By Sameer C. Mohindru and Surabhi Sahu
Crude palm oil producers are working on improving the
sustainability of all aspects of their operations to address
environmentalists' concerns about ecologically damaging practices
and to preserve market share.
Participants in the $40 billion-a-year-sector, which is heavily
concentrated in Indonesia and Malaysia, are initiating a range of
eco-friendly initiatives, from restoring peatland and conserving
forests to increasing the proportion of their products that are
certified as sustainable and upgrading mills to reduce carbon
emissions.
Palm oil is the world's most widely traded vegetable oil, but
environmental campaigns have made large buyers wary of using it,
threatening to reduce its share of markets ranging from biofuels to
chemicals and processed foods. Any reduction in production could
diminish palm oil's competitiveness against rival vegetable
oils--especially for buyers in price-conscious Asian destinations,
including China, India, Pakistan and Bangladesh.
In 2010, Nestle SA (NSRGY) suspended palm oil buying from Golden
Agri-Resources Ltd. (E5H.SG) over the Singapore-listed company's
alleged involvement in rainforest destruction. It resumed purchases
only after Golden Agri-Resources demonstrated to its satisfaction a
commitment to produce sustainable palm oil.
The Roundtable on Sustainable Palm Oil, a grouping of
conservationists, plantation companies and buyers that promotes
environmentally friendly practices at oil palm plantations, in
November said it would make its certification process more
stringent and is considering the inclusion of factors such as human
rights, carbon emissions and labor in its certification
criteria.
The RSPO recently upheld a complaint against Singapore-based
First Resources Ltd. (EB5.SG) for clearing Indonesian rainforests,
directing the company to suspend operations the area being
disputed.
First Resources, an RSPO member, responded amenably to the
request, agreeing in a statement late last month to halt all
land-clearing activity on the disputed 400 hectares for the
six-month period the RSPO has set to resolve the matter.
The RSPO's efforts to provide certification for sustainably
produced palm oil got off to a slow start a decade ago, but it has
gradually built momentum, with around 7 million metric tons
certified in 2012, or 14% of global production.
The main criticism environmentalists have leveled at palm oil
producers in Indonesia and Malaysia is that by burning peat forests
to expand plantations, they are releasing massive amounts of carbon
dioxide into the atmosphere.
Palm oil companies are reconsidering the practice--on the basis
of profitability, both short and long term.
"Planting oil palms on peat is more expensive than on mineral
soils, and water levels have to be maintained through a complicated
series of drainage systems," Henry S. Barlow, a director at Sime
Darby Bhd. (4197.KU), one of the world's top palm oil producers
said in a recent interview.
Despite systems in place to maintain water levels, oil palms
planted on peat still risk being engulfed by up to six centimeters
of water a year, and once plantations complete a 25-year-cycle,
many won't be fit for replanting--regardless of whether excess
water is pumped out.
Last month, Indonesia's forestry minister announced he would
recommend that a moratorium on new forestry concessions in
peatlands and primary forests that expires in May be extended.
Meanwhile, plantation companies are taking the initiative to
designate some land off-limits.
John C. Oakley, Managing Director at London-based REA Holdings
PLC (RE.LN), said in a recent interview the company has allocated
7,000 hectares, or 7% of its total area in Indonesia, for
conservation.
At the same time, transnational companies such as Nestle,
Unilever PLC (ULVR.LN), Neste Oil (NES1V.HE) and Cargill Inc. are
increasingly using and producing sustainable palm oil.
Cargill's plantations in South Sumatra province, Indonesia, are
100%-certified sustainable, and the company expects to achieve full
certification in West Kalimantan province by 2015, D. Chandramohan,
the company's director of corporate affairs said in a recent
interview.
But even if the plantation side of the palm oil industry meets
sustainability targets, critics point out that the process of
extracting oil from palm fruit is another major source of
greenhouse gas emissions.
The palm crushing industry is addressing this criticism by
upgrading its processes. "Many oil palm mills have turned carbon
neutral or positive by using technology to capture methane, which
is then burnt to produce energy," K.R. Raghunath, the managing
director for Southeast Asia at KIS Group, told The Wall Street
Journal.
KIS Group has upgraded mills in Malaysia, Indonesia and Papua
New Guinea, he said.
Peatland conservation and carbon capture at mills will help the
oil palm industry in efforts to meet European Union standards on
feedstock to make biofuels. The EU standards evaluate feedstocks
based on carbon emissions from ground preparation through refining,
using diesel emissions as a yardstick.
Ilmari Lastikka, head of EU affairs at Neste Oil, the world's
largest biodiesel producer, told The Wall Street Journal that
methane-capture facilities at mills can reduce palm oil's emissions
to just 20% of diesel's--a far lower percentage than can currently
be achieved by other vegetable oils.
And it will exceed the EU's standards, which require biofuels'
carbon emissions to be no more than 65% of diesel's. This will fall
to 50% 2017 for existing biofuel plants and the EU has proposed a
40% threshold for new operations.
M.R. Chandran, former chief executive of the Malaysia Palm Oil
Association, told The Wall Street Journal, "As long as the industry
is able to address sustainability and reduction of greenhouse
gases, palm oil sales will continue to rise."
Even the U.S.--one of the world's largest producers of rival
soyoil--is increasing its consumption of palm oil, he said, noting
that annual U.S. imports of the tropical oil have already exceeded
a million tons thanks to what is deemed a healthful property, the
absence of trans-fatty acids.
Write to Sameer C. Mohindru at sameer.mohindru@dowjones.com and
Surabhi Sahu at surabhi.sahu@dowjones.com
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