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USDA GAIN: Oilseeds, Cotton, Sugar, Grain and Feed


13 April 2012

USDA GAIN: Indonesia Cotton and Products Annual 2012USDA GAIN: Indonesia Cotton and Products Annual 2012

International cotton price volatility throughout calendar year (CY) 2011 severely impacted Indonesian cotton spinners’ capacity to import. For marketing year (MY) 2011/12, Post expects that Indonesian cotton imports will decline to 1.8 million bales, compared to 2.1 million bales in MY 2010/11. In MY 2011/12, the market share for U.S. cotton in Indonesia is also estimated to decline, primarily due to strong competition from Australia.
USDA GAIN Report - Oilseeds, Cotton, Sugar, Grain and Feed

Commodities:

Production:

Indonesia produces only 0.5 percent of its total domestic demand for cotton. Indonesian cotton producers receive little support from the Government of Indonesia (GOI) and cotton farmers generally find greater economic incentives to grow other crops. Increased land conversion to nonagricultural uses also reduces the area dedicated to cotton. However, favorable weather during 2011 provided opportunities for a slight expansion of cotton area which led to an increase in Indonesian production. Post estimates that in MY 2011/12, Indonesia’s cotton production will increase to 30,000 bales, up from 25,000 bales in MY 2010/11. South Sulawesi, East Java, West Nusa Tenggara, and Central Java are the main cotton producing areas in Indonesia.

Consumption:

According to a local industry publication, the Indonesian textile and textile products sectors employ about 1.4 million workers, which equated to just over 10 percent of the total Indonesian manufacturing workforce in 2011. The Indonesian textile industry also plays a significant and strategic role in the overall Indonesian macro-economy. In 2010 there were a total of 2,853 textile and textile production companies in the country with a total investment of Rp. 146 trillion ($ 16 billion). According to the Indonesian National Statistics Agency (BPS) estimates that textile products contributed almost two percent toward total Indonesian national gross domestic product (GDP) in 2011. According to data from BPS, during the period of January to December 2011, the Indonesian textile and related product exports amounted to 6.6 percent of total Indonesian national exports. In CY 2010, Indonesia exported about 37 percent of its textile and textile products to the United States, 15 percent to the European Union, 5.2 percent to other ASEAN countries, and 5.6 percent to Japan.

According to industry publications, the volume of Indonesia’s textile and related product exports in CY 2010 increased by 11.85 percent to 1.97 million tons over 2009. Perhaps even more significantly, the actual value increased by 21.17 percent to $11.2 billion. Indonesian textile industry grew by 8.6 percent during the first nine months of 2011 after experiencing a contraction in 2007 and 2008. However, in 2012 the growth in textiles is not expected to remain as strong as during 2011. The Indonesian Textile Association (Asosiasi Pertekstilan Indonesia API ) estimates that local growth will only reach two percent, primarily due to contracting demand from major Indonesian textile export destination countries namely the European countries, China, and the United States.

In the domestic market, Indonesian textile and related products continue to face tough competition from imported products. In CY 2010, Indonesia imported approximately 1.5 million tons of textile products, valued at $6.2 billion. China (27.3 percent) and the Republic of Korea (16 percent) account for the largest suppliers of textiles to Indonesia. Also, with the implementation of the second phase of the ASEAN - China Free Trade Agreement (ACFTA), the import duties of specific products under Normal Track 1, which include textiles and textile products, were reduced to zero percent. This became effective in January 2010, and has been advantageous for Chinese textiles. Chinese products are generally cheaper than domestically produced textiles and are considered comparable in terms of quality.

In CY 2011, Indonesian textile mills ran at about 70 - 80 percent capacity - with a total of 7.85 million spindles and 110,000 rotors. Several fundamental problems hampered the growth of the industry. The majority of the machines used by the Indonesian industry are at least 20 years old. A GOI industry revitalization program, launched in 2007, has assisted in upgrading only six percent of the textile machines currently in use. Furthermore, higher interest rates make it more difficult for textile businesses to get commercial bank loans.

International cotton prices have fluctuated broadly in 2011, which has impacted on small and medium sized cotton spinners. After seven months of consecutive rises, prices of cotton suddenly decreased in April 2011. Some Indonesian spinners panicked, as they had already contracted up to five month supply of cotton when prices were high. Concurrently, the sale price of yarn began to fall faster than the buying price of cotton, which is the raw material. The impacts of the sharp decline in cotton prices at that time are still being felt up to a year later. Many small scale Indonesian spinners are currently struggling to increase their working capital to continue operations. These same spinners are also experiencing significant cash flow problems. Current market conditions are forcing some spinners to make major cost reduction decisions, to include:

  1. Switching their raw materials to synthetic fibers, or to cotton/synthetic blends as a cost saving measure.
  2. Switching from producing course count yarn to high and/or fine count yarn as to reduce raw material expenses.
  3. Switching to use lower quality raw materials.
  4. Taking job orders from other manufacturers instead of producing for their own sales.
  5. Reducing production levels, or
  6. Closing down operations. Closing operation is becoming more common among the smaller mills with cash flow problems.

