Q+A-What's next as consumer firms shun a key palm planter?

KUALA LUMPUR, March 22 Mon Mar 22, 2010 12:05am EDT

KUALA LUMPUR, March 22 (Reuters) - Global consumer firms are gearing up to cut ties with palm oil suppliers who are resorting to widespread deforestation and peatland clearance in a bid to meet growing food and fuel demand.

In a space of three months, the world's top food firm Nestle (NESN.VX) and No. 1 palm oil buyer Unilever (UNc.AS) (ULVR.L) have stopped buying palm oil from Indonesia's Sinar Mas. [ID:nLDE62G2B3] [ID:nGEE5BA0Z3]

The cancellations come after environmentalist group Greenpeace highlighted how these firms' suppliers destroyed forest habitats of endangered orangutans.

Here are questions and answers on what could happen next:

WHICH BIG CONSUMER FIRM WILL BE THE NEXT TO SHUN SINAR MAS?

Greenpeace, in a series of reports on Sinar Mas, also identified Proctor & Gamble (PG.N) and Kraft Foods KFT.N as main customers. These firms will find it difficult not to follow in the footsteps of Unilever and Nestle.

J.P. Morgan said in a recent note there may be more supply cancellations if Sinar Mas, along with its Singapore-listed unit Golden Agri (GAGR.SI) and PT Smart (SMAR.JK), continues with its plantation practices.

The investment bank identified Cadbury CBRY.D, Campbell Soup Co (CPB.N), McDonald's Corp (MCD.N), Shiseido (4911.T), Burger King Holdings Inc BKC.N and Henkel (HNKG_p.DE) as among the key global customers for Sinar Mas.

HOW WILL INDONESIAN PLANTERS REACT?

The Indonesian Palm Oil Association (GAPKI) wants to bring together all planters that supply palm oil to Unilever to discuss taking action against the consumer goods giant, with a focus on whether to stop supplying Unilever collectively. [ID:nJAK404594]

But it remains to be seen if planters will take that step as more customers are expected to cancel contracts on environmental concerns and Indonesia needs overseas demand to absorb 70 percent of its total palm oil production.

There could be other implications. Indonesia, and even rival producer Malaysia may make good on their threats to take EU to the World Trade Organisation courts if their palm oil-based biofuel exports are rejected for markets there.

WILL CUTTING OUT ERRANT PALM OIL FIRMS SAVE FORESTS?

Analysts and traders say if more consumer goods companies join the Unilever and Nestle bandwagon, some Indonesian and Malaysian planters may have to rethink their farming practices.

They may finally take seriously the Roundtable on Sustainable Palm Oil (RPSO) -- an industry body of consumers and planters that has developed an ethical certification system that include pledges to preserve forests and wildlife.

Many Indonesian planters, including Sinar Mas, are members but only three have received certification for some of their estates and mills as the majority say that premiums for producing eco-friendly palm oil are not high enough for them to commit.

Critics say many planters are using the RSPO to show they are eco-friendly but are afraid to subject most of their plantations and mills to scrutiny as many of their farming practices are hardly eco-friendly.

For firms who certified some output, see [ID:nSGE62K024]

Indonesian and Malaysian planters have said they can always rely on demand from top buyers India and China where access to affordable consumer products are a bigger priority than saving forests. [ID:nSGE5BD0KN]

WHAT OTHER PALM OIL FIRMS ARE UNDER THE RADAR?

Friends of the Earth has recently accused Malaysia's second largest planter IOI Corp (IOIB.KL) of encroaching into peatland forests in Indonesian side of Borneo island as it expands -- a practice the firm strongly denies.

This is bad publicity for a planter who belongs to the RSPO, has obtained green palm oil certification for some of its mills and estates in Malaysia and has become a key supplier to Finnish refiner Neste Oil's (NES1V.HE) biofuel plants in Europe. [ID:nLDE62B05H] (Editing by Himani Sarkar)

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