Palm Oil Monitor Weekly Update – 29th April 2019

GFW Forest Data for 2018: Room for Optimism

Global Forest Watch has released its tree cover loss data for 2018. Although media reports have made much of the updated data – according to some, the world’s forests are in an ‘emergency room’ – there are some optimistic signs, particularly in the Asia-Pacific region.

It’s important to remember that GFW doesn’t (yet) record deforestation – it records tree cover loss. The two are distinct. So, if forest area has been lost to fire, disease or other natural disturbances, it is still in the negative.  It also includes oil palm replanting operations and timber harvesting within production areas that will re-grow as part of a cutting cycle.

So what does the data say?

Malaysia’s tree cover loss – 440,000 ha – was its lowest since 2013 (and the year 2013 itself was something of an aberration). Tree cover loss in Malaysia was around 15 per cent lower than the average from the past ten years.

Indonesia’s tree cover loss – 1.3 million ha – was also significantly lower than its ten-year average. Brazil, however, clocked in 2.9 million ha, which is on par with the past decade.

In the global north, Russia clocked up around 5.5 million ha, Canada hit 2.1 million ha, and Sweden reached nearly 300,000 ha.

This year GFW also introduced an algorithm that estimates the amount of primary forest tree cover that was lost for the year. According to the algorithm, Malaysia lost around 144,000ha; Brazil clocked in at almost 1.4 million ha. For the record, this algorithm hasn’t been applied to non-tropical and European countries.

Regarding the Malaysian statistics, it’s worth pointing out that Malaysia’s total forest area is 18.3 million ha, and that production forests have an annual allowable cut of 247,000ha. This leaves less than 200,000ha (around 1 per cent of total forest area)  that might be attributed to other causes, including urbanisation and replanting of tree crops – including oil palm and rubber.  If the number includes a conservative estimate of replanting of 3 per cent of oil palm plantation area (around 180,000ha) much of this forest cover loss is accounted for.

And just to repeat, this is forest cover loss – not deforestation. It illustrates how much the global discussion on deforestation is driven by NGO campaigning slogans, and not by actual data and evidence of which there is plenty.

Malaysia and China ink deal on palm 

As foreshadowed last week, Malaysia and China have inked a memorandum of understanding (MoU) on greater palm oil trade.

China has agreed to buy an additional supply of at least 1.9 million tonnes of palm oil from Malaysia over the next five years, worth around USD1.2 billion.

The likely volumes for exports to China for the year will be around 3.5 million tonnes. This is up from 3.07 million in 2018, and 2.9 million in 2017.

China was historically Malaysia’s largest export destination for palm oil up until around 2013, when the EU and India increased their purchases. In 2015, China started importing more of its palm oil from Indonesia.

ILO Representative: EU RED risks jobs

ILO’s representative in Indonesia, Irham Ali Saifudin, has said that the EU’s Renewable Energy Directive will have an impact on 16 million workers across Indonesia.

Irham made his comments at a forum hosted by the Indonesian Palm Oil Journalists’ Network.

He also said that Indonesia needed to develop new information strategies for the industry.

Executive Secretary of the Indonesian Palm Oil Workers Union Network (JAPBUSI) Nursanna Marpaung has also called on the Indonesian Government to take a tougher approach on the issue.

“The government must be firm because it concerns the fate of workers who depend on oil palm. Our members at JAPBUSI have up to 2 million people working on oil palm.”

COMMENT: Does SR think Europe is the victim?

Sarawak Report (SR) has wandered into the current palm oil debate, with two lengthy pieces on palm oil.

Sarawak Report’s input is indeed welcome; its work on the 1MDB scandal was instrumental in Malaysia’s change of government.

In the first piece, SR criticises the Renewable Energy Directive as “one of the world’s worst ever policies cloaked with ‘good intentions’”. And this is in many ways correct.

But SR’s criticism is for the most part not reserved for the EU, bad policy design and its poor behaviour as a trading partner; its criticism is for everyone else. This is strange, given that throughout the RED process it is the EU that has been driving the issue.

Instead, SR criticises farmers around the world for responding to the EU demand signal; but fails to point to the fact that the whole process was designed to provide subsidies to European oilseed farmers that were already losing market share to imported products.

It also states the following on the EU’s decision to bar palm oil from the RED:

“Rather than fighting these decisions, Malaysia should act smart and work together with the next generation and the chastened EU to forge a better model for raising money from its valuable tropical forests.”

There are three problems here.

First, what Indonesia and Malaysia have difficulty accepting is that palm oil is being singled out for being linked to deforestation, but soybean – which is responsible for deforestation across Latin America – is not.  Both countries would probably be satisfied if there were no double standards and no hypocrisy; but this is simply not the case. Palm oil is restricted; soybeans are welcomed. The fact that this has been done for political reasons – not scientific ones – has caused even more frustration.

