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Palm planters, politicians test Wilmar's new green credentials

Source: Reuters - Wed, 19 Feb 2014 21:00 GMT
Author: Reuters
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Workers collect palm oil fruits inside a palm oil factory in Sepang, outside Kuala Lumpur, Malaysia, Feb. 18, 2014. REUTERS/Samsul Said
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By Anuradha Raghu and Niluksi Koswanage

KUALA LUMPUR, Feb 20 (Reuters) - Commodity giant Wilmar International is using its buying clout to push suppliers to be greener, or else, setting up a battle with growers and governments that have profited from their environmentally damaging practices.

Given Singapore-listed Wilmar's muscle - its refineries process nearly half the world's palm oil - it could also drive up prices of the oil, used in cooking oil to cosmetics and biofuels, especially in price-sensitive India and China.

"That's the unfortunate consequence of any steps taken to make agriculture more sustainable. It's a cost we must learn to bear," said Dorab Mistry, head of edible oil trading at Indian conglomerate Godrej Industries, a big Wilmar customer.

Wilmar, valued at $16.5 billion, has given its growers across Southeast Asia two years to comply with its new environmental policy, which it says is "the right thing to do for the continual viability of the industry, for our children and future generations."

"We need your support and urgent action to de-link your operations from deforestation," it wrote to suppliers in a Jan. 7 letter obtained by Reuters, referring to the practice of clearing rainforests to expand oil plantations, potentially speeding up climate change.

Producers who fail to comply with Wilmar's "No Deforestation, No Peat, No Exploitation" rules risk being cut off from more than 140 refineries that Wilmar and its associates operate globally.

CHANGING MINDSET

Wilmar's 'greening' follows criticism by environmentalists, particularly in Europe, who say its estates in Indonesia have grown at the expense of cutting down the forest habitat of Sumatran tigers and draining peat swamps, emitting climate warming carbon dioxide.

Greenpeace has welcomed the moves to clean up the palm oil processing chain. "It's ambitious and we support it. It's about time the big guns in the industry do something to eliminate the bad image palm oil has in the global marketplace," said Bustar Maitar, head of Greenpeace's Indonesian forest campaign. "Palm oil suppliers who are making a noise about Wilmar really need to change their mindset. It's not business as usual."

Wilmar, which buys around 30,000 tonnes of palm oil every day - equivalent to a day's demand across the whole of India - faces opposition from within its own industry.

Planters and politicians in Indonesia and Malaysia, which together account for almost all the world's 52 million tonnes of palm oil production, accuse Wilmar of siding with Western green groups to set up trade barriers.

Malaysia's commodities minister Douglas Uggah Embas did not respond to requests for comment. He has previously said Wilmar's policy showed no respect for Malaysian laws promoting good agriculture practice, workers rights and farmers' returns.

In Malaysia's Sarawak state on Borneo, where oil palms cover close to three quarters of 1.6 million hectares of peat swamps, planters say there's no suitable land for any expansion. Government officials there have urged growers to shun Wilmar's refinery, Sarawak's biggest, and build their own processors and ship more crude palm oil directly to India, local industry sources said.

Sarawak officials could not be reached for comment.

YOUNGER GENERATION

Wilmar said it will help suppliers to meet its new rules, retaining supply links with growers who developed estates from tropical forests and peat swamps before November 2005, when a surge in palm oil prices spurred rapid plantation expansion.

"It's regrettable that, as yet, not more plantations and refineries have come forward to support these policies," Wilmar said in a statement to Reuters. "In spite of the objections ... we are heartened that there are suppliers, especially the younger generation of planters, who are keenly aware of the need for environmental protection and are supportive of our move."

The company declined to say how many suppliers had signed up to its 'no deforestation' policy.

"I wouldn't sign yet. It's a unilateral move by a big buyer. They just quietly put it out there without consulting the industry," said the chief executive of a listed plantation firm that supplies Wilmar, who asked not to be named because of the sensitivity of the issue.

Makhdzir Mardan, Chief Executive of the Malaysian Palm Oil Association, which groups more than 120 local palm growers, said the issue was a matter of national security.

Wilmar's policy is also partly driven by big-brand clients, such as Kellogg Co, which are pushing their suppliers to weed out oil from plantations tainted by deforestation.

Wilmar is expected on Thursday to report a 36 percent drop in October-December net income to $305 million from a year ago, according to Thomson Reuters StarMine estimates.

POSITIVE INCENTIVES

Wilmar's new policy, launched in December, follows similar moves taken by smaller palm oil rivals such as Golden Agri Resources and Malaysia's Sime Darby, and comes as U.S. Secretary of State John Kerry warned Indonesians that man-made climate change was "perhaps the world's most fearsome weapon of mass destruction."

A smoky haze from Indonesia's timber and palm estates blanketed neighbouring countries for weeks last June, prompting Singapore's government to warn planters listed on its stock exchange they could face consequences if found responsible.

Planters' dissatisfaction at Wilmar stems partly from the firm's dominance of markets in India and China, which soaked up demand for palm oil when its use declined in Europe. The company has 82 refineries in those two markets, and extensive distribution networks, leaving little wiggle room for suppliers.

"Wilmar can create positive incentives to change by rewarding compliant producers with long-term contracts on favourable terms," said Gary Paoli, an analyst who tracks Wilmar with Indonesian environmental consultancy Daemeter Consulting.

Traders predict that slower land expansion and supply growth, as planters in Indonesia and Malaysia are more careful in choosing where to plant, will push up palm oil prices.

"The feeling is that it will lead to more investment in research to increase productivity. So in the long run, if you take a 20-year view, sustainability should come at very little extra cost," said Mistry at Godrej Industries. (Editing by Ian Geoghegan)

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