In 2016, Chain Reaction Research reported (“Sime Darby: Liberian Crossroads”) that Malaysian palm oil conglomerate Sime Darby (SIME:MK) would be unable to fully develop its 220,000 hectare (ha) concession in Liberia without violating its own sustainability policies. As SIME submitted in September 2017 listing plans to the Securities Commission Malaysia to spin-off its plantations and property divisions into pure-play companies, SIME has acknowledged for the first time that it will not plant its entire concession area in Liberia.
SIME’s Q2 2017 financial results included a USD 48 million impairment due to slower than expected growth in Liberia from a moratorium on new planting since 2014, dry weather lowering projected yields, and the tragic Ebola outbreak from 2014 through early 2016.
SIME is scheduled to publish its Q1 FY2017/18 earnings November 24, 2017.
SIME’s plantation and property spin-offs reference price will be available by the end of October or early November 2017, after approval by Securities Commission Malaysia. Its plantation spin-off book value is estimated at USD 3.24 billion (JPMorgan / paywall). According to JPMorgan, as shown in Figure 1 (below), SIME’s plantation company spin-off is targeting an overall increase by 2025 of 25 metric tons per ha fresh fruit bunches and 25 percent oil extraction rate, and a decrease to 10 years average maturity for its oil palm estate.
|2025 Target||FY2017 Indonesia||FY2017 Malaysia||FY2017 Papua New Guinea & Solomon Islands||FY2017 Liberia|
|Fresh Fruit Bunch (metric tons / ha)||25||16||21||24||4|
|Oil Extraction Rate||25%||21%||21%||23%||19%|
|Maturity (years)||10||13 (inclusive of Liberia)
Figure 1: SIME’s 2025 targets. Source: JPMorgan.
Note: SIME depreciates the economic useful life of its oil palm trees using straight-line basis over 22 years. Its average refineries utilization was 70 percent in FY2017, up from 67 percent in FY2016. 70,000 hectares (ha) come into maturity in FY2017, which was 11.6 percent of SIME’s overall planted ha.
Risks from Liberian Concession
In 2009, SIME signed a 63-year concession agreement for 220,000 hectares (ha) of land to be developed into oil palm and rubber plantations in Liberia. An additional 44,000 ha were scheduled to be developed under an outgrower scheme. The company’s concession in Liberia equals 22 percent of SIME’s total global landbank.
As shown in Figure 2 (below), as of Q2 2017, SIME had planted 10,401 ha of oil palm (9,305 ha mature) and 107 ha of rubber.
|Malaysia||Indonesia||Liberia||Papua New Guinea||Solomon Islands||Total|
|Concession area (ha)||344,784||284,367||220,000||130,235||8,304||987,690|
|Oil palm planted area (ha)||303,806||202,302||10,401||79,459||6,765||602,732|
Figure 2: SIME’s Q2 2017 total global oil palm landbank. Source: Sime Darby.
Chain Reaction Research’s 2016 analysis showed the “mainstream investors continue to value Sime Darby’s Liberian project assuming full concession development” despite the land containing 45 percent undevelopable high-density forest, as well as 34 percent medium-density forest and being home to an estimated 55 local communities who are possibly negotiating Free, Prior and Informed Consent (FPIC) with SIME. SIME’s 2009 concession agreement with the Government of Liberia stated that the full 220,000 ha would be developed, and that undeveloped land would be forfeited to the government.
Since SIME issued its moratorium on new development in Liberia two years ago, the company appears to recognize that its original development plans were untenable. In response to inquiries from Chain Reaction Research, SIME stated that:
- Parts of the concession area are primary forests or have High Conservation Value. As per Sime Darby’s RSPO commitments, these areas will not be planted on.
- Some areas have High Carbon Stock value and therefore cannot be cleared in line with Sime Darby’s no deforestation commitments and policies, as expressed in the Company’s Responsible Agriculture Charter.
- If consent is not given by the customary landowners for any part of the land, Sime Darby will not proceed with planting in those areas. This is part of our commitment to uphold FPIC, RSPO, HCSA and no exploitation.
- Some areas will naturally be unsuitable for palm oil development.
Investors will now have to adjust to changed expectations as SIME appears to be aligning its sustainability commitments with financial outcomes. Its Q2 2017 USD 48 million impairment from its Liberian operations reflect this adjustment with SIME management on the record stating “all impairments have already been made.”
