NATURALS IN INDONESIA

Sandeep Tekriwal
Van Aroma
Jl.Raya Bypass, KM 20, Padang, Indonesia
vanaroma@indo.net.id

A very good morning to all the IFEAT Members & Delegates present today.
My name is Sandeep Tekriwal and I am from PT. Van Aroma, Padang, Indonesia. I
would like to take this opportunity to share some information on the World of
Naturals in Indonesia.
This lecture will highlight some of the major developments and concerns of the
essential oils industry during the past two or three years especially in regard to
violent price fluctuations in patchouli.
As is known within the industry worldwide, Indonesia is a major supplier of
patchouli, nutmeg, vetiver, cananga, citronella, massoia bark, sandalwood, cajuput,
ginger, clove and its derivatives.
Almost 85 % of the volume / turnover comes mainly from three products i.e.
patchouli, nutmeg and clove.
But first and foremost some basic information on Indonesia, its location and a
SWOT analysis of the country relevant to the naturals industry worldwide.

!
Indonesia is the largest archipelago in the world with more than 17,500 islands,
located between India on the north western border and Australia on the south
eastern border giving it a width similar to that of Canada. It boasts a population of
235 million making it the fourth largest in the world after China, India and the
United States of America, and has a tropical climate with temperatures ranging
from 22C to 32C all year round with plenty of rain and sunshine and a very
fertile land. Its the world biggest Moslem country with almost 88% of the
population following Islam and people are generally religious and tolerant with
many pockets of other communities following Hinduism, Christianity and
Buddhism living side by side peacefully. It is one of the shining examples of a
country moving to a complete democratic form of governance over a short period
of just 10 years. Recent national elections have provided the country with a stable
and strong government with a dynamic president, and a professional team
delivering consistent GDP growth of 4.5-6% over the past 5 years, despite recent
economic meltdown in many western and developed economies.

SWOT ANALYSIS OF INDONESIA IN NATURALS

STRENGTHS
1)

Supplying 90% of the world patchouli oil requirement. Exporting 1400

MT of the 1500 MT/year world consumption. Other countries
producing patchouli are India and China, but the Indonesian quality is
more acceptable in the world markets.

2)

Supplying 80% of the world nutmeg oil requirement. Exporting about

500 MT out of the total demand of 600 MT/Year. Other countries
producing nutmeg oil are Grenada, Sri Lanka, India, but the quality and
quantity are insignificant.

3)

Supplying 50% of the worlds demand in crude clove oil & 75% of the
worlds clove oil derivatives such as eugenol, iso eugenol, methyl
eugenol etc. Indonesia exports close to 2500 MT of the world demand
of 3500 MT/ Year of crude clove oil and its derivatives.

4)

Having the 2nd highest biodiversity in the world after Brazil, making it
suitable for the production of many other varieties of naturals.

5)

Competitive labour costs for labour intensive industries makes it one of

the low cost production bases for naturals such as vetiver, cananga,
massoi bark, ginger, sandalwood oil etc...

WEAKNESSES
1)

Unorganized field
distillation industry and
production of raw
material with hardly
any significant
contribution from the
organized sector.

2)

Crude field distillation

technology thereby
Current Patchouli Oil Supply Chain

giving poor and inferior quality and yield.

3)

Long supply chain between farmers and exporters adding to the overall
cost of the end product.

4)

Poor infrastructure facilities.

5)

Lack of current international market information, demand and supply

situations for the farmer distillers.

6)

Non availability of working capital from banks, forcing farmers to

borrow from the unorganized sector at very high interest rates, thereby
depriving farmers of their due share of profit margins.

OPPORTUNITIES
1)

Develop partnerships between farmers and exporters and educate them

about modern distillation and farming techniques.

2)

Develop partnerships between local and

overseas buyers so as to encourage new
investments, latest technical know-how
and better market access.

3)

Increasing trend in developed countries

for shifting high cost production base to
low cost economies like China, India and
Indonesia.

4)

Develop local Indonesia flavor &

fragrance industry like China and India.

5)

Increase in purchasing power of the

Indonesian middle class.

6)

Shift in the trend from synthetic to

naturals.

THREATS

1)

Global warming and changing weather patterns- El Nino/La Nina

weather effects.

2)

Violent price fluctuations - Viz. patchouli can kill a products long-term

prospect.

3)

Competition from other plantation products like palm, cacao, coffee

etc... This can easily grab the arable farmland if prices of these
commodities move up.

