Burning rain forest a hard habit to break for palm oil industry

[KUALA LUMPUR] Cleaning up the image of companies that produce the world's most-consumed vegetable oil is proving more difficult and costly than the industry anticipated.

Palm oil, used in everything from food to car fuel to cosmetics, has drawn the ire of environmentalists for years.

Some farmers in Indonesia and Malaysia have burned rain forests to make way for new palm plantations, shrinking animal habitat and compounding water and air pollution across Southeast Asia.

To avoid a consumer backlash, the industry created certification standards intended to show it could meet growing demand without damaging resources.

But 12 years after the Roundtable on Sustainable Palm Oil set its standards, just 17 per cent of world supply is certified, and dozens of companies have been cited for violations.

The latest was Malaysian plantation owner IOI Corp, which had its certification suspended for four months, prompting buyers including Nestle SA to shop elsewhere.

Felda Global Ventures Holdings, the top crude palm producer, withdrew from the certification program in May, saying it needs three more years to educate 100,000 of its small growers.

"All these must comply" with the sustainability standards, said Zakaria Arshad, who grew up on a palm plantation in Malaysia and is now Felda Global's chief executive officer. Farmers who have been using the same methods for generations must change if companies hope to retain customers, Mr Zakaria said. "It's not easy, but we have to go to them and explain to them," he said. "This takes time. I know RSPO is the way forward."

PALM PREFERENCE

The shift has been difficult partly because demand has about doubled since 2005. Farmers scrambled to expand, especially in Indonesia and Malaysia, which account for 86 per cent of global supply, according to the US Department of Agriculture.

Palm-oil output exceeded soybean oil for the first time in 2005, and has been widening the gap ever since as rapid economic growth helped fuel consumption across Asia.

Concern emerged as consumers in Europe and the Americas demanded more foods that don't result in environmental damage or exploit workers. It's still common for swaths of Southeast Asia to be encased in a haze from the smoke of illegal forest fires.

The industry created the RSPO in 2004 to set standards for sustainable production that include environmental, economic and social issues. New technologies like satellites and mobile phones are making it easier to monitor plantations. Palm oil that is certified as sustainable can be sold at a premium, and many food-company buyers require it.

The case of IOI, Malaysia's second-biggest listed planter, illustrates the challenges of adapting to the standards.

The RSPO alleges some IOI subsidiaries didn't posses environmental permits when clearing land, cleared more land than was authorized and planted trees on fragile land. Aidenvironment, an environmental services organization that's also an RSPO member, made the complaint.

The RSPO said in March it was revoking IOI's certification from April 1 and the suspension included European refinery IOI Loders Croklaan, a specialty fats and oils maker that supplies to more than 100 countries.

Over the next two months, IOI shares fell more than 11 per cent. While the suspension was lifted three weeks ago, companies including Nestle, Kellogg Co. and Cargill Inc. have said they won't source from IOI.

IOI, which on Aug 23 reported a loss of RM59 million (S$19.8 million) in the quarter ended June 30, declined to discuss how the suspension affected its business.

In a company filing that day, it said it will prioritise regaining lost sales in the US and Europe. "We aren't inclined to discuss commercially confidential matters in public," the company said Aug 26 in an e-mailed response to questions from Bloomberg.

"IOI hasn't restored the forest it destroyed or resolved its social conflicts with communities in Malaysia," Annisa Rahmawati, a forest campaigner at Greenpeace Indonesia, said in an Aug 5 statement. "It sends the message that the RSPO is more concerned about helping a founding member regain customers than ensuring its standards are upheld."

Voon Yee Ping, an analyst at Kenanga Investment Bank Bhd, said it may take until the second half of 2017 for IOI's downstream business to recover. "The damage is done," she said.

VERIFICATION

The RSPO said this month it welcomed the progress made in resolving IOI's case. The implementation of the company's action plan shall be subject to independent ground verification and after 12 months, following another independent verification, the RSPO will undertake a review.

Producers say the certification standards are working.

While only 17 per cent of global palm-oil supplies are certified sustainable, the RSPO last year said that its market uptake target for Europe was 100 per cent by 2020. The shift will be slower in Asia, where the goal is 50 per cent in Indonesia and Malaysia, 30 per cent in India and 10 per cent in China, according to the group's website.

Golden Agri-Resources, a Singapore-based company that is Indonesia's largest producer, says about 60 per cent of its output is certified sustainable, which carries a premium in the market.

To make sure it can keep palm growers accountable, the company said its mills will be able to trace all palm supplies to specific plantations by 2017, and independent mills who contract to produce palm oil will have to meet that standard by 2020.

Compliant Golden Agri "sees sustainability as an integral part of its operations and value chain, and a long-term investment which contributes to business resilience," said Paul Hickman, the company's head of global vegetable oils and oilseeds, trading. "As an agribusiness reliant on the environment and rural communities, we must act as responsible stewards."

Complying with RSPO standards won't be easy.

Companies may re-assess their planting and acquisition strategies, and the amount of available land that can be developed is reduced when abiding by stricter environmental laws, according to BMI Research. Some also may have to implement costlier production processes to improve conditions for workers, BMI said.

Felda Global Ventures in May voluntarily withdrew RSPO certification for 58 of its 71 milling complexes in Malaysia to educate small holders on changing the way they plant and produce. Sime Darby says almost all of its 2.36 million tons of production is certified.

"Companies who think they can do away with all this sustainability business are living a dream," Darrel Webber, the RSPO's secretary general in Kuala Lumpur, said in an interview in June. "Those people are dinosaurs. They are waiting for mass extinction."

BLOOMBERG