EU-ASEAN TRADE RELATIONS: THE PLOT THICKENS

As reported last week by POM, the Indonesian government has walked back on a $2 billion deal to buy Airbus military aircraft – in retaliation for the EU Parliament’s proposed ban on palm oil in the bloc’s renewable programs.

This has now been widely reported in the UK print media.

Adding to that, Indonesian Fisheries Minister and Special Envoy for palm oil Luhut Binsar Panjaitan made Indonesia’s stance even clearer. He told reporters in Brussels last week, “We have a very good relation with Airbus. But if you punch us to the very difficult corner, what will we do? We are human beings, you know?”

He added, “Airbus is very important but we need to see the reciprocity of this. We don’t want to import Boeing because of this palm oil issue.”

The next round of inter-institutional talks on the renewable energy file are scheduled for May 17. The EU is also discussing a free trade agreement with Indonesia.

But it could get even more complicated for Brussels. Have Malaysian interests joined the fray? According to news reports AirAsia boss Tony Fernandes has walked back on an order for Airbus A350s, stating that the aircraft is ‘too expensive’. Reports also note that Malaysia’s low-cost carrier – arguably the most successful in the world – is now in talks with Boeing to purchase the US aircraft manufacturers’ 787 variants.

This would be a big shift for AirAsia, if it happens. The company’s fleet is composed entirely of Airbus aircraft.

That said, the negative feeling that Europe’s against Malaysia is running particularly deep. Most Malaysians are friends with or related to individuals that have had their lives changed by palm oil.

[One of the co-hosts of this blog is no exception. His family’s hometown of Temerloh in Pahang was transformed by the presence of FELDA plantations just to the north of the town.]

If Fernandes’ decision is based on national pride rather than commercial concerns, Brussels will need to take notice; it will have ruined not just trade relations, but diplomatic relations in the ASEAN region.

NGO CAMPAIGNS STRUGGLE IN PRODUCER COUNTRIES

Indonesia’s Salim Group has been put through the wringer by Rainforest Action Network and fellow NGO, the Netherlands-based Aidenvironment.

RAN’s basic claims are this: Salim has ‘connections’ to two plantation companies, and these plantation companies are causing environmental problems, via peat drainage in Borneo.

The choice of Salim as a target makes sense for the US-based RAN. Salim owns Indonesia’s largest food company, Indofood. Crucially, it has ties to US companies such as PepsiCo.

RAN therefore has a point of leverage with its supporter base in the US. And, RAN has been running a long-time campaign against the US beverage company.

But for anyone who has worked in Indonesia, the claims rest on what is pretty much business as usual. Indonesian business is often opaque, run by family interests and has many layers.

Indonesian compliance with regulations is often problematic because regulations themselves are often problematic.

RAN have been trying this path with Salim and PepsiCo for a while now, to little effect. Arguably the most interesting thing about RAN’s campaign is that even though Indofood is the country’s largest food company, the usual ‘shaming’ of brands has no impact in Indonesia’s domestic market.

RSPO OFFICIALLY LAUNCHES IN NIGERIA

RSPO has officially launched its national interpretation (NI) in Nigeria. Nigeria is the world’s third-largest palm oil producer, although much of the production is small-scale and consumed domestically.

But this is a significant development. Developing the NI has taken several years, and it is one of the first NI outside of the Asia-Pacific region.

POM is yet to analyse the interpretation, but we’re hoping that some of the issues that have been raised about RSPO in Africa – such as not being able to use chemical treatments for blast disease – are addressed. Watch this space for an analysis over the next few weeks.

Last week, Palm Oil Monitor released the breaking news that a military procurement deal between the Indonesian Government and Airbus for A400M cargo planes was being placed under review, until the EU’s effort to ban palm oil under the Renewable Energy Directive is resolved.

On Sunday, UK newspapers The Sun on Sunday and The Sunday Express picked up the story to explain that the EU palm oil ban would impact current and future UK jobs:

 “Hundreds of British jobs have been put in jeopardy by a proposed EU ban on palm oil. Aerospace giant Airbus had been set to win a contract with Indonesia worth up to £1.5billion but the deal appears to have hit the rocks over the EU bid to block one of the country’s major exports.

