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.


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.


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.


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.