The total value of exports of natural essential oils (HS-3301) from Indonesia has
been estimated to be about USD 105 Million, while imports of essential oils stand
at USD 380 million.
Table 1: Indonesia: Imports and Exports of Essential Oils 2003-2008 (US$)

!
Source: Indonesian Bureau of Statistics

Indonesia exports the basic raw naturals without much value addition while it
imports the flavor and fragrance formulations and compounds after value addition
from overseas. The top 5 countries/regions accounting for almost 80% of the total
exports of naturals from Indonesia are:
1)

United States of America

2)

EU- France/Germany/Italy/Spain

3)

China

4)

Japan

5)

India

PATCHOULI OIL
Traditionally patchouli had been cultivated predominantly in the island of Sumatra
and recently Java, these together accounting for 90% of the production, mainly
coming from areas such as Aceh, the Nias Islands, the Mentawai Islands,
Bengkulu, and Jambi in Sumatra and Kuningan, Malang, Blitar and Garut area in
Java. Over the past couple of years, there has been a significant development in
patchouli oil production in Java and it would be safe to say that in the very near
future Java may overtake Sumatra in total production. Other areas which have been
developing fast are some pockets of Sulawesi and Kalimantan. Most of the
patchouli produced in Sumatra is of the dark variety, while Java produces the light
iron free patchouli, basically due to the use of stainless steel distillation vessels,
while in Sumatra, the traditional small Iron drums are still in use. Sumatra quality
patchouli is still much preferred due to its superior odor value.
We are all aware of the violent price fluctuations which have taken place in
patchouli oil over the past three years (Diagram No: 1).

As one can see from Diagram 1, illustrating patchouli prices during the last 5
years, the prices bottomed to a level of USD 22 in Nov2006 and then peaked to a
level of USD 170 in January 2008 falling to USD 95 in April 2008. Prices fell
further to USD 65 by November 2008 and came close to bottoming out at USD
32-35 in August 2009. Nobody will disagree that this is not a healthy phenomenon
for the industry and we all wish to see a more stable and sustainable price, both for
the producers and the consumers. Most of us are probably still not convinced about
the exact reasons why such fluctuations took place, and we at the Indonesian
Essential Oil Council tried to study some of the probable causes and the effect of
these fluctuations. Some of them are as follows:

PROBABLE CAUSES
1)

Global warming/ El Nino weather patterns in the middle of 2006 when

a long dry spell affected the plantation and distillation activities and
supplies dwindled drastically while demand remained consistent.

2)

The speculative trading mentality of

some of the players in the market
including some of those in the
middle who look for short term
profits, thereby damaging long-term
prospects for the product.

3)

The very poor state of farming

techniques being followed in
Indonesia, thereby making it
unsustainable for farmers.

4)

The very steep jump in production

costs for farmers because of the
steep increase in energy prices,
thereby increasing the overall cost
of production.

5)

Crop damage due to the spread of a

new disease in farming areas affecting patchouli leaves.

6)

The nomadic farming system in Sumatra whereby no one particular

area is used permanently for cultivating patchouli.

7)

The production system- perennial crop farming where the farmers plant
crops which give better returns.

8)

During the boom times, prices of all commodities kept moving up

sharply while patchouli prices were still quiet, resulting in farmers
moving to other crops, and thereby reducing production.

9)

Global economic meltdown resulted in severe reduction in demand for

patchouli.

EFFECT

1)

When prices peaked out at levels of USD 170, the actual users
drastically slashed the % consumption of patchouli in their
formulations, thereby reducing demand and the sudden drastic fall in
prices.

2)

New product development based on patchouli formulation does not

take place due to very high uncertainty, resulting in demand not
keeping pace with production.

3)

Confidence of global consumers is shaken and they shift the

formulations to more stable supplies.

4)

Extreme shifts of production take place during severe fluctuations

thereby creating unstable market conditions.

We feel that both exporters and importers of patchouli need to play a joint and
responsible role so that possible this situation can be reduced in future. We had
started to address this problem during the IFEAT Budapest Conference in 2007
where Mr. Gunawan mentioned about the Cultiva system of cluster farming and
developing partnerships between international buyers and Indonesian exporters.

This concept of Cultiva has

been implemented initially in 5
potential areas (Aceh, North
Sumatra, West Sumatra, West
Java, and East Java) and we are
seeing a good level of success
because of the support from the
Indonesian government and the
Indonesian Essential Oil
Council (IEOC).
Cultiva Patchouli Oil Supply Chain

IEOC would like to propose some steps which have been discussed during its
meetings, and we believe that this may help in bringing a sense of stability in the
market. More than 75% of the consumption of patchouli is done by the top 10
players in this industry, and similarly more than 85% of exports by volume are
concentrated in the hands of the top 10 exporters from Indonesia. Their role in this
product is crucial for ensuring stability, and that can probably be achieved by
taking the following steps:
1)

Determine sustainable price levels at both ends. This can be achieved

if both concerned parties are willing to study the production process and
cost of production by making field trips in major production areas so as to
understand the ground realities. Both parties must enter into a meaningful
and open dialogue on pricing so that farmers, exporters and importers can
have a continued and sustainable supply of patchouli. We at IEOC are of
the view that a price ranging between USD 40 - USD 55 CNF shall be a
long term sustainable price.

2)

Develop partnerships so as to know the actual supply and demand

scenario and developments taking place in the world market.

