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Wilmar to Cut Off Palm Suppliers Caught Burning in Indonesia (1)

June 30, 2013

Wilmar to Cut Off Palm Oil Suppliers Caught Burning in Indonesia

A worker sorts bunches of harvested oil palm fruit on a truck as haze surrounds the area in Siak, Riau Province, Indonesia on June 26, 2013. Palm oil is the world’s most-used edible oil. Photographer: Dimas Ardian/Bloomberg

Wilmar International Ltd. (WIL), the world’s largest palm oil trader, plans to cut ties with Indonesian suppliers that clear land with illegal fires after blazes engulfed Singapore in a record haze.

Wilmar, which bans burning on its own plantations, relies on third parties for more than 90 percent of the crude palm oil for its refineries. Sime Darby Bhd. (SIME), the biggest publicly traded palm oil producer, also prohibits burning at its own plantations and relies on other sources for supplies, buying as much as half the commodity for its plants from others.

Palm oil refiners are being pushed to enforce their no burning policies to suppliers after hundreds of illegal blazes raged last month in Indonesia, the world’s top producer of the commodity. Unilever, buyer of 3 percent of the world’s palm oil, said the haze is a reminder of the need to accelerate sustainability efforts.

“We need the money to speak,” said Scott Poynton, founder of The Forest Trust, which worked with Nestle SA (NESN) and Golden Agri-Resources Ltd. (GGR) on sustainability policies. If companies “made a no-deforestation commitment that says to these communities, ‘you can’t burn because we won’t buy your oil,’ that’s directly money speaking to the people,” he said.

Palm oil is the world’s most-used edible oil. It’s in Unilever’s margarine, ice cream and soap. The London- and Rotterdam-based company made a commitment to buy sustainable palm oil and wants all its supplies to be from certified, traceable sources by 2020.

Burning Banned

“What the industry has realized is that they can’t be simple bystanders in an ecosystem that gives them life in the first place,” Unilever Chief Executive Officer Paul Polman said June 27 in Jakarta.

While Indonesia and Malaysia ban burning to clear or manage acreage, 17 timber concession and 10 palm oil plantations had land affected by fires in Indonesia, according to June 24 data from the non-government World Resources Institute, or WRI. Indonesia is investigating a number of companies suspected to be involved in illegal fires and will announce those names once the probe is completed, Environment Minister Balthasar Kambuaya said last week.

Wilmar deals with some of the companies identified by WRI on the assurance they don’t burn, the company said in an e-mailed response to Bloomberg News.

Buying Policy

“Should they be found to be involved in burning to clear land for cultivation, we will stop doing business with them,” Wilmar said. The company’s buying policy states suppliers must comply with all local and national laws and regulations.

Indonesia’s disaster management agency said June 28 that in general people start fires on peatlands to fertilize the soil ahead of planting crops.

Kuala Lumpur-based Sime Darby said in a June 28 statement it had found fires on land at one of its units, though the blazes were in an area where local communities plant crops such as corn and sugar and not in areas planted by the company.

The company buys from palm oil growers in Indonesia that participate in plans run by the company and that adhere to a strict zero-burn policy. Part of its efforts to promote no burning is to continuously educate third-party suppliers on the benefits of complying with RSPO principles, Sime Darby said in a separate e-mail.

Fire and haze are common during Indonesia’s July-to-September dry season because local villages and farmers have long favored cheaper, slash-and-burn land clearing, according to Wilmar. Using machinery to clear costs more than $250 a hectare, while fires cost almost nothing, it said.

Sustainability Efforts

Wilmar, based in Singapore, as well as Sime Darby, Golden Agri and Cargill Inc. all prohibit burning at their own plantations. That’s in line with the Roundtable on Sustainable Palm Oil criteria which include a commitment to avoid clearing land with fires. The RSPO was formed in 2004 to promote sustainability in an industry that’s been dogged by concerns about deforestation, pollution and the environment.

“It is inconceivable that any listed plantation companies is willing to risk open burning to clear their land, not after years of battling the non-government organizations on issues pertaining to deforestation, orangutans and native land rights,” Malayan Banking Bhd. (MAY) said in a June 24 report.

No big plantation group would be involved today with deforestation, Wilmar said. Many of the problems are caused by small farmers, which makes it difficult to control, it said.

Malaysia had 183,774 small palm growers as of May, while Indonesia has more than 2 million. The Indonesia Palm Oil Farmers Association has a “zero burning” policy for its members, and other crop farmers may be responsible for the blazes, said Secretary General Asmar Arsjad.

Investor Concern

For some investors, concern about deforestation remains. Norway’s sovereign wealth fund, the world’s largest with assets of $737 billion, sold investments in 23 palm producers including Wilmar, Golden Agri and Kuala Lumpur Kepong Bhd. (KLK), in the first quarter of 2012 citing concern about deforestation, according to its annual report released in March.

Golden Agri, the second-biggest palm plantations operator, is “absolutely” against burning and “would also encourage best management practices to all stakeholders,” the company said in an e-mail. It buys less than 10 percent of its fresh fruit bunches from outside suppliers. Cargill gets 95 percent of its third-party crude palm oil in Indonesia from RSPO members.

“Those suppliers have signed on to the RSPO criteria which includes a commitment to not to use burning for land clearing,” Cargill said by e-mail. “It is one of the reasons why we target RSPO member for our third-party out supply.”

The number of Wilmar’s suppliers that are RSPO certified is still small, though steadily increasing, it said.

While the haze has lessened in Singapore, it will return, according to The Forest Trust’s Poynton.

“Singapore will choke again because globalization demands it,” he said from Geneva. “These fires are happening to clear the way to grow a commodity for the global supply chain.”

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net; Eko Listiyorini in Jakarta at elistiyorini@bloomberg.net; Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net


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