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Cablegate: East Java--Oil Prices, Poor Infrastructure Batter Both

VZCZCXRO2690
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0080/01 1911052
ZNR UUUUU ZZH
R 091052Z JUL 08
FM AMCONSUL SURABAYA
TO RUEHC/SECSTATE WASHDC 0246
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0127
RUEHJA/AMEMBASSY JAKARTA 0232
RUEHJS/AMCONSUL SURABAYA 0251
RUEHC/USAID WASHDC
RUEHRC/USDA FAS WASHDC
RHHMUNA/USPACOM HONOLULU HI
RUEHWL/AMEMBASSY WELLINGTON 0127

UNCLAS SECTION 01 OF 02 SURABAYA 000080

SENSITIVE
SIPDIS

EAP/MTS, EAP/MLS, INR/EAP, EB

E.O. 12958: N/A
TAGS: EAGR ID ECON PGOV
SUBJECT: EAST JAVA--OIL PRICES, POOR INFRASTRUCTURE BATTER BOTH
STATE-RUN AND PRIVATE FACTORIES

SURABAYA 00000080 001.2 OF 002


This message is sensitive but unclassified. Please protect
accordingly.

1. Summary: Top managers at two major Indonesian factories in
Gresik, East Java, spoke to visiting Consulate staff about the
challenges of running a large-scale factory in Indonesia.
State-owned Petrokimia is a fertilizer company with a protected
market and guaranteed prices. Privately-owned Kelola Mina Laut
(KML) is one of the largest seafood processors in Indonesia with
75 percent of its exports bound for the U.S. Each management
team described vastly different regulatory playing fields: one
protected and the other intensely competitive. However, both
suffer from the direct and indirect impacts of poor
infrastructure and high oil prices. End Summary.

State-Owned and Safe
----------------------------

2. (SBU) During a visit by Surabaya Pol-Econ Officer and
Pol-Econ Assistant, managers at Petrokimia explained the
business realities of operating a state-owned company in East
Java. Petrokimia produces various types of chemical fertilizer
and other by-products supporting the agricultural sector of 10
regencies in East Java province. It is one of only five such
state-owned fertilizer companies in Indonesia. The Minister of
Agriculture, with the governor's certification, regulates the
distribution of this fertilizer. Both the price and
distribution networks of fertilizer are tightly regulated. The
managers referred to the strain that their operation was under
due to rising fuel prices and poor infrastructure. However,
they offered no strategies or plans to adjust operations as a
result of the rising cost of finished fertilizer inputs.

Competing and Winning
------------------------------

3. (SBU) The managers of Kelola Mina Laut (KML), a privately
owned seafood processing facility, presented a more dynamic
picture of business operations. KML is an integrated processing
company that cleans, scales, washes, freezes and packages
locally produced seafood in its Gresik factory. KML's owner, M.
Nadjikh, is a successful Pribumi (native Indonesian) who has
flourished in a field traditionally dominated by
Sino-Indonesians. KML is Indonesia's top fish producer and
exporter, and its third-largest shrimp producer. KML operates
factories in Sulawesi and competes with both domestic and
international seafood corporations. Processing of crab-meat is
particularly labor intensive and high-cost. KML has been able
to use its thousands of skilled crab and shrimp cleaners to
provided value-added products to European and U.S. customers,
(mainly restaurant suppliers) eager for high-end seafood.

A Study in Contrasts
--------------------------

4. (SBU) Petrokimia and KML illustrate the differences between
a domestically oriented state industry and an export-oriented
private business. According to Petrokimia management, the
company would try to redirect operations toward trade and export
surplus fertilizer after domestic demand is met. However, given
that Petrokimia can only produce one third of the 1.2 million
tons used in East Java's agriculture every year, the likelihood
of becoming an export player is extremely low. Petrokimia
relies on imports of raw materials from a wide variety of
countries and increasingly high shipping costs of these inputs
still affect this subsidized industry. To meet domestic demand,
Petrokimia must import low-cost fertilizer (especially potassium
chloride) from China, other raw materials from Canada, the
Middle East, and Russia, phosphorous from Morocco, Jordan,
Egypt, and China, phosphoric acid from Tunisia and China, and
aluminum hydroxide from Turkey.

5. (SBU) In contrast, while Indonesia's subsidized fertilizer
industry relies on imports, KML is a seafood exporter
powerhouse. KML exports 90% of its total production, more than
75% of which goes to the U.S. market. Other overseas markets
are Canada, Europe, Russia, Japan, China, Korea, Australia, New
Zealand, the Middle East, Southeast Asia and Africa. The
seafood comes from throughout Indonesian waters. Stringent
international standards for seafood processing have forced KML
to comply with various international certification requirements.
This has meant that KML products can be sold in European and
U.S. markets. Because the U.S. is such an important export

SURABAYA 00000080 002.2 OF 002


destination, KML also complies with U.S. regulations outlined in
CTPAT (Customs Trade Partnership against Terrorism). U.S.
Customs and the FDA have twice visited KML to inspect safety and
security there.

Common Challenges -- Infrastructure and Fuel Costs
--------------------------------------------- -------------------

6. (SBU) Fuel prices and inadequate infrastructure are problems
for both companies, but they have a more direct impact on KML.
Petrokimia's representatives told us that high fuel prices have
increased the cost of production as well as the price of raw
materials. To insulate itself from the weak power grid in East
Java, PT. Petrokimia has its own power plant (gas turbine
generator and steam turbine generator) with a total generating
capacity of 50 MW. In addition to compensating for poor
infrastructure with their own power plant, Petrokimia's
government managers must keep the retail price of fertilizer
constant and has nearly doubled the subsidy on fertilizer, from
Rp. 7.6 trillion (USD 828 million) in 2007 to Rp. 13 trillion
(USD 1.4 billion) in 2008. Petrokimia cannot increase their
prices to consumers and therefore must try to cut costs through
increased efficiency instead. By contrast, costs that cannot be
cut in the factory by KML have to be borne by the customer.


7. (SBU) Higher crude oil prices have increased demand for
alternative fuels like palm oil, which in turns increases demand
for fertilizer at new palm oil plantations of Jatropha palms.
According to Petrokimia management, this has put sudden added
strain on fertilizer supplies available to local distribution
networks. When asked if they were seeing a shift to cheap and
readily available plant fertilizers in the form of compost-like
green manure, Petrokimia told us that wealthier and more highly
educated agricultural communities, such as those in Java, used
green manure. In poorer and more remote areas, farmers still
use synthetic fertilizers almost exclusively.

8. (SBU) Transportation infrastructure is a particular problem
for KML. Their marketing director praised the government's
crackdown on illegal fishing by foreign vessels, but complained
that the government has failed to create needed infrastructure
at Indonesia's ports. There are only five Indonesian ports
(Medan, Semarang, Makassar, Tanjung Perak, and Tanjung Priok)
large enough for KML's export needs. However, even these ports
do not have the facilities to do direct export to the U.S. KML
containers bound for the U.S. must first go to Singapore and
undergo consolidation on a larger vessel before continuing to
their final destination. This adds time and cost to the bottom
line in an industry where speed and freshness are key. Shipping
fish from Surabaya to Japan (over 3000 miles) is cheaper than
shipping fish barely 500 miles between fishing grounds near
Makassar, Sulawesi, to processing facilities near Surabaya.
Costs stay high due to infrequent inter-island shipping
schedules and a captive market.
MCCLELLAND

© Scoop Media

 
 
 
 
 
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