Second, the forest-ecosystem payments, which are alluded to by SR for ‘raising money from its valuable tropical forests’ have not yet worked.

Some of us have had the misfortune of attending UN climate change meetings for more than a decade. We watched PNG forest envoy Kevin Conrad float the idea of Reduced Emissions from Deforestation and Forest Degradation (REDD) for the Coalition of Rainforest Nations in 2005, and then again in Bali in 2007.

Back then, we were told that timber was the problem, only to find out that people were cutting forests to grow crops and graze cattle.

We have since watched the UN’s Green Climate Fund fall into disarray. We have watched Norway’s climate aid programs fail to even get their money out the door for suitable projects.

Millions of dollars have been thrown at avoided deforestation mechanisms, and they are yet to deliver anything meaningful.

And, when they are successful in the form of carbon offsets or credits, they are pilloried by NGOs in developed economies.

The Renewable Energy Directive and the palm oil debate have moved beyond avoiding deforestation. The RED as it is right now states that palm oil – no matter where it is from – causes deforestation indirectly. How does Colombia argue with that? How does Malaysia argue with that? Both countries have stabilised their forest areas.

Malaysia has ‘acted smart’. Malaysia has tried hard to work constructively with the West. Malaysia developed RSPO with European partners almost 15 years ago.  It has arrested its forest decline. It has increased its yields. It has supported its smallholders. But European legislators and regulators still want to penalise it. And some observers, including Sarawak Report, argue that Malaysia should simply accept this unfair treatment.

Malaysia and other palm oil producers will probably be more than happy to work with the EU for more constructive solutions – provided the dialogue and negotiations proposed by the EU are in good faith.  This is something the EU is yet to do.

Third, how is it that SR sees the EU as the victim here? The EU introduced a bad policy, and has continued to make poor, politically-motivated regulatory decisions that have resulted in suboptimal economic and environmental outcomes. Why is the blame being pointed at Indonesia and Malaysia?

SR’s second piece on landgrabs argues that the larger concerns of smallholders in Sarawak are not around policies being developed in the European Union, but around the threat of landgrabs, particularly among indigenous communities.

This is an issue that is at the heart of everything SR has written about over the years. After the election last year, SR’s editor said they had ‘unfinished business’ in Sarawak, and will continue the push for land tenure and forest reforms in the state.

It would, therefore, be particularly frustrating to see European renewable energy policies dominating the debate around the palm oil sector.

It is also an easy way to highlight the forest reform issue by weighing into the palm oil debate.

But is this effective?

News of indigenous land grabs in Sarawak is fuel for anti-palm oil campaigners in Europe. It’s wrong to assume that policymakers in Europe supporting the RED ban or other measures will support palm oil just because it comes from indigenous communities or smallholders.

EU policymakers have shown their indifference towards Malaysia and the region before; their main interest is European farmers. They support indigenous and human rights when it suits them.

The clearest and most recent examples are RED campaigners seeking to target regulation at smallholders because they see them as a ‘loophole’. Or, more recently, ecologists analysing the Indonesian election called palm oil smallholders ‘the biggest forest destroyers of all’.

It’s easy to assume that EU officials and politicians will be swayed by ‘facts’ or ‘truth’ on the ground in Sarawak or elsewhere in Malaysia. They won’t.  This is about keeping palm oil out of the European market, for any reason, real or constructed – just look at ILUC.

The two SR pieces highlight one of the problems of oversimplifying the RED-palm debate. It can be summarised as follows: all palm oil is corrupt and destructive, and anything that moves against palm oil must therefore be good.  Palm oil is not corruption, and palm oil is not deforestation. Conflating them will provide good copy, but it won’t provide an adequate and considered policy solution — and this is what is needed right now.

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Palm Oil Monitor Weekly Update – 24th April 2019

China, Russia Deal With MY on Palm

Malaysia and China are renegotiating an agreement on the country’s East Coast Rail Link (ECRL). The resumed negotiation process will be indirectly tied to an agreement by China to purchase more palm oil from Malaysia.

China is Malaysia’s third-largest market for palm oil after India and the European Union. China splits its imports between Malaysia and Indonesia, with around one-third coming from Malaysia.

Palm oil is China’s largest vegetable oil import, but not the most widely consumed oil. It represents around one-sixth of China’s vegetable oil consumption. This is because soybeans and other oilseeds are imported for both soybean meals and oil.

However, China’s soybean imports are at multi-year lows, due to a combination of tariffs on US soybeans and swine flu impacting China’s herd.  This implies a shortfall in the vegetable oil supply.  Chinese buyers have also switched away from canola supplies from Canada due to new tariffs. Palm oil can substitute for other vegetable oils for some industrial applications.

