Oxford Business Group
Indonesia’s palm oil sector is looking to adopt more sustainable practices in a bid to alleviate growing environmental concerns while meeting rising global demand.
After having boycotted the products of palm oil giant Sinar Mas over concerns about deforestation and habitat erosion, several corporations have resumed or nearly resumed purchases after the company initiated a number of reforms. In September, Swiss food conglomerate Nestlé announced its intention to resume buying palm oil from Golden Agri Resources (GAR), which operates loosely under the trade name Sinar Mas, after it had dropped the company from its supply chain in March 2010 due to a Greenpeace report that accused the company of destroying the rain forest, endangering orangutans and contributing to climate change.
Sinar Mas has been working with environmental group The Forest Trust on the implementation of a Forest Conservation Policy. By 2015 it aims to have all 433,200 hectares (ha) of its palm oil production certified as sustainable by the Roundtable on Sustainable Palm Oil (RSPO), a Swiss-based group of producers, environmentalists and consumers.
Sinar Mas Agro Resources and Technology (SMART), one of Sinar Mas’ subsidiaries, announced in September that it had obtained RSPO certification for 14,955 ha of plantations and one mill in North Sumatra. SMART follows other Indonesian producers who have already undergone the certification process, including Musim Mas and London Sumatra. RSPO certification and other reforms, which include improved inventory tracking systems, led Nestlé to resume purchases.
However, Sinar Mas, which accounts for 10 percent of Indonesia’s oil palm production, is still working out issues with a number of other Western conglomerates, notably Unilever, Kraft and Burger King. Pressure from environmental groups such as Greenpeace led these corporations to drop Sinar Mas as a supplier in 2010, although the recent reforms may be able to draw them back in. Unilever stated that it was “convinced” of Sinar Mas’ intentions, but had not yet made a purchasing decision. Cargill, a major palm oil trader that also supplies companies like Kraft and Nestlé, reviewed Sinar Mas’ record in early 2010 but ultimately retained the producer.
In April 2011, the Netherlands set an international standard by declaring that all palm oil sold in the country must be sustainably produced by 2015, and has pushed the EU to exempt sustainably produced palm oil from the 3.8 percent import duty currently levied on crude palm oil (CPO).
But European companies only account for a small proportion of Indonesian palm oil sales – Unilever represents 3 percent of Sinar Mas’ revenue and Nestle less than 1 percent. By contrast Asia, led by China and India, accounts for 89 percent, and none of its buyers have raised such public complaints. Still, Unilever may have a somewhat disproportionate impact on the palm oil market as its 1.2 million to 1.5 million ton of purchases each year make it the world’s largest single buyer, and it is pushing for Chinese and Indian buyers to adopt its sustainability requirements.
However, it may require market pressure for Indonesian producers to actually respond to these calls for sustainability. Sinar Mas is currently riding high, having just announced a year-on-year growth in profits of
166 percent, reporting US$411 million for the first half of 2011. These huge profits are being driven by a spike in CPO prices, which, on the Malaysian stock exchange, rose from under $650 per ton in September 2009 to more than $1200 per ton in January 2011, and stood at nearly $950 per ton in September 2011. A drop in prices — which looks increasingly likely given the looming global economic slowdown — could sharpen the impact of Western boycotts and incentivize action.
One avenue that may help divert palm oil operations toward sustainability is the downstream sector, primarily cooking oils, margarine and soap and beauty products, all of which have been growing strongly in recent years. Sinar Mas is investing $1 billion through 2015 in downstream production, while Wilmar, another giant in the sector, will spend $900 million over the next three years. Refined palm oil products could be labelled “green” and sold at a premium in Western markets, driving the increased adoption of eco-friendly practices in producer countries.
In September, Indonesia promoted its downstream palm oil products by lowering export duties on refined, bleached and deodorised (RBD) palm olein, which will now be taxed at a maximum of 13 percent, compared with the 22 percent maximum duty on CPO. This tax change had immediate effects, leading India to purchase 50,000 tonnes of RBD palm olein. Refineries in Indonesia stand to benefit the most from the alteration, at the expense of Indian and Malaysian refineries, and the Indonesian downstream industry will profit from cheaper inputs.
However, the upsurge in Indonesian downstream production will not necessarily lead to the adoption of the sort of environmental standards favoured by Greenpeace, especially with the growing demand from India and China for palm oil-based cooking oils. The industry, perhaps with prodding from the government, will need to be proactive in responding to European demands and the possibility of change in Asian environmental standards.
Indonesia has mentioned the possibility of an Indonesian Sustainable Palm Oil (ISPO) certificate that would provide an alternative to the RSPO, but critics claim this is an attempt to avoid applying tighter environmental standards. If Indonesian palm oil producers make an early start on adopting sustainable practices, they will have a head start in this increasingly lucrative market.