Oil palm planters in the line of fire
The blame of causing the haze falls on plantation companies operating in Indonesia, Malaysian firms included.
THE forest fires in Indonesia that have led to the troubling haze crisis in South-east Asia (SEA) have drawn attention to Malaysian oil palm planters. Serious allegations have been levelled against local planters’ negligence and weak antifire precautionary measures in their estate holdings in the republic.
The Indonesian authorities last week singled out at least 30 companies, including four high-profile Malaysian planters – Sime Darby Plantation Bhd (SDP), IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KLK) and Terengganu-state owned plantation arm TDM Bhd – as the culprits behind the major forest fires.
Ironically, SDP, KLK, IOI Corp and TDM are all members of the Roundtable on Sustainable Palm Oil (RSPO), which imposes the world’s most stringent certified sustainable palm oil cultivation practices that strictly adhere to the zero-burning policy, as well as the mandatory Indonesian Sustainable Palm Oil (ISPO) standard, among others.
If proven guilty, the accused plantation companies would likely be slapped with severe lawsuits as well as other heavy penalties being proposed by the Indonesian authorities, other SEA countries’ regulating bodies, as well as antipalm oil campaigners that have been badly affected by the haze in 1997, 2016 and the latest, starting July this year.
At the time of reporting, the CEOS of the affected companies when contacted by Starbizweek refrained from making new statements, with one plantation conglomerate retracting its prepared statement at the very last minute, given the escalating tension on the haze and forest fires that have now included the full involvement of the Malaysian and Indonesian governments.
It is also believed that more meetings between the affected planters and the regulatory officials from Malaysia and Indonesia are expected to be held in the coming weeks to find an amicable solution to the entire crisis.
Bursa Malaysia chairman Datuk Shireen Ann Zaharah Muhiudeen has come out strong to suggest stricter rules against environmental damage for public-listed companies.
“The unnecessary environmental situation of causing disruption to millions of families, business operations and wildlife is unacceptable. The financial culpability needs to be strengthened.
“I would personally like to see the listing rules of the stock exchanges to look at sanctions against those directors and management who have directly or indirectly engaged the policy of flouting the environmental law.
“The health of current and future generations cannot be marginalised and held hostage due to the weak standards in any sector,” she said.
Primary Industries Minister Teresa Kok has said that the Malaysian government would not protect the four Malaysian companies if such claims are proven true, but also viewed Indonesia’s claims as a serious accusation that could play into the hands of anti-palm oil campaigners.
Prime Minister Tun Dr Mahathir Mohamad has also said that Malaysia might have to pass a law forcing its local planters to tackle fires on land they control abroad.
Lawsuits and penalties
Back in August 2016, Indonesian courts slapped oil palm planter Sampoerna Agro Tbk with a record fine of 1.07 trillion rupiah (about Us$81.62mil), said to be the biggest ever fine to be handed down to a company linked to the forest fires.
Sampoerna’s unit PT Nasional Sago was found negligent in relation to forest fires on 30,000 hectares of its concessions in Riau.
Another planter, PT Kalista Alam, was also fined 366 billion rupiah in relation to fires in the Aceh province in 2015.
So far, only one Us$565mil forest fire lawsuit against pulp and paper firm PT Bumi Mekar Hijau has been rejected by the Indonesian courts.
It is also believed that there are more than 10 lawsuits currently being pursued by the Indonesian courts on similar forest fires and haze charges.
To put it into perspective, Indonesia’s Kalimantan, Sumatra and Riau are the mecca of the oil palm land bank among big plantation companies with deep pockets, especially from Malaysia, since the 1980s.
The annual forest fires in Indonesia, which often occur during the dry spell season, have increasingly become a major risk for oil palm planters operating in the republic.
In recent years, many Malaysian and Indonesian oil palm plantation companies with large estate holdings and concessions have been the most susceptible to the annual forest fires, especially during the dry El Nino season.
Industry experts say that Malaysia has about 5.8 million hectares of total oil palm planted area, while Indonesia is estimated to have 15 million hectares.
Of the total, about 15% of the oil palm plantations are planted on peat land, which has very high carbon content that can continue to burn under low moisture conditions.
