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Indonesia's agriculture contributes only about a tenth (13%) to its economic output. Nevertheless, it is of outstanding importance because it provides income, including forestry and fishing, for over a quarter of (26%)the workforce. The government wants to increase agricultural production in order to increase the share of self-sufficiency in food and to increase the yields in agriculture. This requires a greater use of fertilizers because the productivity of agriculture, which is still largely small-scale, is too low. Staple foods like rice, soybeans or corn have to be imported in large quantities. 

According to the statistics office BPS, plantation management is practiced on almost 10 million hectares in Indonesia, and a further 18 million hectares are cultivated by small farmers. Together, this corresponds to about three quarters of the area of Germany. Palm oil is grown on about half of it, rubber on another 13%. The remaining is mainly used for food production. 

Fertilizer demand increases by over a quarter 

Indonesian fertilizer production has been continuously expanded in recent years. In the case of simpler, urea-based fertilizers (urea), production capacities have recently increased significantly. The domestic increase in demand in this regard comes primarily from the plantation industry. An increasing proportion could also be exported. Between 2020 and 2024, supply and demand are expected to increase by around 27%.

The situation is different for more complex fertilizers, such as the so-called NKP fertilizers, which mainly consist of nitrogen (N), phosphorus (P) and potassium (K). These and their raw materials have to be imported in large quantities. Data Consult forecasts that demand will increase by almost 17% between 2020 and 2024. The forecast, almost 30% increase in production, reduces the deficit to be covered by imports. However, the expansion of production has lagged behind in the past

New production facilities planned 

The Indonesian fertilizer industry is largely in the public sector. A significant part of the production is accounted for by state-owned companies, which are united under the Pupuk Indonesia Holding Company (PIHC). In 2018, the holding company was responsible for 98% of the production of urea-based fertilizers and 43% for NPK fertilizers. 

However, many fertilizer factories are considered technically outdated, the majority of which having been in operation for more than 20 years. They are inefficient in the use of natural gas, which accounts for 60 to 75% of the costs in the production process. That is why new production facilities are to be built in the coming years. 

Upon request, the Association of Indonesian Fertilizer Manufacturers (APPI) and PIHC did not provide information on the number of new buildings and modernizations or the amount of investment required. According to the PIHC, new production capacities will be created beyond the main island of Java. The technology for the factories will be sourced from several countries. 

Because the manufacturers depend on imports both for the primary products of fertilizers and for the technical operation of the plants, the production costs fluctuate considerably - especially if the Indonesian rupiah depreciates against the US dollar (at Rp 16,614 per US$1 as of March 23). Between 2014 and 2016, the production costs per ton of urea and ammonium increased by 30% in many plants, according to the PIHC.

Subsidies in the billions 

State influence in the industry also goes beyond production as the price of fertilizers in food production is supported by the state. Distribution is also strictly regulated. There are more than 1,500 wholesalers and almost 45,000 retailers. In addition, certain industry products may only be exported if domestic needs are met.

Since 1979, the Indonesian state has intervened - with interruptions - in the prices of fertilizers. State aid has been cut back in recent years. In 2019, fertilizers were still subsidized with the equivalent of more than US$2 billion. Aid worth $1.9 billion is planned in 2020. 

German deliveries are falling 

Indonesia is one of the largest importers of fertilizers worldwide. According to UN Comtrade, the archipelago ranked 6th among the largest importing nations in 2018 behind Brazil, the USA, India, China and France. In total, Indonesia has to import fertilizers valued at between $1.5 billion and $2.5 billion annually. That is a several times above the value spent in the beginning of the new millennium.

The most important supplier of fertilizers to Indonesia is by far China, ahead of Canada and Russia. German fertilizer exports to Indonesia have decreased continuously in recent years. Nevertheless, Germany was one of the country鈥檚 ten most important suppliers, according to Indonesian import statistics with the last available figures from 2018. The main product is potassium chloride. 

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.