Indonesia is threatening a tit-for-tat boycott of European goods in protest over EU plans to ban imports of palm oil from the would-be buyers.

Last week the ban was discussed at a meeting between the UK Ambassador in Jakarta and Indonesia’s state-owned Enterprises Minister, Rini Mariani Soemarno. He made clear no trade talks with Europeans would take place until the palm oil ban is lifted”.

This was communicated to a UK delegation, including UK Ambassador to Indonesia, H.E. Moazzam Malik and Richard Graham MP, visiting Jakarta last week to discuss future trade relations.

Articles referenced in this blog:

• Sunday Express, EU News: Palm Oil Ban Puts Hundreds Of British Jobs At Risk
• The Sun on Sunday, Slippery Slope Hundreds Of Brit Jobs Put At Risk As EU Trade War With Indonesia Looms

This is an interesting development, in that popular media are beginning to understand that palm oil discussions are not niche – but rather, are at the forefront of international trade policy with South-East Asia, which has significant impact on local employment in Europe, both positive and negative.

We will continue to bring you the breaking news and the latest policy discussions from the palm oil industry and the global sustainability debate.

This is an exclusive to Palm Oil Monitor.

According to our sources in Jakarta, the Indonesian government has issued an internal directive that effectively suspends the Indonesia-EU negotiations on a trade deal until the matter of the EU’s effort to ban palm oil under the EU’s Renewable Energy Directive is resolved.

This was communicated last week to a UK delegation visiting Jakarta to discuss “trade relations” by Indonesian Minister for State-Owned Enterprises, Rini Mariani Soemarno. Present from the British Government was the UK Ambassador to Indonesia, H.E. Moazzam Malik and Richard Graham MP.

It gets more interesting: according to our UK sources, the Ambassador was also told that a military procurement deal between the Indonesian government and Airbus for A400M cargo planes worth around USD2 billion is effectively off until the RED problem is dealt with. That contract could stave off proposed job losses across multiple EU sites, including a potential 450 jobs in the U.K. Without the Indonesian contract, are those jobs once again at risk?

The issue of Iceland supermarket’s planned removal of palm oil was also raised at the meeting with Ambassador Malik – although, as we had reported at the time, Iceland’s share of the global palm oil market is miniscule.

What is the wider context to the Indonesian stance? Indonesia has very few bilateral FTAs. Most of its agreements are between the ASEAN bloc and third countries (e.g. China, Korea).

There has been a political and popular backlash against previous FTAs. A holdup in the EU-Indonesia negotiations would not be considered a major failure by many Indonesian businesses and politicians — or the public.

But the palm oil dispute has added dimensions. The Indonesian government earns significant revenue from its palm oil taxes – approaching USD1 billion at times. A dip in palm oil exports is a dip in revenue. In addition, there are more than 2 million farmers in Indonesia that rely on palm oil. A drop in demand equals a loss of income for these farmers.

This has further political ramifications. There is a general election next year. President Widodo will be seeking a second term. The EU’s stance on palm oil will not help him move closer to victory.  The Indonesian government will find leverage with the EU where it can.  The same can be said for Malaysia.

At the last round of Indonesia-EU negotiations there was a special meeting between the countries’ two chief negotiators that covered only palm oil. Clearly nothing was resolved at this meeting, and it seems that Indonesia has now decided to flex its muscles.

Is the UK ready to risk all of this over palm oil?

ICELAND GETS COLD ON PALM OIL

The news generating the most headlines this week is that UK supermarket chain Iceland has decided to remove palm oil from its private label (own brand) products.

The move has gained considerable news coverage for the supermarket chain, which specialises in frozen goods. This is surprising given the relatively small market penetration of the group. It represents about 2 per cent on the UK grocery market, so can definitely be considered niche. Its palm oil purchases are around 500 tonnes, representing approximately 0.001 per cent of annual global production.

Given the small numbers involved, this looks more like a marketing stunt than a business unit decision. Going ‘palm oil free’ gives Iceland a tiny point of marketing difference in a crowded and competitive market.

We’ve seen this previously, when French retailers launched a palm oil free chocolate spread to compete with Ferrero’s Nutella. It did not really make a dent in Nutella’s market share, but it did provide a niche option for a niche market.

