The Chain: KLK’s Equatorial Palm Oil Obtains Five-Year Tax Holiday – Palm Oil Sector Hides Risks, says ZSL

KLK’s Equatorial Palm Oil Obtains Five-Year Tax Holiday

Kuala Lumpur Kepong’s (KLK) Equatorial Palm Oil PLC gained a five-year extension to its tax holiday in Liberia last week. Equatorial Palm Oil trades as PAL the AIM market of the London Stock Exchange.

PAL’s tax holiday covers its Palm Bay and Butaw palm oil concessions in Liberia. It was initially applied for seven years. Liberia has extended the tax holiday because development is slower than planned.

Last September, PAL’s joint venture Liberian Palm Developments disclosed a $30 million loan from KLK Agro Plantations (KLK Agro). Proceeds will fund the next building phase of a 60-metric ton palm oil mill on the Palm Bay Estate, Liberia. Palm oil from this new mill will be exported by the Equatorial Palm Oil PLC subsidiary LIBINC Oil Palm Inc. facility at the port of Buchanan.

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The Chain: EU Parliament 2020 Resolution on Biofuels Imports, Market Reacts

Markets and Traders Bearish

The environment committee of the European Parliament last week adopted a resolution, in a 56 to 1 vote, urging the European Commission to phase out the use of vegetable oils for biofuels by 2020. Lawmakers also urged that all palm oil entering the EU by 2020 be covered by a single clear set of certification mechanisms. The next step occurs next month, when the full House of the EU Parliament will vote on the resolution.

At the same time, according to median estimate of analysts compiled by Bloomberg, Q4 2017 palm oil futures on the Bursa Malaysia in Kuala Lumpur are forecast to be $595 (MYR 2,650) a metric ton compared with MYR 3,020 so far in Q1 2017.

Interestingly, Olam International Ltd., one of the world’s largest food traders, said in its earnings call last week they are also bearish on palm oil in H2 2017.

Current EU Policy

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The Chain: Sime Darby To Split Into Three Corporations In 2018 But No IPO – Risks Remain in Liberia

Sime Darby to Split Into Three Corporations in 2018 But No IPO

Sime Darby announced that shares of its property and plantation divisions will be distributed to current shareholders in 2018, in proportion to their shareholdings in Sime Darby.

The conglomerate will split into three publicly-traded companies: Sime Darby Plantation while manage the plantation business, Sime Darby Property will stay in property management and Sime Darby will comprise its trading business, motor and industrial, logistics and other businesses including healthcare, insurance, retail and investments.

As a result, Fitch Ratings put Sime Darby (BBB+) – the remaining company after the proposed spin-off of Plantations and Property – on Rating Watch Negative. Kenaga Research also downgraded Sime Darby to “market perform”.

Sime Darby Plantation may be the winner if leverage post-restructuring is similar to Sime Darby’s current level 3x (Net Debt/EBITDA). Sime Darby Plantation’s global scale and integrated operations, its leading position producing certified products and an efficient operating cost structure strengthen its credit profile. Recent high crude palm oil prices, for example, Malaysian free-on-board (FOB) spot prices have averaged of $735 per ton in 2017 compared to $500 per ton end of 2015, have improved revenue.

The MYR 3 billion perpetual sukuk program (BBB+) and the $1.5 billion sukuk program (all BBB+) will probably be distributed to the new Sime Darby Plantation spin off. The underlying assets for these two sukuk programs are plantation land and related assets.

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The Chain: Investors With $600 Billion Launch Latin America Forest Protection Initiative, UK Makes Progress in Palm Oil, France Adopts Corporate Supply Chain Monitoring Law

Investors With $600 Billion AUM Launch Latin America Forest Protection Initiative

Green Century Capital Management announced it has organized 38 investors in the U.S. and globally, representing $617.5 billion in assets under management, to ask that companies reaffirm and extend zero deforestation commitments specifically to Latin America.

These investors have requested that ADM, Bunge, McDonald’s, Wal-Mart Stores and others consider the material financial risks that they face from deforestation – including the risk posed “stranded land” that cannot be developed due to zero-deforestation supply chain agreements and government policies. For example, there are 6.1 million ha of stranded land in Indonesia. The coalition wants these firms to drop suppliers that cause deforestation.

Signatories of the Latin America Forest Protection Initiative are requesting that companies adopt policies modeled on the region’s successful soy moratorium. Recent research shows that deforestation rates have increased again across the South American continent. According to the Food and Agriculture Organization (FAO) of the United Nations, South America experienced the largest loss of forest area globally between 1990 and 2015. This has severe consequences: recent analysis shows that global emissions from deforestation are five times greater than the emissions from global aviation.

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The Chain: HSBC Updates Palm Oil Policy

Europe’s largest bank HSBC – with $165 billion market capitalization – announced that it is expanding its prohibited businesses commitment in the palm oil sector. It is making its commitment consistent with No Deforestation, No Peat, No Exploitation (NDPE) policies adopted by market leaders. The policy applies to refiners, traders, growers and mills. HSBC has stated it will not agree to any new financing that violates their NDPE policy.

