Indonesian and Malaysia, which produce some 85 percent of the world's crude palm oil (CPO), will cut production in the short-term to help limit supply and prevent further falls in prices.

The production cut will be made starting next year through a replanting program covering a total of 300,000 hectares of oil palm trees from both countries, Agriculture Ministry's director general for plantations, Achmad Mangga Barani, said Friday.

The replanting means felling still-productive but old trees to be replaced later by new seedlings. The program will then freeze production in replanted areas until the new trees start producing crude palm oil in the fourth year.

Achmad said the agreement between the two nations has been signed by Minister Anton Apriyantono and Malaysian counterpart Peter Chin, with the aim of anticipating oversupply amid falling demand.

"Demand is projected to slow down in every sector next year as a result of global recession. We're preventing a possible oversupply of palm oil that may occur next year by replanting trees," he said.

"This hopefully will help boost the palm oil price to a normal level — at around US$700 to $800 per metric ton," he added.

Palm oil prices in Malaysia touched a three-year low of 1,331 ringgit (around $376) a ton on Oct. 28, Bloomberg reported.

The two countries together produce around 85 percent of the world's CPO and account for 88 percent of global CPO exports.

Indonesia alone produces 18.5 million tons of CPO per annum on a total of over 6 million hectares of plantations, according to Indonesian Oil Palm Association (Gapki) chairman Akmaluddin Hasibuan.

This agreement, is the country's second move to anticipate oversupply of a commodity next year, after Indonesia, Malaysia and Thailand jointly agreed last Wednesday to cut rubber production by 210,000 tons next year, also by felling trees.

The three counties make up 70 percent of global rubber output.

On the CPO, according to Achmad, Indonesia will replant 50,000 hectares of oil palm trees owned by local farmers and Malaysia 250,000 hectares.

"Indonesian farmers will receive interest subsidies if they want to replant their trees," he said.

He said Indonesia and Malaysia expected to cut palm oil output by 75,000 tons and around 500,000 to 600,000 tons, respectively, next year.

Over a longer period until 2011, Achmad said, the country planned to replant a total of 125,000 hectares of oil palm trees.

He emphasized that the government's replanting program was a short-term solution because "CPO demand will be high in the next few years as European Union countries mandate the use of 20-percent CPO in fuel and our country mandates 10 percent".

Akmaluddin of Gaoki said he was encouraged by the move, but warned that replanting was "costly", saying that replanting oil palm trees needed around Rp 25 million ($2,253) to Rp 27 million per hectare.

The Indonesian Chambers of Commerce and Industry (Kadin) says Indonesia needs clear-cut strategies to protect local products amid a mushrooming number of bilateral and regional free trade agreements.

Such protection could be in the form of incentives or policies that favor local businesses, Kadin's vice president of trade and distribution, Ketut Suardhana Linggih, said on Thursday.

Developed countries like Japan and the U.S. resorted to protectionism to a certain degree and maximized the benefits of their trade deals, Ketut said.

"Free trade has been unfair to Indonesia because it has no strategies to protect its local products," he said on the sidelines of a Kadin national meeting, pointing out that the U.S. had been protective of its local market despite its active involvement in the global free trade movement.

"The U.S. supports free trade very much. Meanwhile, it also has a strong commitment to protecting its local industries."

Indonesia recently secured a trade agreement with Japan under the economic partnership agreement (EPA). Under the ASEAN framework, Indonesia is also working to build a similar deal with Australia, New Zealand and China.

Kadin head M.S. Hidayat said the government needed strategies so as not to miss out on opportunities presented by free trade deals while protecting local industries.

"The government must draw up a blue print of strategies as how to deal with other countries," he said.

Domestic products the government could protect in the local market include textiles and batik.

"In the past, locally made textiles dominated Tanah Abang markets (central Jakarta). Nowadays, 70 percent of the products sold there are made in China — with good quality and lower prices," he said.

Protection from the government could be in the form of numerous incentives for local businesses.

"The government could provide loans with low-interest rates for local businesses with export orientation," he said.

Commenting on the credit crisis in the U.S., Hidayat expected Indonesia's exports to the U.S. to decline in the third and fourth quarters because of the collapse of Lehman Brothers and American International Group Inc (AIG).

Indonesia's non-oil and gas export value to the U.S. stood at US$7.43 billion in the first seven months of this year, up by 15.37 percent from $6.44 billion for the same period last year.

The Finance Ministry has officially lifted the value-added tax (VAT) imposed on textile machinery imports as part of a national restructuring program for the textile industry.

In a letter dated Sept. 3, Finance Minister Sri Mulyani Indrawati approved lifting the 10-percent VAT as an incentive to the industry-wide technology upgrading program.