This goes hand-in-hand with the policy rationale the company is using, where it is stating that it does not believe palm oil can be sourced sustainably. Anyone who has had anything to do with sustainability certification – whether MSPO, RSPO, ISCC or ISPO – would beg to differ.

INDONESIA RATTLES THE SABRE ON RED

The European Union Parliament’s proposed ban on palm oil in the Renewable Energy Directive continues to generate waves in the European Union and across the globe.

At the European end, the trilogues between the Council, Parliament and Commission are ongoing. The objective of the trilogue is to reach a compromise position for the final Directive, which then needs to be approved. This isn’t just on palm oil; it covers the entire gamut of European renewables programs. There has been some jockeying for policy preferences over the past week, but European NGOs are currently focused on having carbon capture programs excluded from the RED. NGOs probably see their job on biofuels as complete; they have convinced the Parliament to take their position, and now it’s up to the Parliament to carry this through.

At the ASEAN end, Indonesia is deploying its resources to both rebuff the EU and gain greater international support.

Indonesian trade minister Enggartiasto Lukita has reportedly asked for a mandate to retaliate against the EU Parliament’s proposed ban.

One of the tricks Indonesia has up its sleeve is the difference between its bound and applied tariff rates. An applied rate is the current tariff on a good; a bound rate is the maximum tariff they can apply to that good. Most applied tariffs in Indonesia are well below the bound rate. This means that Indonesia can place a much higher tariff on a product coming from Europe and still be within WTO rules.

Indonesia has also been rallying in the region, calling on Malaysia to coordinate their positions, and calling on Nigeria – the world’s third-largest palm oil producer – to join the Council of Palm Oil Producing Countries.

The additional wildcard here is the proposed EU-Indonesia free trade agreement. The last negotiating round was completed in February. Palm Oil Monitor has heard from reasonably good sources that the Indonesians were considering postponing the next round, which the EU has slated for June but remains unconfirmed.

ZERO DEFORESTATION POLICIES: NOT SO SUSTAINABLE?

As noted last week, Greenpeace recently called out food companies on their ‘zero deforestation’ commitments. Now CIFOR has joined the fray.

CIFOR’s work is often robust, and this is no exception.

CIFOR’s report looks at perverse outcomes from zero deforestation commitments by 50 large companies that have undertaken them.

What they discovered is that no companies made commitments to either: maintain marketing relations with the smallholders in their supplier base; or ensure commitments do not adversely affect food security because of changing land use patterns.

The upshot is that – as some people had suspected – smallholders were very much being left out of the ‘zero deforestation’ equation. CIFOR sums it up as follows:

“Many companies may be required to narrow their supply base to a smaller number of producers who have the capacity to conform to more stringent production standards in order to reduce transaction costs. This may then further exclude smallholders from participating in profitable commodity chains.”

For practitioners interested in the wider definition of sustainability this can’t be considered acceptable. Anyone with the most basic understanding of sustainability certification or stakeholder relations knows that the local community – and their welfare – is paramount. This truly underlines the difference between a corporate or NGO commitment and a sustainability standard.

Welcome to the first weekly update of the Palm Oil Monitor.  The authors of this blog, Khalil Hegarty and Pierre Bois d’Enghien, will provide our opinions on the state of the global palm oil sector.  We are experts in the fields of trade, sustainability and environmental conservation.  We have worked on palm oil for years – and all over the world.  Now we want to share our views often and with a global audience. Too often, the debate is dominated by the extremes, so we intend to offer a little dose of reality and good old-fashioned analysis along the way.  In addition to our weekly update, we will provide both longer and shorter commentary as news and events unfold.  Our opinions are ours, and if you disagree, that is just fine with us.

Upsides in the US-China Trade Spat

President Trump’s decision to slap China with tariffs have potential upsides for CPO going into China.

China is hitting US soybeans with a 25 per cent tariff. Brazilian soybeans will make up some of the shortfall, but Chinese markets use palm oil and soybean oil interchangeably.

Around two-thirds of US soybean goes to China. China gets around 40 per cent of its soybean from the US.

Some analysts also note that replanting in Indonesia, ongoing labour shortages and lower inventories mean that any supply response for palm may come up short – which means better prices going into China. Though others think, any gains will be undone by US soybeans dumped on other markets.

