The Chain: PNG Land Leases Revoked, P&G Sets Commitment, New Data on Asian Consumers

The Prime Minister of Papua New Guinea announced he will cancel controversial land leases that have been exploited by the timber industry – and require all new large-scale leases to seek cabinet approval.

This announcement came in response to charges that over five million hectares of land had been issued without landowners’ consent – an area about the size of Costa Rica. Papua New Guinea is sending a clear signal that good governance and sound leasing practices are increasing in importance for the agricultural commodity industry. Today’s announcement concerned land used for timber, but contested land leases are seen across multiple sectors – and they introduce serious risk into any supply chains based on forest commodities.

One company that could be affected by this announcement is IRIS Corporation Berhad (ICB:MK). IRIS just announced a joint venture with Alvery Resources Limited to develop a 100,000-hectare plot of land in Papua New Guinea for commodity production. The IRIS joint venture is a prime example of the risk that these cancelled leases could introduce to commodity markets. The IRIS lease has been contested by the local government, due to lack of consent from local landowners. Previous companies like Kuala Lumpur Kepong (KLK:MK) had their leases struck down when they tried to develop land in that area. The IRIS joint venture could be affected by the Prime Minister’s announcement, throwing into doubt its ability to bring a return on investment. TA Securities has also noted that this project “may be susceptible to execution risks.” Chain Reaction Research will provide detailed analysis on this case to interested parties. This analysis will soon be available on our website.

In addition to the break news above, we’re sharing a few important updates on no-deforestation sourcing policies and consumer trends.

  • No-deforestation commitments: Earlier this month, Procter & Gamble, the world’s largest consumer goods company, committed to sourcing its palm oil only from deforestation-free sources. In our last update, we concluded that consumer company demand for deforestation-free commodities is rising, and producers and traders that can meet the demand will enjoy expanded market access, particularly at the high end of the market. Interestingly, Procter & Gamble has stated it will fully implement this commitment by 2020, even though a number of their suppliers, like Wilmar, will fully implement their own no-deforestation policies by 2015.
  • Increased demand for responsibly sourced products in Asia: While market transformation for deforestation-free products is occurring rapidly for Western consumer companies, aspirational consumers in Asia could drive change in the future. Strategy firm GlobeScan has demonstrated that status-oriented consumers in Asia are increasingly embracing sustainable branding. These consumers’ concern on socio-environmental issues is often locally focused. As egregious reports of deforestation and human rights violations in Indonesia continue to rock certain palm oil producers, most recently KLK, we predict that Asian consumers will become increasingly aware of palm oil supply chain issues, including deforestation, since these issues are concentrated in Southeast Asia. With pressure for deforestation-free, responsible production applied by consumers and companies, palm oil producers continuing to commit social and environmental ills will face reduced market access – and not only in high-end markets.