The rail link will link north-east cities such as Kota Bahru with the eastern port of Kelantan, and then to KL and the major port of Klang. It will effectively link both sides of the Malay Peninsula with China’s Yunnan Province. The ECRL will be further discussed at the Belt and Road Initiative (BRI) Summit on April 25 in Beijing.

It is being speculated that an agreement between China and Malaysia on greater palm purchases will be inked. Similarly, it is being reported that Malaysia and Russia are in talks to discuss a ‘palm for fighter jets’ swap, as Malaysia moves its military procurement away from the EU following the introduction of the Renewable Energy Directive.

Airplanes are France’s largest exports to Malaysia.

Is Europe Getting Further Sidelined?

EU policymakers should be demonstrating some level of concern that two of ASEAN’s largest economies are moving farther away from the EU’s orbit, and lobbying others to join with them. It’s worth noting that one week out from Indonesia’s election, the Jakarta Post ran an editorial that led with the following in relation to palm oil:

We call on ASEAN leaders to form a united front as a regional grouping to demonstrate full support to President Joko “Jokowi” Widodo and Malaysian Prime Minister Mahathir Mohamad … ASEAN should send a strong warning to their trading partners, especially in the Western bloc, to think twice before playing fire with Southeast Asia.

This is a strong message to both Europe and to other ASEAN leaders from a newspaper that is generally centrist, and is read by the diplomatic bubble in Jakarta. As much as European leaders might tell themselves that this is pre-election nationalism, it is not. Whether it’s Malaysian timber, Thai seafood, Indonesian paper or Cambodian garments, ASEAN economies are often in the firing line of EU double standards on protectionism.

The BRI Summit coincides with a meeting between ASEAN Senior Trade Officials and the EU’s Trade Commissioner on April 26.

It’s highly likely that EU Trade Commissioner Malmström will be seeking to placate the situation after last week’s bilateral meetings that saw the EU leave empty-handed.

But the question is whether she will be able to herd the cats in the European Parliament and Council of the EU.

Indonesia’s election, RED and the moratorium

Indonesia headed to the polls this past weekend. At time of writing, the incumbent President Jokowi appeared to be heading for a second term, although results will only be known in a few days.

Palm oil was not a central campaign issue, but both candidates were keen to showcase actions that would alleviate farmer and rural concerns around low prices.

This was particularly evident in areas such as South Sumatra and Riau, where polling indicated that Jokowi had suffered a backlash because of the three-year moratorium on land clearing.

This particular issue has been examined by Indonesian think tank Greenomics, which argues that the introduction of the RED ban on palm oil could result in increased deforestation.

The argument runs as follows.

The RED in its current form punishes Indonesia for deforestation that took place during the term of President Yudhoyono, which is the period covered by the RED’s deforestation data. It takes no account of reduced deforestation that has taken place in the Jokowi era.

Any drops in demand for palm oil as a result of the RED – and lower prices, household incomes and tax collections – may prompt President Jokowi to permit expansion of the sector.

Norway’s first payment to Indonesia this year as part of its ‘payments for deforestation’ agreement was worth around USD24 million for a 60 per cent reduction in deforestation in 2016-2017. By contrast, the government’s export tax on palm oil collected around USD900 million on palm exports for the same period. Although the export tax is triggered by prices, a reduction in exports – precipitated by European policies, e.g. the RED – will have an impact on government revenue.

The debate over RED and ILUC has had constant references to perverse outcomes.  The dropping of the moratorium would fit this description.

EU talks suspended, MPOB advisor hoses down trade talk

Malaysia has reaffirmed that it has suspended talks with the European Union for a free trade agreement, and that it has the support of ASEAN nations in suspending EU-ASEAN talks.

Malaysia’s Deputy Trade Minister Dr Ong Kian Ming said last week that “ASEAN leaders have heard our views and agreed to suspend the elevation of that partnership. We hope the issue can be resolved.

“We do not refute the possibility of taking other measures that will have far reaching implications on the trade relations with some EU countries.”

Despite the clear tough line that Malaysia is taking with the EU and its member states, there appears to be a misunderstanding of the trade dispute’s politics.

Denis Murphy of the University of Cardiff and an advisor to the MPOB has argued that Malaysia is “not big enough to win” and that the country should “Focus on being smart.”

He said that Malaysia should focus on improving yields, partnering with NGOs, and that palm oil should re-brand: “It is premium coffee. There is also traceability of which farm it comes from.”

Although Professor Murphy is clearly an expert of biotechnology, it is vital that industry participants understand the politics of the RED and of the EU’s approach to palm oil.

At this stage, it doesn’t matter how much better yields are, how much NGO support there is, or if traceability is in place: palm oil has been subject to an intense politically motivated campaign that has nothing to do with facts or science. Indirect land-use change is the best example of this and a sign of more to come.

That Colombia’s palm oil – which has been cultivated on non-forested lands — can be treated in the same way as that coming from deforested lands in Indonesia – indicates precisely how politically oriented the policies are.

