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Asia's palm oil firms face tricky balancing act

Publication Date : 25-02-2014

 

Singapore-listed palm oil trader Wilmar International, which faces pressure from environmentalists to address problems such as the annual haze choking the region, recently signed a pledge that it would not buy palm oil harvested from trees planted on forest land and peat swamp areas cleared from end-2015.

The episode illustrated the tricky new terrain Wilmar and other plantation companies such as Malaysia's Sime Darby and Felda Holdings have to navigate as they try to balance addressing environmental pressure and decades-old business and local political interests.

When Wilmar announced its intention in late December, it created a panic in Sarawak. This is because half of Sarawak's palm oil output is bought by Wilmar, the world's largest palm oil trader.

Wilmar said the media reports that it would stop buying palm oil from Sarawak were "untrue".

Wilmar processes palm oil, which later becomes part of the ingredients for chocolates, ice cream, instant noodles and soap, among other things.

Analysts said Wilmar's environmental pledge has set the ball rolling, and could force other plantation companies to sign similar "green" pledges sooner or later.

The pressure can be seen with the move two weeks ago by Kellogg, a renowned brand for cereals such as Corn Flakes and Rice Krispies, to stop buying palm oil harvested from deforested land.

And mainly European multinational food and consumer product makers such as Unilever and Nestle - seen as new forces in the environmental battle - are set to push planters to produce sustainable palm oil.

There is now an increasing economic imperative for the palm oil giants not to dismiss environmental allegations made against them, DBS Vickers Securities plantation analyst Ben Santoso said.

"Palm oil conglomerates can no longer afford to have a bad image in the eyes of the world, as this means their products will be shunned," he told The Straits Times.

Wilmar, which signed the pledge last December, said consumers globally are moving towards sustainable production of commodities, and the palm oil industry must adjust its practices.

"Without any effort to make the industry sustainable, green lobby groups will continue to damage the image of palm oil, leading to lower usage of palm oil for food and biofuels, and eventually lower palm oil prices," Wilmar told The Straits Times.

Sime Darby and Felda, both giant planters, also told The Straits Times that they have banned new development on peat areas, and would continue to explore ways to improve sustainable palm oil production.

Planters like Wilmar, Sime Darby and Felda are members of the Roundtable on Sustainable Palm Oil, which means they have to comply with sustainable practices.

But there is another side to the push to produce environmentally sustainable products.

For instance, Wilmar's environmental pledge riled Sarawak planters and politicians, who accused European companies of attempting to destroy the livelihoods of plantation smallholders.

"This directive from Wilmar has a very disastrous effect on us because it will stop our programme on poverty eradication among the rural people," Sarawak Land Development Minister James Masing said.

Analysts like Khor Yu Leng, who runs her own consultancy firm, believe that solutions for planters in this balancing act will not be quick and easy, especially for smaller planters, who find it less cost-effective to fully comply with sustainable practices.

"The worry is, will too much interference from all sides also lead to instability in the global supply chain?" she asked.

 

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