Flames cast dark clouds over palm oil

The industry needs to prepare for a major long and close to bloody battle ahead from climate change shareholders


THE fires raging in the Amazon rainforest are only going to make the market access case for palm oil all the more tougher in developed markets like the European Union (EU).

The fires will very likely embolden non-governmental organisations, climate change investors and lobby groups across the continent to push for more measures to protect and preserve forest ecosystems worldwide and force politicians and companies to address climate change issues.

With active ownership on the rise, the move to curtail market access in developed markets for product perceived to be contributing to climate change like Malaysia’s golden crop is likely to rise.

The industry needs to prepare for a major long and close to bloody battle ahead from climate change shareholders in global companies determined to use their money to make a difference.

Engaging with government leaders may not be enough going forward.

A Schroders report last month noted that shareholder resolutions targeting climate-related and environmental topics have been on the rise globally on the back of a perception that there is little political will on the part of governments to address climate change issues.

Approval rates of these types of resolutions have been rising too, indicating increasing pressure from active shareholders is changing the way companies operate.

Companies’ boards and management — under pressure to preserve brand names and market share — tend to bow to the pressure.

As it stands, some fast-moving consumer goods companies have resorted to having no palm oil content labels on their packaging — which has irked the governments in Malaysia and Indonesia — the world’s two largest producers.

Calls are growing in both countries to remove anti-palm oil products from retail shelves and to protect and promote the oil palm industry as there is a lot at stake for both nations.

There are some 700,000 smallholders dependent on oil palm in Malaysia and about four million people in the value chain. It accounts for about 4% of GDP annually and bring in some RM40 billion in exports with the EU taking about a third of them.

The oil palm sector is not new to market access challenges. In the past, rival edible oil lobby groups have sought to cast it as an unhealthy alternative despite the scientific evidence of its nutritional values and yield economics.

As a product, its versatility and competitive pricing enable it to be used in things like soaps to cookies, produced by major multinational brands.

The biggest immediate challenge for the industry comes from the EU wanting to phase out the use of certain edible oil feedstock in the production of biofuels through the European Commission’s Delegated Act on high indirect land use change.

In a nutshell, the act aims to gradually phase out the use of edible oils that cause deforestation as feedstock in the production of biofuels on the continent, and palm oil has been identified as such a commodity.

Malaysia has moved to lobby the European Commission and filed a joint trade dispute with Indonesia at the World Trade Organisation (WTO) to ensure exports of palm oil to the continent will not be curtailed unfairly.

A victory at the WTO could offer a lifeline in the short- to medium-term, but with the “Green” tide rising across developed markets, the industry and the government need to find a longterm solution on land use, production and prices.

Raising exports to major markets like China and India, and new markets may help, while having an integrated business model provides better earnings.

The industry players themselves need to know the days of expanding acreages to reap growth profits cannot go on forever and issues like climate change and labour rights are getting to be more important to the wider stakeholders across the world.

Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.