To draw a similar example, the EU attempted to ban beef products from the US on the basis that hormones used in animal feed posed a risk to health. This ban was slapped down by the WTO. Rather than let the exports in, the EU pays millions of dollars in penalties annually – all to keep the peace with the bloc’s farm sector.

Professor Murphy’s implication is that Malaysia should simply accept the ban and move on.  European authorities have signalled they will take on palm oil with further regulation on deforestation and on health. What should Malaysia do then?

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Palm Oil Monitor Weekly Update – 15th April 2019

Memo from Brussels

Delegations from Malaysia and Indonesia visited Brussels last week in order to make their positions clearer on the ban of palm oil from the European Union’s Renewable Energy Directive (RED).

The delegations were led by Indonesia’s Economic Coordinating Minister Darmin Nasution and Malaysian Secretary General for the Ministry of Primary Industries Dato’ Dr Tan Yew Chong.

Indonesia appeared to be much more aggressive at a press conference held in Brussels.

Minister Darmin Nasution stated unequivocally that it would challenge implementation of the Delegated Act at the WTO, citing its victory against EU antidumping duties on biodiesel.

Malaysia was much more conciliatory. Secretary General Dr Tan Yew Chong stated that “Malaysia will not retaliate hastily. We’re urging the EU to let vegetable oils trade be market driven. Let’s work together to let free and healthy competition prevail.”

This was, however, just a press conference. There were two other key moments: a letter from Prime Minister Mahathir Mohamad and President Jokowi, and the bilateral meetings themselves, which were much more revealing.

The letter followed a similar line to the one Malaysia presented to Norway and France earlier this year. But this paragraph stood out:

“Should this Delegated Regulation enter into force, our Governments shall review our relationship with the European Union as a whole, as well as its Member States. This may include the reviewing of our partnership negotiations, procurement contracts and key imports from the EU”.

What’s notable is that the Governments have said they will review the relationships, and they’ll do it together.  This isn’t far off saying that ASEAN is going to unilaterally review its relationship with the EU.

The bilateral meetings between the EU and Indonesia were led by President Juncker’s Cabinet.

Indonesia’s aggressive stance yielded some results. Europe offered to broaden the scope of the RED Delegated Act review (due before 2021) to include certification, and particularly ISPO certification.

Europe asked Indonesia to remove any new barriers to alcohol importation; Indonesia responded by saying that any import clearances were undertaken on a ‘case by case basis’.

It appears that currently the Europeans did not offer similar bilateral talks with Malaysia – probably as Malaysia has not (yet) implemented any trade actions.

On certification, there is a broader backdrop. One of the key recommendations of the EU’s final Sustainability Impact Assessment of an Indonesia-EU FTA – released coincidentally last week — was for the EU to give greater support to certification schemes.  It stated:

“in parallel to the FTA the Parties should consider cooperating in strengthening the RSPO certification scheme and the Indonesia Sustainable Palm Oil certification scheme’s protection of human rights, including the customary land rights of indigenous people.”

A question that Indonesian trade officials might ask is whether the EU was offering them anything new at all.

Although Juncker’s cabinet members are experienced, its composition indicates that Southeast Asia is not a major priority. No cabinet members appear to have significant experience or knowledge of the region.  It’s also worth noting that Juncker does not appear to have visited ASEAN during his Presidency.

What does this mean? Malaysia and Indonesia need to compete for attention in the European trade policy space. Much of that space is currently being occupied by the United States, and to a lesser extent China.

The clearest evidence of this is US lobbying for greater soybean purchases via the RED, with the EU capitulating first on certification, and then on making soybean a low-ILUC risk feedstock. The EU did this in order to stop the US imposing steel and auto tariffs.

But in doing so, they gave Malaysia and Indonesia the clear message that they are ‘second class’.

The talks will no doubt continue, but the next few weeks are critical as the EU’s various arms decide whether they should or shouldn’t support the revised Delegated Act.

 

Will the EU reconsider soybean in its DA review?

Perhaps by coincidence, new deforestation figures for soybean also emerged last week from Brazil’s environment ministry. The data shows that 220,000km2 of deforestation took place in Brazil’s Amazon and Cerrado regions between 2006 and 2017.

Further, modelling by Stockholm University’s Trase program reckons that 22,000km2 – 2,200,000ha — was used for growing soy. It’s worth noting that the EU’s ‘scientific report’ for the Delegated Act reckoned that only 1.2 million ha of deforestation over a similar period was a result of soybean expansion globally, not just in Brazil.

The general understanding among Indonesian and Malaysian officials now is that soybean deforestation has been glossed over in the RED to keep the EU’s relationship with the US intact (see above). This has been underlined by the political deal between President Juncker and President Trump for the purchase of more US soybeans.

 

WWF opposes palm oil divestment

Norway’s sovereign wealth fund recently gained some attention for divesting from a number of palm oil firms.