"A businessman who imports and — or — receives machinery subject to VAT will obtain a letter of tax exemption issued by the head of the local tax office where he is registered," Sri Mulyani said in the letter.

The approval for the tax exemption came in reply to an official request sent on Oct. 23, 2007 by the Indonesian Textile Association (API).

API chairman Benny Soetrisno said Wednesday he would soon meet with the ministry's tax director general Darmin Nasution to obtain an explanation related to certain technical aspects covered in the letter.

"We received the letter on Sept. 9. We have requested an appointment with the tax director general to find out how it *the program* will be implemented," Benny said, adding the association hopes the VAT exemption will also apply to machinery imported last year.

"We don't know whether the letter applies retroactively."

The association has yet to calculate the financial benefits to be derived from the tax exemption.

The government has recently begun providing incentives for the textile industry, whose growth has been stalled mostly due to aging machinery.

To help change that, the government launched a revitalization program for the industry early last year in the form of soft loans and subsidies for bank lending interests.

The government disbursed Rp 175 billion (US$18.77 million) to 78 textile and garment manufacturers under the first scheme and Rp 80 billion to 14 small- and medium-scale textile and garment manufacturers under the second.

According to the Industry Ministry's textile industry director Arryanto Sagala, the ministry has signed contracts this year with 113 companies worth Rp 132 billion in interest subsidies, with plans to disburse Rp 285 billion in subsidies as part of the program.

Sri Mulyani dismissed the association's other request, for the elimination of income tax.

The country may not need to import white sugar next year as local producers will be able to meet local demand once a government-funded refinery revitalization program is completed, Trade Minister Mari Elka Pangestu says.

"We won't need to import white sugar next year as the gap in the demand can be offset with the stock," she said.

According to the ministry, national production of white sugar is estimated to reach between 2.7 million and 2.9 million tons this year, while demand is forecast to reach 3.18 million tons.

Mari said the country could save between 1.2 million and 1.3 million tons of refined sugar and white sugar combined annually, although she refused to mention the tonnage of the country's white sugar reserves.

Refined sugar is consumed by the food and beverage industry.

Mari said the stock should be enough for domestic consumption, especially during the milling period from January until April, during which sugar refineries typically import the commodity.

Citing an estimate made by the Indonesian Sugar Council, Mari said the country had this year received a total of 6.2 million tons of white and refined sugar from imports and local production.

Domestic consumption of the two sugar types stands at 4.9 million tons so far this year, leaving some 1.3 million tons in stock, according to Mari.

With the aim to increase domestic production to match domestic demand by 2009, the government will increase production by renovating 52 refineries, most of which are located in Java, Sumatra and Sulawesi.

The government has estimated that Rp 7.9 trillion (US$857.95 million) will be needed to finance the program.

Part of the fund will be financed by banks, including state lenders Bank Rakyat Indonesia and Bank Negara Indonesia, as well as privately owned Bank Central Asia.

The Agriculture Ministry's director general of plantations Ahmad Manggabarani said the program would boost the country's sugar production to 2.7 million tons this year and secure self-reliance next year.

Indonesia, Asia's largest sugar importer, may see its sugar production jump to 3.3 million tons next year.

The government also aims to increase the country's total sugarcane plantation area, mostly by injecting capital into state plantation firm Perusahaan Perkebunan Nusantara (PTPN) to help it acquire and manage more land.

The country's total sugarcane plantation area grew 4.15 percent to 427,000 hectares this year from 410,000 hectares in 2007, and is expected to reach 450,000 hectares by next year, Ahmad said.

Steel imports reached a record high during the first seven months of the year due to limited production capacity and soaring demand driven by government-sponsored infrastructure projects.

Imports of iron and steel were higher in the period than in the whole of last year, leading analysts to predict total imports this year will double last year's.

According to the Central Statistics Agency (BPS), imports of iron and steel and their products in the seven-month period reached almost US$7 billion, or equivalent to 7.5 million tons, up by 127 percent from $3.08 billion, or 3.5 million tons, in the same period last year.

The figure for this year's period is about 1.5 million tons more than the 6 million tons received in full in 2007.

The BPS revealed that $5.12 billion worth of the raw materials were received in the form of sponge iron, pig iron, scrap, hot rolled coils and cold rolled coils, while $1.88 billion-worth came in the form of iron rods, sections, iron angles, wire rods and zinc-coated steel sheets.

The Industry Ministry's director general for metal, textile and miscellaneous industries, Ansari Bukhari, said Tuesday the jump in the import might be have been prompted by numerous government-initiated infrastructure programs.