Sumatra, to date, has the largest oil palm plantations planted on peat land at about 1.4 million hectares, followed by Sarawak at 476,000ha, Kalimantan at 307,515ha and Peninsular Malaysia at about 215,984ha.
According to industry consultant M.R. Chandran, prior to the Indonesian government taking any legal proceedings against Malaysian planter companies operating in Indonesia, the respective agencies in the republic had better remind themselves of some of the inefficient systems and practices that have been going on in the past.
To put the entire blame on the oil palm planters is totally unacceptable, as most Malaysian planters in the republic have invested a lot on fire prevention equipment and other precautionary measures against any fire outbreak in their operating estates.
“To begin with, the Malaysian government also has a sizeable stake in many of these plantation companies with sprawling land banks and concession areas in Indonesia,” he points out.
During the forest fires in Indonesia, which lasted for four months in 2016, Malaysian planters had to fork out additional costs from RM10 to RM50 per hectare per year, depending on the size of their respective hectarage in the republic.
This is in addition to the planters’ existing fire-prevention budget estimated at RM110-RM120 per hectare for planting on normal land and 25%-30% higher costs when planting on peat land, he explains.
trans-doundary Pollution Act
Rather than pointing fingers at each other, Indonesia, Malaysia and the Asean nations should embark on the Trans-boundary Pollution Act, suggests Chandran.
“The haze pollution is not just confined to Malaysia and Indonesia.
“Earlier this year, from February to April, Mekong countries also experienced very polluted haze and the extent of the haze blanket also increased the daily temperatures to 40°C,” he adds.
Chandran points out that all Asean nations should unite and fight for trans-boundary haze and pollution issues.
“Aside from just implementing legal justifications, Asean should also unite and seek assistance from advanced agrarian nations such as Australia and the Netherlands on how to implement civilised and modern methods of farming, instead of the slash-and-burn method periodically to fertilise and rejuvenate land for planting crops.
“This should be a holistic effort by all parties involved,” Chandran points out.
Also bear in mind that the current forest fires in Indonesia are not the first El Nino-induced fires, according to weather climate experts.
It started in 1982-1983, and again in 1997-1998 and in 2015-2016.
“If history is to be relied upon, the current 2019 forest fires may not be the last,” says Chandran, adding that “we must take cognizance of the fact that a new category of El Nino has become far more prevalent in the last few decades than at any time in the past couple of centuries.
“Over the same period, the traditional El Nino events have become more intense as well. What more with the vast expanse of forest around plantation concessions with multiple players of biomass build up is only a recipe for disaster waiting to happen.”
For example, the region has been experiencing severe dry weather conditions from July this year and it’s been dry so far almost across the entire Indonesian archipelago.
“The National Forest Reserves, including national parks, are not resourced at any level to handle such dry weather patterns.
“This problem will continue if the diagnosis is wrong, and hence, putting the oil palm plantation CEOS in jail and having political brickbats is not going to solve the trans-boundary haze problem,” adds Chandran.
Meanwhile, the Malaysian Palm Oil Association (MPOA) CEO Datuk Mohamad Nageeb Ahmad Abdul Wahab says SDP, IOI Corp, KLK and TDM are reputable members of the association.
The MPOA represents 118 plantation companies, which account for 1.87 million hectares or 40% of the total planted oil palm area in Malaysia.
“The zero-burning policy is strictly adopted by all our oil palm planters (members) with operations in Malaysia and abroad.
“The slash-and-burn method to
THE golden years of investing in the palm oil industry appear to be over. Declining crude palm oil (CPO) prices top the list, but there are more challenges. Over the last few years, cost pressures have mounted on oil palm planters.
Compounding matters is the blame levelled on the palm oil industry for the dreadful haze phenomenon which has hit the sector hard with negative publicity. This is despite the industry’s claim that it has spent billions of ringgit on sustainable practices.
According to Maybank Kim Eng Research, the palm oil industry’s investment returns are no longer attractive, unlike its golden years from 2008 to 2012.
The research house points out that industry profits in the second quarter of 2019 (2Q19) were the worst in recent times, dragged down by sluggish CPO prices.