Divestment also gained headlines last month when a number of US Democrat Senators wrote a joint letter to institutional investors asking them to explain their stance on palm oil. That initiative was led by Hawaii Senator Brian Schatz, a long-time colleague of former Congressman and anti-palm campaigner Henry Waxman.

However, it’s worth noting that WWF last week stated that it generally opposed palm oil divestment. WWF notes that when divestment takes place:

“the most committed financial institutions lose their considerable ability to influence and improve the sector’s sustainability. There is a high likelihood that divested companies become clients or portfolio companies of financial institutions with less stringent sustainability policies and criteria. As a result, divestment could lead to the erosion of sustainability in the sector, thereby enabling continued deforestation, peat degradation and abuses of human, labour and community rights”.

“Instead, WWF believes that financial institutions should not divest from palm oil, but instead remain engaged with their clients and portfolio companies in the sector to improve sustainability. Divestment should be a last resort, used when all avenues of engagement have been exhausted, and a company has demonstrably and consistently failed to progress against clear expectations for sustainability. WWF encourages financial institutions to disclose the process leading to such divestments”.

This is a particularly sensible approach. This is often already used by a number of financial institutions when requiring that new project finance adhere to sustainability certification or other lending criteria.

Despite this, it’s unlikely to cut any ice with those who continue to pressure investors to get out of the sector entirely.

Divestment as a strategy doesn’t make much financial sense to begin with. If an investor sells out of a plantation company that is profitable and low risk, any subsequent change to the share price will mean that the investment is underpriced – and therefore waiting to be snapped up by an investor that doesn’t have a divestment policy in place.

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Palm Oil Monitor Weekly Update – 8th April 2019

RED gets even hotter

Just when we thought it wasn’t possible for the RED issue to gain more traction, it has done precisely that.

The Indonesian actions against imports of alcohol have caused major ructions in Brussels (more details on the measures themselves below). But, sources are telling us the following.

First, President Juncker is personally concerned by the prospects of a trade battle with ASEAN being one of the last things his Presidency is remembered for.

This is understandable. Under Juncker’s watch, trade agreements with Singapore and Vietnam have both been (more-or-less) completed, as was the agreement with Japan.

A trade war with Indonesia – the world’s fourth-most populous country – as well as general disagreements with the US on trade, plus an increasingly distant Turkey, are not the things he would like to be remembered for.

Second, and similarly, Cecilia Malmström, who has managed to distance herself from the EU’s worst protectionist impulses, will not want this to get any worse.  Our understanding is that from now, DG Trade and her Cabinet will be leading the discussions on this issue.

This also stands to reason.  We had persistently heard that DG Trade was unhappy with the way RED II had evolved under DG Energy. Observers of trade policy (and we include DG Trade in this) would have been aware that this would end in a hot mess – which is precisely what has happened.

Third, although Europe will frame Indonesia as the aggressor, the EU is acutely aware that it is the aggressor, and if or when Malaysia piles on to any action, it will be particularly problematic for the Commission. Indonesia is a frequent user of the WTO system and of non-tariff measures more broadly. Malaysia, on the other hand, is shy. This is most likely because Malaysia has a much greater dependence on exports.

 

What are the Indonesian actions?

One of the problems with the Indonesian actions at this point is that they haven’t appeared as a regulation or decree from any agencies – they haven’t even been confirmed to the media by Indonesian officials.

So what’s actually happening?

First, there are definitely disruptions. SpiritsEUROPE, which is the EU’s leading body for alcohol exporters, is apparently already encouraging some form of action against Indonesia, potentially via the WTO.

Second, any changes to Indonesian regulations may not necessarily be published on a website or gazetted immediately.

The Indonesian Government directly controls – and has absolute discretion over – which beverages might come into the country and who can sell them via a 2006 regulation. There are quotas for different types of alcoholic beverages that are set every year. These quotas are determined every year on April 1.

So, the problem for the Europeans is that alcohol is regional. Scotch whisky comes from the EU. But rye whiskey comes from Canada or the US. They are not the same product, and they have different codes under the world’s customs system to reflect this.

Third, proving that this flouts WTO rules may be difficult.

Indonesia is a Muslim country. Let’s say Indonesia decided to flatten alcohol quotas, i.e. allow the same amount of different hard liquors from different countries, rather than allowing more Scotch than Rye whiskey.

It could permit the equal amounts of Scotch, brandy, rye whiskey and rum, but overall have a lower amount of liquor going into the country, even though these quotas don’t necessarily reflect the market demand for liquor going into the country.

This isn’t exactly discriminatory. And could easily fall within the WTO’s moral exceptions.

It is very different to an early WTO case that covered Japanese taxation on imported whiskey and brandy. The Japanese levied a lower tax on ‘shochu’ whiskey and a higher tax in brandies, cognacs and Scotch. Japan lost the case, because the WTO determined that these are like products and that they do actually compete.

