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Indonesian Palm Oil’s Stranded Assets

10 Million Football Fields of Undevelopable Land

February 9, 2017
Stranded land is a type of stranded asset. Stranded assets are “assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.” Due to stranded assets, the Indonesian palm oil industry may be facing a trend of lower growth and equity revaluations. Banks may be left with poor loan collateral when the underlying oil palm concession is recognized as stranded land. Risks and costs for companies and credit and equity investors are likely to increase. This means that landbank expansion – regardless of location – is a high-risk financial strategy.

Key Findings

  • 6.1 million ha of forests and peatland are “stranded assets” on the balance sheet of Indonesian palm oil companies as it cannot viably be developed. This magnitude is potentially unknown to investors and bankers. Analysts may be mispricing these stranded assets into current financial valuations.
  • 29 percent of Indonesia’s leased out landbank cannot be developed without violating buyers’ No Deforestation, No Peatland, No Exploitation (NDPE) policies. This stranded land is equal in size to ten million football fields.
  • NDPE compliant growers may enjoy wider, more secure markets and be able to sell at higher prices. This could render a full transition to NDPE imminent.
  • With 365 NPDE policies from traders and consumer goods companies, and new regulations from the Government of Indonesia, analysts need to change their financial modeling techniques to include stranded asset discounts.
  • 95 identified palm oil company groups – 35 of which are publicly traded – each hold at least 1,000 ha of stranded land within their concessions.
  • 10 percent of Indonesia’s total land has been leased for oil palm concessions in the last 25 years.

To mitigate business risk, companies may want to focus on improving growth and yield, achieving buyer NDPE policies and alternative growth strategies instead of risky landbank expansion. Only companies that comply with NDPE policies by refraining from developing forests or peatland will retain access to the market segment that demands sustainable production. This segment is quickly becoming mainstream and offers better CPO trade terms.

Ten company groups have over 1 million ha in stranded land:

  • Pacific Inter-Link, Menara Group, Tadmax project
  • Korindo
  • Astra Agro Lestari
  • Gandasawit Utama
  • Hardaya Inti Plantations
  • Salim Group and Indofood Agri Resources
  • Genting Plantations
  • Eagle High Plantations
  • PTT Green
  • Austindo Nusantara Jaya

Three out of every 10 ha leased to oil palm concessions in Indonesia is stranded land. This land cannot be developed without violating buyers’ No Deforestation, No Peatland, No Exploitation (NDPE) policies. This undevelopable land area is the same size as ten million football fields.

It is important to note that NDPE compliance is not a guarantee of protection of forest and peatland. Under current Government of Indonesia regulation, growers’ licenses might be revoked if they do not develop their land into palm oil plantations. Licenses can then be redistributed to other actors, including those active in other commodity sectors that are not necessarily bound by any NDPE policy.

Four trends are driving this supply chain transformation:

Trend #1: Undeveloped palm oil landbanks are no longer a viable proxy for financial valuation.

Trend #2: 365 companies globally have adopted zero-deforestation or NDPE policies.

Trend #3: The Government of Indonesia is directing the palm oil industry away from deforestation and peatland development to improving growth and yields.

Trend #4: “Eyes in the sky” provide immediate transparency and monitoring capabilities.

Download as PDF: Indonesian Palm Oil’s Stranded Assets: 10 Million Football Fields of Undevelopable Land

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