations are still making a healthy profit margin.