NUTMEG OIL
Unlike patchouli oil, price, demand and supply of
nutmeg oil have been pretty stable, ranging
between USD 40 to USD 55 per kg, but recently
prices have started firming upwards towards
levels of USD 65. Farming and distillation
methods for nutmeg oil are far more organized
and concentrated in few pockets in Aceh and west
Java.
Traditionally, prices for nutmeg oil have always
been higher than patchouli, but during the past
couple of years, the price of nutmeg oil has been
lower than patchouli, thereby discouraging
farmers from distilling nutmeg oil. Prices are
expected to further firm in coming months
because of an expected shortfall in crops for the following reasons:
1)

Decreasing yields from nutmeg trees in producing areas of Aceh and West
Java.

2) Deadly disease, attack by stem borer bug

(Batocera) destroying the nutmeg trees in the main
producing areas of Aceh.

3)Smaller number of new plantations for nutmeg

trees coming up, thereby reducing the supply of raw
material available for distillation.

4)Strengthening of the Indonesian currency.

5) Increase in demand by consumers of almost 15%.

6) Higher prices for

nutmeg and mace
as a spice
discourage farmers
from producing
raw material for
distillation, as only
tender nutmegs are
used
for
distillation oils.

Nutmeg stainless steel distillation unit

CLOVE OIL & ITS DERIVATIVES

Indonesia is the worlds biggest producer and
consumer of clove bud and most of the production
is used in the clove cigarette industry. Most of the
time, demand for clove
bud is more than
production so
Indonesia needs to
import clove buds from
Madagascar and
Zanzibar.

Clove leaf and clove stems are mostly used for distillation of clove oil and its
derivatives and the leadership of Indonesia in this is bound to continue in times to
come.
Prices are quite stable and the majority of production
is centralized in the Java and Sulawesi regions.
Because of the strengthening price of cloves recently,
prices of clove oil and derivatives have started
firming up and are expected to go up further in
coming months.

SOME NEW DEVELOPMENTS IN NATURALS IN INDONESIA

1) Alpinia Malaccensis Oil
This oil is grown mainly in the
wild areas of Java and Maluku
islands. The annual production
of this oil is approximately
12-15 MT per annum and
international prices are ranging
from USD 35-40 per kg world
ports.

It is used to produce Methyl Cinnamate

crystals which are used in cosmetics and
pharmaceutical industries.

Since Alpina
Malaccensis is grown in the wild, it has
tremendous potential for organic
certification if the demand can be
generated.
2) Aetoxylon Sympetalum Oil
This oil is mainly grown again in the wild in the
Kalimantan islands of Indonesia and distillation
takes place in Kalimantan and Java islands.
Annual production of this oil is about 5-6 MT
per annum and international prices range from
USD 130-140 per KG world ports.

Aetoxylon Symetalum is mainly

used in the fragrance industry and
the main component is Alfa Eudesmol, which has a sweet woody note like
that of agarwood oil.
3) Sandalwood Papua ( Santalum Macgregorii) Oil
Papua Sandalwood oil is mainly produced
and distilled in west Papua.

The international
price for this oil ranges between USD 300-350 and
is mainly used in the fragrance industry. Production
of this oil is 2-3 MT per annum but it can easily be
scaled upwards if additional demand can be
generated. It has good potential for growth as it is
much cheaper than the other varieties of
Sandalwood oils.

MAIN ISSUES RELATED TO ORGANIC CERTIFICATION OF

NATURALS IN INDONESIA
Unlike other developing countries viz.: Egypt, Sri Lanka, India, and China, exports
of organic certified naturals have not been able to make significant growth in the
international markets because of the following issues:
1) Total lack of education and information on the benefits of organic
certification within the naturals industry in Indonesia, both to the farmer
distillers and exporters.
2) Very high cost of certification, especially when the majority of plantations do
not exceed few hectares/acres of land and the distillation units are small
scale.
3) Very few local companies are internationally accredited to certify organic
products unlike India, China and Egypt.
4) Lack of focus on the part of big exporters in educating the farmers on the
benefits of organic certification.
5) Non availability of supporting organic certified material for farming, viz.:
fertilizers, pesticides, composts etc...
Keeping in mind all the above issues related to naturals in Indonesia, I can
confidently state that the future for naturals in Indonesia is wide open with
unlimited opportunities for future growth. With the support and guidance from
major industry players worldwide, and active participation by local exporters, there
is no reason why Indonesia cannot be one of the top five players in the world of
naturals.
Thank you.
Sandeep Tekriwal is the President of PT. Van Aroma, having more than 14
years of experience in exports of agro products, spices and essenAal oils
from Indonesia. Having done his Masters in Business from Mumbai
University, he has travelled extensively in the south east Asian countries
especially Indonesia trying to carve a niche name for the companys
porIolio of products in internaAonal markets. He is working closely with the
Indonesian EssenAal oil AssociaAon (DAI) to implement sustainable farming
techniques in Patchouli in Indonesia.