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The Chain: RSPO Suspends IOI – Buyers at Risk, Company Needs to Strengthen Sustainability Mandate

March 25, 2016

The Roundtable of Sustainable Palm Oil (RSPO) today announced that it was suspending the ability of leading palm oil producer IOI to sell Certified Sustainable Palm Oil (CSPO).

This directly impacts IOI’s contracts to sell CSPO to Unilever and other corporate buyers with zero-deforestation commodity commitments.

While IOI cannot claim to produce or sell CSPO products during the suspension period, its existing CSPO inventory pre-suspension remains unaffected and can continue to be sold as CSPO. IOI can continue to sell Crude Palm Oil (CPO) without the RSPO certification. IOI says its premium from selling CSPO vs. CPO is about 0.5% of firm-wide revenue, meaning the company’s potential revenue hit may be negligible assuming it can sell its formerly CSPO as CPO.

But IOI had been overwhelmingly focused on CSPO. IOI sells about 750,000 metric tons of CSPO annually, about 96% of its palm oil sales. With its suspension, global CSPO supply is reduced 6%, from 12.5 million metric tons to 11.75 metric tons annually. Other CSPO buyers may see their prices increase, resulting in global margins between CSPO to CPO increasing.

Financial Impacts

Financial impacts were immediately felt by IOI as Maybank downgraded IOI to HOLD (from a BUY) with a target price of MY 4.97 based on the uncertainty of potential financial losses. Hong Leong Investment Bank confirmed that they saw potential downside risk to earnings given IOI’s suspension.

After the suspension was announced, IOI’s shares traded 3.73% lower closing at MY 4.65. Volumes of shares traded increased sharply as nervous institutional investors repositioned portfolios. Daily volumes increased 3x 12-month average to 26 million shares from 7 million shares traded. The majority of institutional traders sold below or near the close of MY 4.65, demonstrating potential downside pressure, as earnings expectations might be impacted if buyers switch to CSPO supplied by more reliable sustainable palm oil suppliers.

Share Price Had Already Fallen in Anticipation

Finally, over the past month, according to Bloomberg data, IOI’s share price has underperformed versus most of its competitors as industry waited for the pending RSPO decision. Over the past month, as institutional investors anticipated the RSPO decision, IOI underperformed some of its competitors:

  • Eagle High up 34.1%
  • Golden Agri up 14.7%
  • Wilmar up 9.8%
  • First Resources up 4.2%
  • IOI down 2.5%
  • Felda down 5.7%

(Source: Bloomberg)

IOI’s suspension was not a surprise as the two complaints against IOI, as chronicled in recent Chain Reaction Research report, had been pending for at least five years. The complaints focused on IOI because breaking various national and regional laws and RSPO policies against rainforest destruction. This is one of the most high-profile RSPO suspensions for rainforest destruction.

Reaction from NGOs

Eric Wakker with Chain Reaction Research NGO partner Aidenvironment told Mongabay:

“For six years, RSPO allowed IOI to abuse its systems in attempts to sweep serious non-compliance with law and RSPO standards and procedures under the carpet. It was incredibly hard work just to see RSPO fully suspend IOI, based on its own formal rules.”

“The other thing is that IOI needs to give up some land to local communities and work with them as smallholders instead of trying to occupy their land for higher profit. It also needs to accept that consumers will not accept sustainability certificates on products that came from land that ultimately was stolen from ordinary Malaysians and Indonesians.”

A Path Forward Requires a Sustainability Mandate

To move forward and transform itself into an industry leader, IOI needs to strengthen its sustainability team’s operational risk controls over plantation activities. Plantation managers need to know that RSPO violations will result in significant reputational risk and uncertain financial risk to IOI, and its downstream buyers who place their trust in IOI to meet the contractual terms of delivery for CSPO products.

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