Industry Trend Analysis - Settling As World's Second Importer Out To 2021 - FEB 2017

BMI View: Indonesia will not be able to sustain strong production growth in sugar over the next five years due to numerous challenges including land availability, productivity in the milling sector, insufficient government support and competition from imported raw sugar. In contrast, the country will remain the world's second-largest sugar importer as fast growth in the processed foods and confectionary segments will rely on increasing amounts of foreign sugar, mainly from Thailand.

Indonesia is currently in the midst of its 2016/17 sugar cane crushing season and, although we maintain our forecast for white sugar production to rebound by 7.0% y-o-y to 2.2mn tonnes, we have revised downward the trajectory of our long-term forecasts. This is because the strong y-o-y growth in 2016/17 is mostly due to base effects after two consecutive years of declines caused by the lasting impact of the El Nino weather phenomenon. Once output returns to levels more in line with its long-term trend, we do not believe Indonesia will be able to sustain similar growth rates and expect gains to diminish.

Numerous Challenges Prevent Strong And Steady Growth
Indonesia - Sugar Production ('000 tonnes) & Growth (%, y-o-y)
f = BMI forecast. Source: USDA, Badan Pusat Statistik, BMI

Below we highlight four key reasons underpinning our less favourable view of Indonesian sugar production.

  • Land available for sugar cane planting is declining due to farmers seeking more profitable crops (mainly rice and corn) and the conversion of land on Java, the country's main sugar cane region, for residential and industrial purposes.

  • Low productivity in the milling sector due to lack of investment continually weighs on the growth prospects of the whole sugar industry and creates a bottleneck in the country's sugar supply chain.

  • Despite an increase to IDR8,900/kg in 2015 , the government's purchase price for sugar cane remains below its 2012 and 2013 levels of IDR11,800/kg and IDR10,250/kg respectively. This low purchase price goes against the government's stated ambition to achieve self-sufficiency in sugar by 2019, with the government focusing the bulk of its investments on building new sugar mills at the expense of a more active support of sugar cane plantings.

  • Domestic producers face competition from imported raw sugar illegally refined for household consumption. Sugar imports are only destined to be refined for industrial uses (mainly the food and drink industry) rather than retail sugar which must come from domestic production. Yet, while the government closely controls the imports of raw sugar, it fails at properly tracing imported raw sugar once it enters the country which lowers the price at which domestic producers can sell their produce.

Consequently, we have revised downward the trajectory of our production forecasts from average yearly gains of 5.0% y-o-y to 3.0%, which will bring output to a level of 2.4mn tonnes in 2020/2021, a record high level but merely 0.1mn tonnes above production recorded in 2012/13 and 2013/14.

Indonesia Becoming A Leading Importer
Select Countries - Sugar Production Balance (mn tonnes)
f = BMI forecasts. Source: Local statistics, USDA, BMI

Sugar Consumption: Buoyant Outlook Out To 2021

In contrast with challenges on the supply side, we remain strongly positive on the outlook for Indonesian sugar consumption and view the country as a global outperformer in import demand growth out to 2021 along with China ( see ' Sugar: Bearish From Spot As Fundamentals Loosen ' , January 12). Indeed, demographic trends and rising income levels will support fast growth in processed foods and confectionary consumption, pulling the country's sugar requirements well above its long-term average.

The rise in imports is a direct consequence of the fact that industrial consumption (processed foods and confectionary) is the main contributor to sugar demand growth. This is due to the inability of the domestic sugar sector to produce industrial grade raw sugar that meets the needs of the Indonesian food and drink industry. As a result, industrial consumption mainly relies on imported raw sugar that is refined domestically rather than domestic production.

Indonesia: Fast-Growing Market For Regional Exporters
Indonesia - Raw Sugar Imports By Origin & Sugar Production Balance (mn tonnes)
e/f = BMI estimate/forecast. Source; USDA, ITC, BMI

Thailand To Benefit Most From Indonesian Demand

The consequence from this rising import demand is that Indonesia will be a prime contributor to the growth in Asian sugar consumption and imports over the coming years, the region being already a world leader in both metrics.

We expect that this will directly benefit Thailand, thus translating in stronger regional trade, as the country is already Indonesia's main supplier and will succeed in maintaining elevated exportable supplies out to 2021. After Thailand, Australia and Brazil stand to benefit from increased Indonesian sugar demand ( see chart above).

Risks To Outlook

The risks to our view are weighted to the downside. Despite our downward revision, challenges in Indonesian sugar production could prove even stronger than we currently expect and result in output struggling to maintain positive growth over the next five years. On the demand side, consumption could grow slower than we currently expect if economic growth were to falter and fall below our Country Risk team's forecast of 5.8% per year on average over the 2017-2021 period.

Sugar Production & Consumption (Indonesia 2013-2021)
2013 2014 2015 2016 2017f 2018f 2019f 2020f 2021f
f = BMI forecast. Source: USDA, Badan Pusat Statistik, BMI
Production, '000 tonnes 2,300.0 2,300.0 2,100.0 2,025.0 2,166.8 2,231.8 2,298.7 2,367.7 2,438.7
Production, % y-o-y 25.7 0.0 -8.7 -3.6 7.0 3.0 3.0 3.0 3.0
Consumption, '000 tonnes 5,400.0 5,450.0 5,400.0 5,935.0 6,261.4 6,655.9 7,088.5 7,570.5 8,108.1
Consumption, % y-o-y 6.9 0.9 -0.9 9.9 5.5 6.3 6.5 6.8 7.1
Production balance, '000 tonnes -3,100.0 -3,150.0 -3,300.0 -3,910.0 -4,094.7 -4,424.1 -4,789.8 -5,202.9 -5,669.4
Self sufficiency, % 42.6 42.2 38.9 34.1 34.6 33.5 32.4 31.3 30.1