As an example, he cited construction work under the government's 10,000-megawatt power plant program, and the conversion of kerosene to liquefied petroleum gas which has demanded steel for cylinders.

He also cited the on-going construction of 1,000 subsidized apartment tower blocks.

"These programs require a huge volume of steel," Ansari said.

"The soaring import may also have been made possible by the huge demand from the automotive sector, shipyard and electronic devices businesses," he said, adding that the demand was likely to remain strong in the next few years.

Local steel producers only have the capacity to produce between 4 million and 4.5 million tons annually compared to an estimated demand of 12 million tons this year.

Ansari said he believed domestic steel demand would grow 10 percent annually.

A recent drop in crude oil prices on the global market is expected to lower international prices of iron and steel price, thus increasing the attraction of importing.

However, Ansari said the leap in the import was unusual as the ministry had in recent years recorded total imports of the materials ranging between 2.5 million and 3 million tons per year.

The ministry's metal industry director I Gusti Putu Suryawirawan said he would investigate the cause of the rising imports.

"We don't know yet why such huge imports occurred. It could be from the massive project or the BRR (Aceh-Nias Rehabilitation and Reconstruction Agency) projects or the Suramadu bridge project," he said.

The BRR is still building houses and infrastructure for victims of the 2004 tsunami in Aceh and North Sumatra's Nias. The Suramadu bridge will connect Surabaya with Madura Island, both in East Java.

However, Gusti Putu said he was suspicious the country's major steel producers, state-owned PT Krakatau Steel, PT Essar Indonesia and Gunung Garuda Steel Group, had been raising their exports since last month and would continue to do so through October.

The government is inviting the private sector to assist it in developing an integrated system of river and railway-based transportation systems across the archipelago.

"We aim to develop a river transportation system by connecting rivers to rivers, rivers to a port, etc.," Dedy Supriadi Priatna, a deputy at the National Development Planning Agency (Bappenas), said Wednesday in a seminar.

"The government also plans to develop and manage an integrated system of land transportation and railway-based transportation and combine both systems with a river transportation system."

The water infrastructure development projects form parts of the 2005-2009 national infrastructure program which requires a massive US$65 billion in investment — although none of the funds have been allocated to waterway projects.

According to Dedy, the government invested Rp 19.68 trillion ($2.14 billion) in 2005, Rp 34.32 trillion in 2006, Rp 44.13 trillion in 2007 and Rp 61.92 trillion in 2008, and has proposed Rp 62.58 trillion for next year, to finance the projects across the archipelago.

"The government is short more than $40 billion, which it hopes can be filled in by the private sector," he told the seminar attended by representatives of local administrations, including South Sumatra, Central Kalimantan and Papua, as well as water transportation experts.

In a region seeing the kind of development envisioned by the government, a river transportation system would ship products from, for example, mining, plantation and forest sites to a port, Dedy said.

To guarantee that rivers used in an integrated transportation system were sustainable, local administrations should engage private partners for river maintenance and management.

"We are in dire need of huge investment from the private sector to carry out these plans," he said.

To lure potential investors, Dedy said, the government was offering a set of possible incentives, including tax cuts, interest subsidies, revenue shortfall guarantees and ease in the issuance of permits.

A European Union regulation on imported products that contain chemicals may impede Indonesian exports to the region when it is enacted this year, business associations say.

The Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) regulation was introduced in June 2007 with the aim to protect the environment and people from dangerous chemicals by requiring that suppliers register the chemical contents of their products.

Under the scheme, which will be enacted on Dec. 1, products containing chemicals must be pre-registered with the European Chemical Agency or face a long and costly registration process before they can be exported to the EU.

With less than four months left to register, the government must quickly request the EU postpone the scheme's enactment as many exporters in Indonesia remain in the dark over its rules, said M.S. Hidayat, chairman of the Indonesian Chamber of Commerce (Kadin).

"REACH is a new, big obstacle that we, including the government, need to deal with. Otherwise, we'll lose our markets in the EU," he told The Jakarta Post on Tuesday.

The Central Statistics Agency (BPS) recorded US$3.61 billion in non-oil and gas exports to the EU in the first quarter of this year, up 12.93 percent from $3.2 billion in the same period last year.

"I'll ask for a delay in the implementation because we need time to make some adjustments," Hidayat said, adding that he would meet with Trade Minister Mari Elka Pangestu and Industry Minister Fahmi Idris later this week to discuss the issue.

Budi Susanto Sadiman, secretary general of the Indonesian Plastic and Olefin Industries Association, agreed, saying that many companies in the country were unaware of the regulation and would face additional costs in meeting its demands.

The high costs will push up product prices, thus decreasing their competitiveness on European markets.