But that might not be the point.

One thing many countries do – and something that Indonesia is very good at – is disrupt each other’s trade to get leverage, or just get listened to.

Realistically, if the EU was to raise this at the WTO, they’d have to see what the published measure is, request consultations, then call for a dispute panel to be convened, then wait for the panel report, and then that might go to the WTO Appellate Body, which is currently not functioning.

But the fact that European industry lobby groups are calling on the Commission to take action already indicates that this strategy has been successful on the part of the Indonesians.

 

What are the options?

As we noted last week, the EU is likely to offer Indonesia and Malaysia a review of the Delegated Act within the next six months (well in advance of the 2021 deadline currently foreseen), in exchange for some form of de-escalation.

Both countries should be wary.

In six months’ time, all three EU institutions could look very different. The Council of the EU, the Commission, and the Parliament could all be led by entirely different political leaders.

It is possible that the incoming Commissioners and Member State governments will be even less sympathetic to palm oil.  A review of the Delegated Act guarantees nothing other than a review of the Delegated Act – unless it comes with guarantees.

 

Japanese renewable energy policy allows National Schemes, RSPO

Japan has delayed introduction of a mandate that requires the use of certified palm oil for its biomass power plants.

Japan’s trade ministry (MITI) originally issued a requirement that all biomass power plants must use RSPO-certified biomass beginning March 31 this year.

The requirement was introduced last year, but Japan has agreed to delay the requirement for a further two years as Indonesia and Japan review their economic relationship.

MITI also stated that it will allow the use of biomass from other certification schemes, including national schemes such as ISPO and MSPO.

The move by Japan’s authorities should be watched closely by European regulators. They might learn a thing or two.

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Palm Oil Monitor Exclusive: Indonesia Blocks Imports, EU Scrambles

Indonesia blocks imports from the EU

In a dramatic escalation in the war over palm oil, Indonesia has upped the stakes and this week tightened imports of European spirits as a direct response to the Renewable Energy Directive Delegated Act.

According to various sources inside and outside government in Jakarta, Brussels and London, EU countries have been denied quotas, while other exporters from Asia, Australia and the US have had their quotas approved.

Indonesian officials have been reasonably clear in letting Brussels know that this is all about the Delegated Act.

Sources in Brussels indicate that this has left EU officials scrambling, with a flurry of phone calls and emails travelling between officials in Jakarta, London, Brussels and elsewhere.

The move comes after Indonesia excluded the EU from the high-level Indo Pacific Cooperation meeting two weeks ago, which was led by Indonesian Foreign Minister Retno Marsudi, according to our sources.

EU countries are attempting to formulate a response.

Ambassadors to Indonesia from the EU’s major economies have forwarded a strategy paper and sent this to DG Trade in Brussels.

According to sources, they are acutely aware of:

  • EU attitudes to palm oil being raised as an election issue;
  • Anger of small farmer groups across the country;
  • The favouritism displayed to the US in the Juncker-Trump soy deal;
  • That this may impact prospects for trade deals with Indonesia, Malaysia and ASEAN.

More importantly, they are also expecting that the Delegated Act will cause serious diplomatic harm to the EU across the ASEAN region, and that these risks have been grossly underestimated.

 The EU’s strategy

EU diplomats and officials are considering several options to deescalate the situation.

  • First, they are considering to ask the Commission to conduct an immediate review of the Delegated Act, with consultation and input from Indonesia and Malaysia. This review is well in advance of the original 2021 review date. This indicates how serious the problem is.
  • Second, there is to be a high-level visit by Coordinating Economic Affairs Minister Narsution to Brussels next week. The EU is hoping that they are able to give Narsution some policy ‘wins’. This, in their view, will de-escalate some of the tension and effectively buy Indonesia off for the time being.
  • Third, they are further hoping that EU financial support for ISPO will ameliorate the situation.

In addition, they have called for immediate progress on the palm oil working group that was announced at the EU-ASEAN Summit.

The view from Indonesia: The EU is insulting the region

All three of the measures outlined above are flawed. They are designed to do one thing: Keep Indonesia and Malaysia quiet.

On consultation and review, it should be remembered that as the Delegated Act was being drafted, input from Malaysia and Indonesia was completely ignored, as were the protestations made at the WTO. Moreover, this is just another step in more than ten years of EU policymakers denigrating and financing a campaign against palm oil. The question for palm oil producers – when will Europe table the same deal as they gave to the Americans?

On the high-level mission, this is viewed in Indonesia and other palm oil producing countries as if the EU displaying its worst tendencies.  The idea that Indonesia can be ‘bought off’ with anything less than the same treatment given to the United States is seen as an insult to Indonesia, the region and Minister Narsution.