The new policy will require HSBC customers to:

  • Commit to protecting natural forest and peat by June 30, 2017.
  • Identify and protect forests and peat in new plantations prior to commencing new development.
  • Provide independent verification of their NDPE commitments by December 31, 2018.

HSBC also announced that it will join the Banking Environment Initiative and the Tropical Forest Alliance (TFA), which is hosted by the World Economic Forum. HSBC’s Group Chief Executive will initially lead HSBC’s presence in TFA.

Greenpeace recently led a campaign engaging HSBC on its palm oil lending practices. Greenpeace stated that since 2012, HSBC has been involved in $16,341,898,120 in loans and $1,996,087,395 corporate bonds financing Bumitama, Goodhope, IOI Corporation, Noble Group, POSCO Daewoo and the Salim group / Indofood Agri Resources deforestation-linked activities. 30,000 HSBC customers also complained about these practices.

The Chain: Indofood Agri Resources New Palm Oil Policy; Risks in Advanced Holdings SG$240 Million Reverse Takeover; Malaysia’s Sukau Bridge Risks Investors, Dooms Elephants

Indofood Agri Resources New Palm Oil Policy

Singapore-listed Indofood Agri Resources (IndoAgri) is one of the largest oil palm plantation companies in Indonesia, with a total landbank of 63 concessions covering 549,287 ha (42 percent of which is contested land), and planted area of 247,000 ha. This week it launched a new sustainability policy, superseding its former policies.

The new policy will apply to the company’s own plantation operations as well as third-party suppliers, including smallholders. At present, at least 36 percent of the crude palm oil processed in IndoAgri’s refineries comes from undisclosed sources. These third-party suppliers will now be confronted with these policy requirements.

The new policy is quite similar to the No Deforestation, No Peat, No Exploitation (NDPE) policies earlier adopted by the main traders and processors of oil palm. IndoAgri is an exception because it has chosen to follow the weaker RSPO standards for preserving High Carbon Stock areas, instead of the prevailing HCS approach. Since 2013, the company has had a policy of refraining from developing peatlands.

IndoAgri’s new policy, for the first time, expresses its intentions to comply with the fundamental conventions of the International Labour Organization. However, the company has not adopted sector specific labor standards. This exposes it buyers and investors to material risks. In October 2016, the NGOs Rainforest Action Network, OPPUK and ILRF filed a complaint with RSPO. In their report The Human Cost of Palm Oil these NGOs documented several material violations of workers’ rights in North Sumatra, and to date IndoAgri has not resolved these issues. This case, and the lack of a commitment to establish a credible grievance mechanism aligned with UN Guiding Principles on Business and Human Rights in its new policy, shows that the company still has a long way to go in its opening up to society and handling of grievances.

IndoAgri’s new policy does not include a statement requiring its executive directors to maintain NDPE in their outside activities – and it does not cover the side businesses of Mr. Anthoni Salim, the controlling shareholder of IndoAgri. His oil palm operations are linked to the destruction of peat forests in Sintang, West Kalimantan and orangutan habitat in East Kutai, East Kalimantan. For comparison, Bumitama’s sustainability policy from August 2015 advises its executive directors with oil palm assets outside the listed group to uphold a similar no-deforestation policy. Mr. Salim needs to embrace a similar policy to address NGO-scrutiny over his plantation businesses which are not compliant with IndoAgri’s own NDPE policy or the NDPE policy of IndoAgri’s buyers.

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REPORT: Indonesia’s Palm Oil Landbank Expansion Limited by Proposed Moratorium and NDPE Policies

Indonesia’s proposed palm oil moratorium combined with buyers’ No Deforestation, No Peat, No Exploitation (NDPE) policies impacts industry growth potential. Within current concession areas, the moratorium adds regulatory risks to market access risks for companies that proceed with developing forests or peatland. Outside these existing concession areas, there is a material loophole in the proposed moratorium for land classified as ‘convertible production forest’ (HPK). However, this loophole is essentially closed by stranded land risks caused by NDPE policies.

Key Findings

  • West Kalimantan has 2.2 million ha of land suitable land for palm oil development outside of its current licensed palm oil concessions. But, because of the moratorium and NDPE policies, at most 2.6 percent of this land is available for future viable oil palm concessions.
  • Likely responses to NDPE market innovations and the moratorium are an increase in smallholder investments, industry consolidation and vertical integration.
  • Productivity improvements and international expansion are less likely to materialize in the short term.

After 25 years of aggressive palm oil development, which saw concession areas grow from 1 million ha to 21 million ha, the Government of Indonesia is now taking steps to limit further landbank expansion. These measures come at the same time that compliance with No Deforestation, No Peat, No Exploitation (NDPE) is increasingly becoming a condition for market access and that public monitoring capacities are rapidly improving. These trends increase pressures within the Indonesian palm oil industry to seek other growth strategies.

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