The US-China developments combined with changes in the EU biofuel trade means there’s some turbulence in the market – all caused by policy changes. ​

EU Drops Dumping Duties on Indonesian Palm Oil

Continuing on trade, the EU has finally given way to the inevitable, dropping antidumping duties on palm oil from Indonesia. The ruling came through from the WTO in late January, but the EU only removed the tariffs in March. Just to refresh the memory: this case goes all the way back to 2012.

The EU investigated at the behest of the European Biodiesel Board. The tariffs were imposed roughly a year later in late 2013 at up to 23 per cent. Wilmar – one of the world’s largest palm oil groups – was arguably the hardest hit.  Indonesia didn’t waste any time taking it to the WTO in 2014, but it has taken around four years for this to be resolved.

The EU’s approach didn’t wash with the WTO, hence the ruling. Indonesia will now be exporting biodiesel to the EU again

But this isn’t over. The tariffs were also applied to Argentina’s biofuels; they have also been lifted. The EU has now launched an investigation into Argentine subsidies.

Just to give an indication of how big this is for EU biodiesel, Platts noted the following in relation to Argentina’s exports:

“These duties against Argentinian biodiesel were reduced on 7 September, paving the way for SME (soybean derived biodiesel) to flood back into Europe, and that is not hyperbole … the extent of this trade flow has shocked many market participants, with over 700kt booked in 2017 alone, from virtually none.”

Indonesia’s exports aren’t as significant as many other players, but they are significant enough to make a dent. By way of indication, the US slapped antidumping duties on Indonesian exports last year.

Greenpeace Pushes Traceability…

On the sustainability side, in case you missed it, in mid-March Greenpeace published a report calling on major users of palm oil to disclose their sources and live up to deforestation commitments. These promises – made in 2012 – were to have deforestation removed from product supply chains by 2020.

Interesting to see that Unilever published its traceability report a couple of weeks before everyone else, becoming the ‘first consumer goods company to publicly’ disclose the suppliers and mills they source from.

The timing of the report released also coincides very much with discussions ongoing at the European level on the Renewable Energy Directive (RED) that looks to phase out palm oil biofuels from 2021.

Moreover, Greenpeace has followed this up with a fancy-looking video asking the question: ‘where did the palm oil in my chocolate bar come from?’

Greenpeace got plenty of media mileage out of its campaign against Nestle in 2010. Any company that was a target jumped on to RSPO certification. Moreover, for most companies and most consumers, that’s probably commitment enough.

… And withdraws from FSC

The announcement by Greenpeace that it was withdrawing from the Forest Stewardship Council (FSC) is a surprise.

What has this got to do with palm oil? FSC laid down the model for the RSPO. It is one of the two major timber/paper certification schemes in the world.

Like RSPO, Greenpeace’s relationship with FSC has always been up and down. Greenpeace helped establish FSC, it participates where it can, and will attack the organisation if it’s dissatisfied.

But it needs to be in the room to make a difference. The reporting on the announcement sounded like Greenpeace was disgusted with FSC. The Greenpeace announcement contained text as follows:

“FSC, as a forest certification scheme, is a tool for forestry and timber extraction and Greenpeace believes it is not doing enough on protection. While it has rules for conservation built-in, and can contribute to conservation outcomes, we believe the FSC system is currently focusing on commercial forest operations and needs to carry out improvements to achieve large scale forest protection in all the forest regions of the world.”

This does strike us as odd. Customers for FSC certification – like RSPO – are timber companies. They’re interested in sustainability, but conservation isn’t what they do. Greenpeace wants to include a conservation objective into FSC.

But Greenpeace has only actually withdrawn at the international level; national Greenpeace offices are still able to participate in FSC.

Will Greenpeace follow suit on RSPO?

We don’t think so. In forestry, Greenpeace has almost been a victim of its own success. It spent years convincing major sellers and buyers to join FSC, which most of them did. And there’s little mileage left.

But there’s plenty of room for Greenpeace on palm and other commodities, e.g. it’s trying to ramp up the organisation’s commitments on carbon.

As we said at the top, these are our opinions. Make sure to subscribe to get a real feel about what is happening behind the scenes.  If you have a tip, or have any input, feel free to send us an email.