On ISPO, it’s worth remembering that UKAID is already working with NGO Kehati on a ‘Revamping ISPO’ program and handed over IDR 22 billion (GBP 1.2 million) for ‘Revamping ISPO.’ This was part of a GBP 40 million program to reduce emissions. It had nothing to do with increasing trade. The Indonesian Government shouldn’t be satisfied with anything less than recognition of ISPO as sustainable.

Finally, the Palm Oil Working Group needs to seriously be questioned. The Working Group was convened nearly two months ago as the Delegated Act was in train. Brussels would have been acutely aware of the timeline for the Delegated Act. If the EU was negotiating in good faith, why wasn’t it sharing information on the Delegated Act?

 This is likely to heat up in the next week, with a visit from the UK Trade Envoy to the region and a joint mission from Indonesia and Malaysia heading to Brussels. We’ll have more updates as they come; keep an eye on our Twitter and your inbox.

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Palm Oil Monitor Weekly Update – 2nd April 2019

Malaysia, Indonesia respond to the palm oil ban

Both Malaysia and Indonesia have responded aggressively to the final version of the RED Delegated Act. This response isn’t surprising given that palm oil is ASEAN’s largest agricultural export, and Indonesia’s largest export across the board.

The latest intel circulating in KL and Jakarta is that:

  • PM Mahathir Mohamad and President Jokowi will write a joint letter to the heads of the European Commission and Parliament;
  • Both are likely to collaborate on a WTO action;
  • Both will engage in diplomatic missions to Europe;
  • Trade retaliation against European exports to the region remains on the table.

Here’s a rundown of the actions that have taken place so far.

Indonesia has said it is reviewing its trade agreement with the EU.  Indonesia’s Director General of Trade, Iman Pambagyo, has said that Indonesia will undertake a thorough review of the Indonesia-EU Agreement, which has been triggered by the Delegated Act. Pak Iman made the comments following the most recent round of negotiations between the two countries, which ran from March 13 to 16 in Brussels. Pak Iman stated that “There is one amazingly difficult chapter, namely trade and sustainable development in which there is an issue of vegetable oil,” noting that the EU does not accept Indonesia’s conceptual approach to sustainability.

Malaysia has publicly stated that Malaysia-EU trade talks will remain on hold.  Deputy Trade Minister Ong stated that “We have not decided whether to continue with the discussion or not … But this is a very important platform for Malaysia, which provides an opportunity for us to show our stand in the ongoing issue with palm oil [in the EU] … Malaysia has submitted a proposal to the EU to introduce a new appendix on vegetable oils and fat in the Malaysia-EU FTA. This is to ensure Malaysia’s right is protected especially on oil palm-related issues that are actively highlighted in Europe presently.”

Prime Minister Mahathir has written to all EU heads of state directly. He told reporters that “We have pointed out to them that we will need to retaliate if they continue with this unfair discrimination against palm oil.”  He is also reported as saying that Malaysia “should be more aggressive” in its response to the European Union’s effective ban on palm oil-based biofuels.

Indonesia has declared that it will commence a case at the World Trade Organization if the Act is adopted.  Indonesian Coordinating Minister Darmin Nasution, Trade Minister Lukita Enggartiasto and Director General of Trade Iman Pambagyo convened a special meeting with the country’s key palm oil stakeholders to plot a path forward on WTO action, telling reporters that legal representatives “have been appointed”.

PM Mahathir has stated Malaysia will consider boycotting EU-built fighter jets. Malaysia is currently considering upgrading its fighter jet squadron with two EU-built models.  However, Mahathir stated that “If they keep on taking action against us, we will think of buying airplanes from China or any other country …If we have to buy fighter jets, we will consider these China-made jets.” Shortly thereafter, a senior Russian official made a not-very-transparent statement that Russia is ready support the purchase of additional palm oil, as part of a wider trade package that could include defence procurement (Malaysia already uses MiG and Sukhoi aircraft). There is a growing sense that the EU’s approach to palm oil has created an opportunity for others.

Broader trade retaliation

There has been talk of trade retaliation from Malaysia and Indonesia. But what could it look like?

Among the biggest exports from the European Union to Malaysia and Indonesia are aircraft. Both countries have leveraged this before.  Two years ago, when the European Parliament tabled a motion calling for a general phase-out of palm oil, both countries made clear that future military procurement deals could be affected, particularly the purchase of Airbus aircraft and Thales electrical systems.

But this only works when procurement is in the pipeline – as is potentially the case for Malaysia.

But it is also possible for countries to isolate and target particular products that are coming from a particular trade partner without falling afoul of WTO rules.

Germany, for example, exports large numbers of cars to Malaysia. These cars have a relatively high price point that could be targeted with a ‘luxury car tax’.

It may be possible to apply such a tax that will not irritate other trade partners by identifying a higher taxation threshold. The tax could also support revenue collection, as well as the local car industry, which has long been a personal favourite of Malaysia’s Prime Minister.