Outgrower Model Transition
Chain Reaction Research identified the advantages of a sustainable outgrower model, where SIME would abandon its own development in favor of arrangements with smallholders in the concession, as an approach that would significantly reduce reputational risks and conflict. SIME has begun developing an outgrower program they call ‘evergreen’ it is developing in a formal partnership with IDH (The Sustainable Trade Initiative) stating:
Sime Darby has held numerous discussions with IDH and has shared its views both with its senior management in the Netherlands and with the Liberia implementers on the ground. We have discussed the IDH approach and the ‘Evergreen’ model. Both “models include production and protection and in the same 1:5 ratio. We are currently unclear as to whether the IDH model is in alignment with the thinking of the High Carbon Stock Approach but believe in principle that both models could offer a way forward in Liberia. In both cases we believe that external funding to the farmers through Government of Liberia is required for these projects to be successful
We have opted for a precautionary approach and are steadily working our way through the options to ensure we uphold our commitments. This has been done with the full knowledge of the High Forest Cover working group. In addition, our focus is on raising the productivity of the land we have already planted to demonstrate that the operations is truly viable.
This response implies that the transition to a full outgrower model is a strategic commitment.
Mitigating Liberian Risks
According to SIME, the Government of Liberia is aware and supportive of SIME’s change in direction towards a green growth strategy, so the risk of legal forfeiture appears remote to unknown as results Liberia’s national elections were held October 10, 2017. Sime Darby’s expected breakeven for its new mill appears to require only 10,000 ha of development. In response to queries from Chain Reaction Research, the company downplayed the importance of the concession to their overall business, stating that, as shown in Figure 3 (below), “our Liberian plantations account for approximately 1.7% of Sime Darby’s total global planted area for oil palm (approximately 10,401 ha out of 602,732 ha globally).”
|Liberia||Sime Darby Group|
|Fresh Fruit Bunches Production (metric tons)||27,038||2,665||9,780,000||9,620,000|
|Fresh Fruit Bunches Yield (metric tons/ha)||4.04||1.70||19.44||18.82|
|Crude Palm Oil Production (metric tons)||5,691||570||2,450,000||2,440,000|
|Palm Kernel Oil Production (metric tons)||181||–||580,000||570,000|
|Crude Palm Oil Extraction Rate (%)||18.73%||21.39%||21.29%||21.89%|
|Palm Kernel Oil Extraction Rate (%)||2.48%||–||5.02%||5.09%|
|Average Crude Palm Oil Selling Price (RM/metric ton)||2,413||2,028||2,848||2,242|
|Average Palm Kernel Oil Selling Price (RM/metric ton)||–||–||2,469||1,581|
Figure 3: SIMEs FY16/17 plantation operational statistics. Source: Sime Darby.
SIME is the world’s biggest producer of Roundtable on Sustainable Palm Oil (RSPO)-certified sustainable palm oil. For the financial year ending 30 June 30, 2016, SIME produced 2.2 million metric tons of certified sustainable palm oil and 0.5 million metric tons of certified sustainable palm kernel oil. For the financial year ending June 30, 2017, the total certified sustainable palm oil produced was 2.43 million metric tons.
SIME has achieved RSPO certification for 100 percent of upstream plantations in Malaysia (except for 2 estates and 1 mill, which was acquired recently in Johor), Papua New Guinea, and Solomon Islands and 96 percent of its upstream operations in Indonesia.
In 2011, SIME was subject to RSPO complaints when it developed a 10,000 ha portion of its concession. While its Liberian operations have not achieved RSPO certification, the company states that:
“Sime Darby Plantation aims to have all operations RSPO certified. RSPO certification is only achievable once a mill is established as the Principles and Criteria only apply to the oil and not the palm fruit. The mill in Liberia was completed in May 2017 and the Company began preparations for audit to the RSPO standards in January 2017 some 3 months before mill completion. Sime Darby has already implemented the New Planting Procedures in its Liberian operations, a prerequisite to RSPO certification. We hope to achieve RSPO certification by 2018.”
Their Q2 2017 unaudited financial statements say that “for the current financial year, [the] Plantation division recorded a 91.8% jump in operating profit from RM 1,031 million to RM 1,977 million despite an impairment of assets in Liberia of RM 202 million.” Along with SIME’s filing with Securities Commission Malaysia and SIME’s statement that “all impairments have already been made”, analysis suggests that SIME is now able to enable its Liberian operations on it is 20,000 ha portion of its concession to be financially secure while potentially addressing community FPIC and deforestation-related concerns.