The numbers speak for themselves. In 1Q12, the combined profits of Malaysian listed palm oil companies under its coverage totalled a whopping Rm1.82bil.
But in the second quarter of this year, that number shrunk to a mere Rm191mil. Even just in recent times – 4Q17 – that profit figure still stood at under Rm1.5bil.
The research house notes that the 2Q19 results of plantation companies show that the industry is “barely” profitable.
“Some companies are in the red, as the CPO price is below their per unit cost of production.
“Had it not been for the good contributions from the downstream divisions of selected large entities, the industry would have fared worse,” Maybank Kim Eng says.
Citing an example, the research house points out that IOI Corp Bhd, said to be the lowest cost producer in the region, has seen its profits per hectare dropping by more than two times in just a year.
IOI Corp posted an operating profit per hectare of RM2,713 for its financial year ended June 30, 2019 (FY19) compared with RM6,225 in FY18. This was IOI Corp’s lowest profit in 18 years. Before that, its lowest operating profit per hectare stood at RM1,615 in FY01.
While the bigger boys suffer declining earnings, analysts reckon that the smaller players and those less efficient have it even tougher. Many are struggling to break even, with some going into the red.
Yet another factor is the lack of new plantings in both Indonesia and Malaysia.
“The bigger concern for the next two years is the slower growth in mature oil palm areas due to the lack of new plantings in Indonesia and Malaysia since 2015,” Maybank Kim Eng says.
From 2015 onwards, new planting in the palm oil industry has slowed sharply, partly due to a forest moratorium imposed by the Indonesian government. This essentially limits the conversion of forests and peat land for oil palm, pulpwood and logging concessions.
Given the lack of new plantings and slower growth in mature oil palm areas, Fitch Solutions Macro Research forecasts the CPO average selling price to strengthen to RM2,300 per tonne in 2020.
“Prices will rise as global production growth will slow down, at a time when consumption will continue to grow robustly, mainly driven by Indonesia and Malaysia’s resolute biodiesel development policy,” it says.
Is palm oil really to be blamed?
The negative publicity surrounding the palm oil industry has been linked to the reoccurring regional haze crisis.
However, some analysts reckon otherwise, saying that smallholders are slashing and burning other cash crops rather than oil palm, resulting in the recent dreadful haze.
According to CIMB Investment Bank’s regional head of plantation research Ivy Ng, there are other perennial crops that have a shorter life-cycle which require replanting every year unlike oil palm which has a 25-year cycle.
Moreover, she points out that big planters would not tear down their reputation after practising the Roundtable on Sustainable Palm Oil principles which strictly adhere to the “no burning” policy for plantations.
“It does not make sense for big planters to do that. I believe the open burning could be due to the negligence of the smallholders during the dry season that can be even caused by a cigarette butt that has not been disposed of properly.
“The burning can be accidental that has originated from neighbouring land that swayed across other plots of land,” Ng notes.
Meanwhile, Maybank analyst Ong Chee Ting echoes similar views that oil palm does not require cutting and replanting every year unlike other non-perennial crops like sugar cane, padi, vegetables, soybean, tobacco and oil seeds.
“Hence, it is inconceivable that the haze is due to oil palm planting,” she points out.
In view of the haze situation, Maybank expects that there could be a minor negative impact on the CPO output next year.
Recall that post-2015’s strong El Nino, Malaysia’s average CPO yield contracted 15% year-on-year to 3.21 tonnes per hectare in 2016.
To stamp out the negative perception of the palm oil industry, Maybank Kim Eng believes the support of sustainable agricultural practices, continuous education and financial support for smallholders are crucial.
Malaysia has made it compulsory for all oil palm planters and smallholders in the country to obtain the Malaysia Sustainable Palm Oil certification by the end of this year. The certification is exclusively for palm oil that is sustainably grown and produced in the country.
Indonesia, on its part, has also made it compulsory for all planters to acquire the Indonesian Sustainable Palm Oil certification.
However, analysts believe that smallholders’ participation in both Malaysia and Indonesia is behind schedule to be certified due to lack of funds, understanding and education.