"REACH can damage the Indonesian chemical-based industry, such as the plastics industry. This will be costly," Hidayat told the Post, adding that small and medium companies would be the hardest hit as the registration costs would be beyond their reach.

"The worst part is many of manufacturers are still unaware of REACH," he said.

Sofjan Wanandi, head of the Indonesian Employers Association, said manufacturers remained oblivious to the scheme because the government is "notoriously lax in disseminating information among manufacturers".

However, Diah Maulida, the trade ministry's director general for foreign trade, said the ministry had been promoting the regulation for months through, among others, seminars and workshops.

Diah said a seminar on the issue would be held on Wednesday at the Industry Ministry.

The world's second-largest sportswear manufacturer, Adidas Group, has placed its final orders with local shoemaker PT Prima Inreksa Industries, under an agreement signed by both companies on Friday at the Industry Ministry.

Adidas Group Indonesia representative chief Georg Krebelder (speaking on behalf of Adidas Group footwear sourcing head Horst Stapf) said the agreement marked the termination of the business partnership between Prima and Adidas.

"As part of our final agreement, we have committed to a total order of 900,000 pairs (approximately 300,000 pairs per month) from October to December 2008."

"This (order) is to help PT Prima with their cash flow during the transition period. The final date for the termination of the business relationship, however, remains unchanged: That is Dec. 31, 2008."

Also attending the signing was Prima president director Paulus Harli, Industry Minister Fahmi Idris and a number of ministry officials.

From July to September, Adidas has placed orders with Prima of 200,000 pairs every month.

Adidas, which ordered 201 million pairs of shoes from the Indonesian shoe industry last year, had been ordering 500,000 shoes per month from Prima since 1997 before it first aired the idea of terminating the partnership in July, because Prima had been implicated in debts.

Prima is one of six Indonesian companies manufacturing sport shoes for Adidas.

According to a letter received by the ministry, last year Prima owed US$37.25 million to state lender Bank Negara Indonesia (BNI) and $8 million to suppliers.

Reports suggested Prima had previously asked Adidas to extend the contract for two years starting December, but Adidas offered only three months of extension.

Paulus said his company would post a break-even point if the factory (which has a full capacity of 500,000 pairs of shoes per month) produced at least 400,000 pairs monthly.

The production of 100,000 pairs was equivalent to between $1 million to $2 million in revenue, he said.

Despite the termination, Paulus promised none of Prima's 6,000 staff would be affected.

"We're optimistic our company will keep running next year because many buyers have expressed an interest in us," he said, refusing to name potential buyers.

Echoing Paulus, Ansari said Indonesian shoes were gaining ground in the international market, as sports shoes produced by Vietnam and China have been subjected to anti-dumping duties by the world's large markets, notably the European Union.

Indonesia's garment industry has been reaping profits this year filling out orders worth US$230 million placed by 17 branded garment producers from Germany, the United States, South Korea and Taiwan.

The orders, which amount to a three-year high for the industry, were made out to 30 local garment manufacturers, said Henrietta Lake, the senior consultant of U.S. agency for international development project Senada, on Thursday.

Lake said the global producers had been attracted by the competitive prices and high quality products offered by the industry's textile and garment manufacturers.

"The quality of Indonesian garment products are better than other countries, including Bangladesh. Indonesian products are likely to be ready to take over China's market," she said.

She said Indonesia's garment prices were even more competitive than those of Vietnam, the Philippines, China and Cambodia.

The orders were place by companies including Abercrombie & Fitch, Dewhirst, HanesBrands, J.Crew, JCPenney, GAP, Jones Apparel, Li & Fung, Linmark, Liz Claiborne, Nike, PIERS, Ralph Lauren, Target, Vanity Fair and Walmart.

Executive director of national textile research institute Indotextiles Redma Gita Wirawasta said GAP had placed an order for 12 million to 14 million items worth $100 million and Walmart had ordered 11 million to 13 million items valued at $80 million.

SOT and Marks & Spencer submitted orders for 8 million items, worth $60 million.

"Orders from other global garment manufacturers like Target, Nike, Adidas, Levi's, Arrow, Van Houesen, only reach less than $50 million… However, their orders grow by an average of 10 percent annually," said Lake.

The country is the global garment market's 10th biggest provider and the U.S. market's third biggest, Lake said, citing a recent study.

The country's garment exports reached $2.1 billion in the first semester of this year, up 6 percent from last year.

Lake said demand for local garment products had increased by between 12 and 14 percent compared to last year.

The country's textile and garment industries are enjoying a revival after being devastated by the 1997 Asian financial crisis, which left companies unable to expand capacity and invest in new machines.