Palm Oil Monitor – Weekly Update 16th August 2018

New biodiesel mandates in Indonesia and Malaysia

The biggest news in palm-based biodiesel – surprisingly – has nothing to do with the European Union. Instead, both sides of the Straits are talking about new rules mandating the use of palm oil methyl esther (PME) in diesel fuels in both Malaysia and Indonesia.

Malaysian biodiesel producers are calling on the government to move ahead with the implementation of the B10 mandate, which was announced in July. The mandate requires a 10 per cent blend of PME in diesel fuels, up from the current 7 per cent.  The mandate was first put forward as part of Malaysia’s 11th Plan in 2015, with a target of 15 per cent biodiesel by 2020.

Much of the opposition to implementation has come from car and truck manufacturers or sellers who are concerned about performance and warranties.

Similarly, there has previously been concern that the higher price of CPO would push B10 prices to a point that would damage the transportation sector and perhaps require government subsidies — there is a subsidy for diesel fuels in Malaysia. However, the current spread between crude oil and CPO – with CPO sitting lower — should give fuel users some comfort.

At the same time, Indonesia has announced the implementation of its own B20 mandate for diesel users.  The mandates were announced in 2008, and have gradually increased since then, with implementation of B20 originally planned for 2016. The 20 per cent level this year is likely to be raised to 30 per cent in the next few years (that was originally set to be introduced in 2020).

For Indonesia, the higher mandates solve several problems.

First, it reduces the need for diesel imports. According to one estimate, around 43 per cent of Indonesia’s transport energy comes from diesel, and around 40 per cent of that is imported. The Indonesian government sees the biodiesel mandate as alleviating some of these problems.

Second, the mandate creates a significant market for the country’s palm producers, and that market is growing at around 5 per cent annually.

Third, Indonesia has set a renewable energy target of 23 per cent by 2025; the mandate contributes to that.

The Indonesian mandate may push up global prices for palm oil at the margins; the Malaysian mandate – if implemented – will potentially do the same.

The irony, of course, is that both these policy changes are coming at a time when the EU is seeking ways to crimp palm biodiesel demand in Europe. The silence of EU groups on Indonesia’s biodiesel subsidies speaks volumes about the nature of the campaign; it’s not about saving rainforests, it’s about propping up European farmers.

A renewed export push into China and India

Malaysia’s new Minister for Primary Industries Teresa Kok has announced that there will be a push on exports, particularly in China.

The Minister will join Prime Minister Mahathir Mohamad later this month where the issue will be pushed bilaterally.

Malaysia is seeking greater uptake in food production in China, as well as seeking to attract investment in food production in Malaysia, specifically geared towards the Chinese market.

Over the past few years China has increased its investments in food production overseas. This has been particularly noticeable in countries such as Australia, which have a ‘clean, green, safe’ image among Chinese consumers. This was particularly the case after food contamination scandals in 2008.

Unlike Western markets, there is no ‘perception’ of palm oil among China’s consumers. Although the dairy fats market is relatively new and growing, it is quite distinct from the vegetable fats market, which is generally determined by price. That said, Chinese authorities have stated they are keeping an eye on the impact of trans-fats consumption (palm oil, being free of trans fats, may even benefit from any restrictions).

At the same time, RSPO has announced a push into the Chinese market, with an announcement of a China sustainable palm oil alliance. A joint announcement was made with WWF and the CFNA, a business group for food manufacturers.  Ecolabels do not have a significant market penetration in China; food safety rather than environmental concerns take priority. This may change, but it will take some time.

Almost on the same day, India and Indonesia announced a memorandum of understanding between the Indonesian Sustainable Palm Oil (ISPO) system and the Indian Palm Oil Sustainability Network (IPOS). The announcement was made by the Solvent Extractors Association (SEA) of India, the Indonesian Palm Oil Board (DMSI) and global sustainability support organisation Solidaridad Network Asia Limited (SNAL). Although this is a nice idea, India reducing their applied tariffs on palm oil imports would be nicer.

Nestle and RSPO: The plot thickens

Swiss news outlet Swissinfo has revealed there was significantly more to Nestle’s suspension – and reinstatement – than met the eye.

To recap: Nestle had their membership suspended when they failed to pay their membership fee and did not commit to a certified sustainable timeline. The problem was resolved and Nestle was reinstated once Nestle resubmitted a new plan.

However, Swissinfo writes:

Nestlé argued that the RSPO system is insufficient and “is not conducive to achieving the levels of industry transparency and transformation the sector so urgently needs”. The Swiss firm has more faith in bringing more transparency in its own supply chain instead of relying on palm oil with RSPO’s stamp of approval … Nestlé thinks it can do a better job sourcing sustainable palm oil on its own and doesn’t want to commit to achieving 100% RSPO certified sustainable palm oil as required by RSPO.

 A Nestlé spokesperson told swissinfo.ch that when the company stated that their goal is not to achieve 100% certification of palm oil, it was asked by RSPO to remove the 2017 action plan and re-submit that they have no action plan instead. This in turn is what got Nestlé suspended. In other words, RSPO was willing to suspend Nestlé rather than accept an official challenge to its unwavering approach on certification …

 “There is broad acceptance that globally agreed standards must be implemented to stimulate the growth and demand for sustainable palm oil, in order to achieve market transformation and make sustainable palm oil the norm,” an RSPO spokesperson told swissinfo.ch.  

This is likely to have been in train for some time. Several large companies have hinted at a business-to-business approach to sustainability that doesn’t require third-party certification or audits.

Although we can see the value in that it will keep compliance costs down, it does fly in the face of everything that certification is supposed to provide to the market: independent assurance and transparency. Nestle has been scarred several times by major negative campaigns, particularly the baby formula scandal. Their aversion to risk is understandable.

But it also looks like the first time that RSPO has rebuked a major purchaser in a very public way.

It has been the case for several years that producers have been seeking to have consumer goods companies censured for ‘palm oil free’ and ‘no palm oil’ labels.  After a long push, RSPO’s rules were changed to prevent these labels, but only if the labels carried a direct or indirect message of environmental superiority. This is in some ways absurd; ‘no palm oil’ is now almost by default an environmental message.

At the same time, Nestle’s environment section on its website states quite clearly:

 Nestlé uses palm oil as an ingredient in a number of our products. At the same time, we are meeting demand for choice in our product range where feasible, with palm-oil free recipes.

It also needs to be remembered that Nestle was one among many European companies that insisted its suppliers have RSPO certification. And now it tells them that it no longer wants it. Nestle’s new direction on sustainable sourcing, plus its fair-weather approach to palm oil may simply be too much for RSPO – particularly when around half of the world’s certified palm oil still remains unpurchased.

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