Another possibility is isolating European products that are applied at lower than agreed WTO tariff rates (known as ‘applied rates’) and raising them where possible to ‘bound rates’.  This is a perfectly legal action and used by countries such as India quite often.

The products chosen would either have to come almost exclusively from Europe, and there would have to be a country from which an alternative supply is available that has a preferential trade agreement with Indonesia or Malaysia. In the case of Malaysia, most of its whey powder comes from Europe. Malaysia could consider sourcing from Australia or New Zealand – both have additional bilateral or multilateral arrangements with Malaysia.

Other products, such as whiskies and brandies from the United Kingdom and France are an obvious target for either changes in tariffs or limiting of quotas.

In both cases, consultation with local industry would be required.

WTO Action

WTO action will not take place straight away. The law has to be adopted in its final form before in can be objected to in the multilateral forum.

However, it is not surprising that Indonesia is taking the lead. Indonesia recently emerged victorious from a protracted antidumping battle with the European Union.

The EU was applying illegal antidumping tariffs on Indonesian (and Argentinean) biodiesel exports.

The exporters carried the day, but the mechanics of the case are instructive.

The case commenced in 2013, but took almost five years to resolve. Once it was completed, the EU launched a countervailing duties investigation against Indonesian palm oil.

At roughly the same time, Argentina lodged a complaint against the first version of RED in 2013, which resulted in Argentinean soy-based biodiesel being excluded from the RED. At that time, the issue was the ‘default values’ ascribed to different biodiesel feedstocks.

The complaint gives an indication of the complexity of the case; it’s not just a matter of the Directive or the Act, but also any implementing regulation.

As with the dumping action – or any other WTO settlement – the process could take years to resolve.

It’s worth noting that when it comes to blocking palm oil, the EU never gives up. Although it’s the revised RED now, in a few years it will be another measure. WTO action is just another bout.

A longer view: ASEAN realignment

Could the procurement of military hardware from Russia signal a pivot away from Europe by ASEAN, particularly Malaysia and Indonesia? This is entirely plausible.

EU officials are acutely aware that they were caught off guard by China’s rise. This has had considerable economic and security impacts; China now outweighs the EU’s economic and military influence globally.

EU officials should not make same mistake in ASEAN – but this appears to be happening.

The EU’s population is flat at just over 500 million people. ASEAN’s is already in excess of 600 million and will hit 700 million in around five years. Indonesia’s GDP already matches that of Germany by one measure.

The EU needs to wake up to this significant demographic and economic change if it is to participate in the region’s growth and avoid repeating its China mistake.  And that participation should be of mutual benefit.

Indonesia is open to China’s One Belt infrastructure projects. Japanese development loans funded Jakarta’s new MRT system. EU aid contributes to education and health programs, but the EU’s highest-profile aid contributions have been for stopping deforestation – which are read by many as a way of curbing palm exports.

On palm oil, last month, China agreed it would increase its palm oil purchases from Malaysia by 50 per cent.  Russia is now also signalling that it will increase purchases of palm oil. This was at almost exactly the same time that the EU singled out and banned palm oil — ASEAN’s largest agricultural export — under the RED. Indonesian palm biofuel exports have been hit by wave after wave of EU measures.

It is perfectly reasonable for Malaysia and Indonesia to ask why they should display any ‘loyalty’ to Brussels at all when it comes to military hardware — or anything else. The region’s trade agreements — RCEP and CPTPP — are progressing or completed. At this point in history, Tokyo, Beijing and perhaps even Moscow seem like more reliable trade partners. This should induce significant reflection in Brussels – because a core element to this is European leaders not understanding what is actually important to their ASEAN partners, both economically and politically. It appears that both Russia and China have figured out what the EU could not: that palm exports are fundamental. They are now looking to press home their advantage, and encourage a wider re-alignment in southeast Asia, away from the historic ties with Europe.

Iceland tries to ‘dig upwards’ on sustainability

Iceland CEO Richard Walker has made the news again for his statements on sustainability and palm oil.

Walker came under fire for instituting a boycott of palm oil in his company’s supply chain, and launching a widely viewed joint PR campaign with Greenpeace.

Walker stated that the move “did nothing for sales”, and that “If I were the boss of Tesco, I’d be sacked because I’m loading up millions of pounds of cost into our business.”

It’s well understood by more qualified sustainability experts that boycotting palm oil will do nothing to stop deforestation – and arguably it will make it worse. It’s also understood that around 35 per cent of palm oil is produced by smallholders around the globe.

Despite the fact that this move has done nothing for sales, nothing for the environment and nothing for people in developing countries,  Walker states that “we genuinely feel it’s the right thing do, and we have quite a long history of being a corporate activist.”

Which is odd; we “genuinely felt” Iceland was a business, rather than an activist group.

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