For manufacturing process, the Indonesian textile industry sources about 70 percent of its energy needs from the National Electricity Company (Perusahaan Listrik Negara PLN). The balance is met by self-owned generators, and gas and/or coal powered industrial equipment. Compared to other Asian countries, Indonesian electricity tariffs are relatively high. The electricity supply is also inconsistent, which can lead to production slow-downs and/or stoppages. The PLN annually increases the electricity tariff which adds additional expenses to the textile industry. For 2012, the GOI has decided to postpone any electricity tariff hikes to 2013. However, the GOI currently plans to decrease gasoline subsidies, which will lead to a 33.3 percent to Rp. 6,000 ($ 0.65) price increase per liter as of April 1, 2012. The textile industry reports that the increased fuel prices will drag production costs up by approximately 10 percent, as well as increase transportation costs, and decrease the purchasing power of domestic consumers. It may lead to lower Indonesian textile and textile products competitiveness in both domestic and international market.

The United Nations International Labor Organization (ILO) reported that the productivity of Indonesian workers ranked number 59 compared to Thailand (ranked 27), Korea (ranked 29), and China (ranked 31). Indonesian textile workers are still largely unskilled. The GOI requires importers to pay a 15 percent import duty on imported textile chemicals, which is considerably higher than other Asian countries. The Indonesian textile industry must also cope with problems related to the distribution of textiles and textile products. Indonesian port fees are considerably higher than other Asian countries. GOI also requires that these fees be paid in U.S. dollars rather than in the local currency.

Road conditions for ground transportation to and from Indonesian ports are mostly bad, highly congested, and subject to traffic timing. This leads to inefficiency and high transportation cost. As a comparison, API calculates that transportation costs in Indonesia are about $0.34/km/truck. Post understand through industry sources that transportation costs are significantly lower in other regional countries. As a result of the aforementioned situation, Post estimates that MY 2011/12 Indonesian cotton consumption will decrease to 1.86 million bales compared to 2.1 million bales in previous marketing year of MY 2010/11.

Stocks:

In line with the decreased cotton imports, Post estimates that MY 2011/12 Indonesian ending stocks of cotton will decrease slightly to 399,000 bales. Post expects that despite the increase of imports in MY 2012/13 stocks will likely to decline further to 322,000 bales. This is due to the estimated slight increase in consumption and loss in MY 2012/13.

Policy:

The Indonesian industry’s outdated textile machines amount to lower productivity levels, and increased energy and power usage. In 2007, the Indonesian Ministry of Industry launched a textile industry revitalization program under Minister of Industry Decree No. 141/M-IND/PER/10/2009 (Please refer to GAIN Report ID1112). The regulation was amended by the issuance of Ministry of Industry Decree number 15/M-IND/PER/2/2012. This new regulation, aptly titled “Machines Restructuring Program for Textile and Textile Products and Leather and Leather Products Small and Medium Enterprises”, reduced the percentage of reimbursement provided to any textile company that purchased new textile machines to 10 percent. Additionally, if the new machines are domestically produced, the program provides a subsidy of up to a 25 percent of the cost of the machines. The reimbursement provided is now increased to not allowed to exceed Indonesian Rupiah (IDR) 3 billion ($ 326,513) per company annually.

Marketing:

In CY 2009, the Ministry of Industry reported that 2,853 textile companies broken into subsectors of consisting of 1. fiber (30 companies), 2. yarn (225 companies), 3. fabric (1,067 companies), 4. garment (996 companies), and 5. others (535 companies). Textile industry representatives report the following factors affect the current conditions of Indonesian spinners:

  1. Some spinning mills still suffer from the high price contracts in 2011 that led to tight cash flow.
  2. The flat trend of textile exports to major destination countries such as the United States, Europe, and other Asian countries.
  3. Tight competition with imported textile products in domestic market.

Given the above-mentioned situation, Post estimates that Indonesian imports of cotton in MY 2011/12 will decrease to 1.8 million bales, compared to 2.1 million bales in MY 2010/11. Post forecasts that MY 2012/13 cotton import levels to rebound to 1.9 million bales, assuming that some cotton spinners will recover from the impact of the fluctuating prices of cotton in 2011, an expected increase of 5-10 percent in domestic sales, and improving world economy that may increase demand of Indonesian textile and textile products in major exporting countries.

Despite facing stiff competition from Australian and African cotton suppliers, the United States remains the largest supplier of cotton to Indonesia. According to the Global Trade Atlas, in MY 2010/11 the United States held 30 percent market share, followed by Brazil (17 percent), Australia (14 percent), and India (6 percent). Despite high levels of contamination, the quality of cotton from India, Brazil, and African countries are considered adequate by Indonesian industry standards. Post estimates that in MY 2012/13 the United States will slightly lose its market share given the projected jump in Australia’s cotton production.

April 2012

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