Amid the plunge in palm oil prices, giant palm oil company Indonesia Indofood announced plans to exit the world’s largest palm oil certification scheme, the Roundtable on Sustainable Palm Oil (RSPO). This policy was carried out after the company did not submit an RSPO mandatory corrective action plan in November 2018.
The RSPO claims that Indofood did not respond to more than 20 violations of the RSPO Principles and Criteria, as well as 10 violations of Indonesian laws found on the Indofood plantation. And they then freeze sustainability certification for palm oil mills and three plantations owned by PT London Sumatra Tbk, with oil giant Indofood as the majority shareholder because they was found to violate the basic principles of the International Labor Organization (ILO).
Certifications previously given to oil palm mills Begerpang and its supplier gardens, all of which are owned by PT London Sumatra Tbk (Lonsum), have been revoked by a body that often voices environmental NGO protests related to the national palm oil industry. As is known, Indofood owns London Sumatra Plantation through Indofood Agri Resources Ltd, a subsidiary of PT Indofood Sukses Makmur which is listed on the Singapore Stock Exchange, with ownership of 64.4% of Lonsum’s shares.
The story of the freezing of RSPO certificates based on the investigation of Indofood’s oil palm plantations began complaints against the company filed by the Rainforest Action Network (RAN), International Labor Rights Forum (ILRF), and Indonesian institutions engaged in labor rights, namely Business Strengthening and Development Organizations -Community Service (OPPUK), in October 2016.
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To the media, the Indonesian RSPO through Executive Director Herwin Nasution said that Indofood had shown its true identity: a company that perpetuates the practice of exploitation of labourers in an industry known not because of its high standards.
The RSPO even claims to have known Lonsum’s unsustainable practices for years. For this reason, the RSPO concludes that it is time for RSPO to uphold certification standards and membership regulations.
“Indofood’s statement from the RSPO shows that for the umpteenth time this company has refused to correct labour rights violations that have systematically occurred,” Herwin said.
It became something extraordinary, when Indofood’s decision was made in the midst of rising prices of crude palm oil (CPO). On January 23, the CPO price on the Malaysian Derivatives Exchange in April 2019 contract shot 0.22% to a position of MYR 2,253 per ton, after previously closing up 1.66%. This means that since the beginning of the year, CPO prices have surged 6.46%.
Is Indofood optimistic regarding the strengthening of CPO prices, even though the RSPO claims that their voices were heard by buyers in the US and Europe? On the other hand, many observers of the vegetable oil industry say that RSPO members only have 30% market share.
Nobody knows for sure. However, 2019 seems to be a year full of positive sentiment for CPO prices. The survey, conducted by Intertek Testing Services, AmSpec Agri Malaysia, and Sociece Generale de Surveillance, recorded a rise in Malaysian palm oil exports of 9-13% in the January 1-20 period, compared to last month. If three survey institutions have said similar conditions, it means that the increase in demand for palm oil is likely to be true.
Increasing demand while abundant palm oil reserves can calm market players because it can drain reserves and give a boost to CPO prices. In addition, in the December-March period, palm oil production is predicted to decline due to seasonal factors.
“In terms of the [plantation] of oil palm, the production declines in December-March because the cycle goes down,” said Joko Supriyono, General Chair of the Indonesian Palm Oil Association (Gapki), after discussing in Menteng, Wednesday (1/9/2019).
CPO prices are expected to rise to as low as MYR 2,400 per ton according to analyst Dorab Minstry when speaking at the Pakistan Edible Oils Conference, last weekend. The prediction is based on increasing demand in the energy sector and slowing production.
Fundamentally, world CPO trade has the potential to strengthen when abundant supply has the potential to decrease dramatically. The mandatory biofuel policy in Indonesia and Malaysia is now underway and is planned to have a larger portion.
In mid-January, Malaysia’s Main Industry Minister Teresa Kok said that her government intends to increase the amount of palm oil in biodiesel blends to 20% next year (2020), up from the on going B10 program with the use of palm oil pegged at 10%, as quoted by Reuters. With only the B10 program currently underway, it has been able to increase Malaysian CPO consumption by 70,000 tons per month.
In Indonesia, the mandatory 20% biofuel program has taken place and the absorption rate has reached more than 90% as of the end of January 2019 with the B20 allocation target this year reaching more than 6 million kilolitres. It is not surprising if the oil palm association projects that the value of exports this year will decline, which will directly affect prices in the global CPO market.
Regarding the success of Indonesia’s B20 program, referring to Malaysia’s assumption of reaching 70 thousand tons per month, the absorption volume of CPO has the potential to reach 2-3 times. Especially if the Indonesian government can spur the mandatory program into 100% CPO along with the optimal operation of the Dumai refinery in Riau as a pure CPO-based fuel processor.
Is this what makes Indofood so confident, after making the RSPO so furious that it freezes Lonsum’s membership? Only time can prove.
However, if we look at the map of global palm oil trade specifically to the world vegetable oil business, Indofood’s freezing decision has the potential to increase the price of international vegetable oil. Not only oil palm, almost all vegetable oils have the potential to accelerate.
In that situation, the results of the RSPO decision will be seen. Indofood’s exit and rising CPO prices will benefit other RSPO member producers. Meanwhile, for the RSPO, their “firm attitude” towards Indofood seems to be a valid stamp of the level of sustainability of the institution as well as the members of the oil palm company, which is under its control. The RSPO can claim that being under their auspices will be a significant advantage for its members.
On the other hand, Indofood has the potential to gain greater profits. Released from RSPO, Indofood has the potential to sell CPO at large volumes, even though this is done through their partners engaged in commodity trading companies.
Perhaps in terms of margin, RSPO member companies have high profitability margins, but they will still be faced with challenges related to the accumulation of CPO stocks in their warehouses. Prices are expensive because RSPO labels make them a number of preferences for global buyers. Moreover, the months of December to March are commonly known as the dragging months of production.
This situation claims the environmental NGOs are associated with the many companies that buy palm oil that claim to have severed their relationship with Indofood before the sanctions were granted, indisputably automatically. How could companies such as Nestle, Musim Mas, Cargill, Fuji Oil, Hershey’s, Kellogg’s, General Mills, Unilever, and Mars, be willing to choose high-priced raw materials in the midst of a global trade situation that shows the pace of stagnation?
The RSPO might win a step, but Indofood advanced further forward.