Is sustainable palm oil becoming the new norm?

Palm oil is the most produced oil in the world today. Its annual production reached 49 million tonnes (Mt) in 2011. Indonesia and Malaysia, with 24 Mt and 18 Mt respectively, contribute to 85{0b218882f1ccfe7a3275ae7bbe9d656cfafc5eaab3e2452200d025fc9f1cffbd} of worldwide palm oil production and major consumers include India, China and the European Union.

80{0b218882f1ccfe7a3275ae7bbe9d656cfafc5eaab3e2452200d025fc9f1cffbd} of all palm oil produced worldwide is consumed by the food industry followed by the non-food sector (soaps, detergents, cosmetics) and biofuels that are steadily growing in popularity.

Global demand for palm oil

The demand for palm oil has rapidly shifted in recent years and it is predicted to more than triple by 2050 in comparison to year 2000 figures.

It is predicted that by 2050 the world’s population will reach 9 billion. This is 2 billion more than today. As well as an increase in the size, a big expansion of the so called “middle class” is expected; meaning 25{0b218882f1ccfe7a3275ae7bbe9d656cfafc5eaab3e2452200d025fc9f1cffbd} of the global population will live in cities by 2025 which means amplified demand for goods including food, energy and services.

Increasing interest in palm oil from the food industry looking for a healthier and cost effective alternative to replace trans-fats is contributing to the growing demand for this product. Local governments’ policies to eliminate or reduce use of trans-fats in foods have made palm oil a strong competitor in the vegetable oil market.

Another aspect influencing global demand for palm oil is the biofuel market. The key drivers in this area are set by national and international policies. The European Union has declared that by 2020 10{0b218882f1ccfe7a3275ae7bbe9d656cfafc5eaab3e2452200d025fc9f1cffbd} of its fuels sold will come from agricultural biofuels whereas China sets the same target at 15{0b218882f1ccfe7a3275ae7bbe9d656cfafc5eaab3e2452200d025fc9f1cffbd} . Indonesia and Malaysia are already producing a bio-diesel blend of processed palm oil with petroleum diesel, and although today the majority of biodiesel worldwide is manufactured primarily from rapeseed or sunflower oil, the demand for palm oil in this sector will grow.

Palm Oil Commodity Market

Total trade in palm oil and palm kernel oil is over 35 million tonnes, imported and exported. The oil has an annual trading value of about $50 billion. Major exporters of palm oil include Indonesia and Malaysia. Key importing economies include India, China and the European Union.

Palm oil is being traded as a commodity on the Bursa Malaysia in Kuala Lumpur. Traders can buy and sell palm oil contracts and options. Commodity trading is done in the form of futures and carries significant potential for profit and loss as it involves predictions for the future and hence uncertainty and risk. Therefore robust market information on availability on supply and demand cycles is crucial when trading in commodity markets.

Crude Palm Oil Future Contracts (FCPO) & Crude Palm Oil Kernel Oil Futures (FPKO) protect the buyer against price fluctuations. They work exactly like a fixed term energy contract at home – you decide on a price on the day of signing the contract, with the trade taking place on a futures exchange. FCPOs cover spot month and the next 5 succeeding months, alternate up to 24 months ahead. The maximum contracts a participant can hold or control is 800 for the spot month or 15,000 for all months combined.

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(Source: Crude Palm Oil Futures, 01 November 2013)

Furthermore the prices of FCPO also serve as a reference point for the pricing of other oils and fats industries.

Commodity price of palm oil is influenced mainly by the demand –supply balance, especially by:

• Increasing demand from both, food and biofuel industry
• Weather – both Indonesia and Malaysia are at risk of significant rainfall that can impact the quality and size of the harvest
• Substitution – if a substitute product e.g. soya can be purchased at the favourable price then it could decrease price of palm oil

At the beginning of November, Crude Palm oil was traded at RM 2,623 which equals $826 per metric tonne.

Palm Oil and Sustainability

It is widely recognised now that increase in demand for palm oil as well as a move towards large plantations (between 2,500 – 10,000 hectares) is contributing to environmental damage including deforestation and loss of biodiversity, in particular orang-utan habitat. The topic has become a focus of leading non-governmental organisations (NGOs) like WWF, Friends of the Earth and Greenpeace with the latter launching an internet campaign against Nestle called ‘Give the Orang-utan a break’ reaching almost 650,000 views on Youtube.

The Roundtable for Sustainable Palm Oil (RSPO) was set up in 2004 to promote production and use of sustainable palm oil. Nowadays it is a leading organisation that works with the growers, oil processors and traders, consumers as well as NGOs and investors. Additionally RESPO has developed an international certification standard which helps to ensure that environmentally and socially sound practices are implemented across the palm oil supply chain. In July 2013 there were 240 Companies and 621 Facilities certified to RESPO Supply Chain Standard worldwide.

On the 27th of October 2013 Malaysian Plantation Industries and Commodities Minister, Datuk Douglas Uggah Embas, announced that they were at the final stages of drawing Malaysian Sustainable Palm Oil (MSPO) certification to improve standards and the image of locally produced palm oil products. He argued that RESPO certification scheme is too expensive for small producers hence the new standard will be focusing on local laws and will take into account 60 local laws including wildlife legislation and state enactments.

Unilever, a RESPO member and the world’s biggest palm oil buyer, has declared in its Sustainable Living Plan that by 2020 all of its palm oil will come from sustainable sources and will be fully traceable. Similar objectives can be found in M&S’s or Co-op’s policies.

It is not only large organisations that are looking to make responsible choices. In the UK many trade associations, especially in the hospitality sector, have already make a commitment to improve their supply chain and introduce sustainable palm oil. However according to Defra’s Report many smaller manufacturers, in particular in the cosmetics industry, are looking to substitute or to eliminate palm oil rather than introduce sustainably sourced product. For example Lush developed its own palm oil free soap base.

Is the above trend in searching for a substitute, proof that when it comes to sustainability and smaller organisations, it is still a case of ambition vs. market demand? Are the smaller companies being discouraged by the complexity of the palm oil supply chain or maybe more sensitive to the controversy around the environmental damage caused by plantations?

The fact is that the demand for palm oil is increasing and the industry is a significant contributor to the local economies in SE Asia. Therefore by supporting sustainable supply chain schemes we can ensure a good standard of operating practices is followed.

About Author

monika maciejewska_websmallMonika Maciejewska, M.Eng, PG(Dip), accomplished sustainability and CSR professional with over 16 years of business experience.

Monika specialises the development and delivery of bespoke solutions for commercial and non-profit organisations that helps them to outperform the competition and build a long lasting relationship with their customers, suppliers, employees and the community around them.

Her professional interests include: manufacturing, hospitality and the natural & organic cosmetics sector. Monika actively works with a non-profit sector and she is a Trustee of The Beat Project.

To find out more about Monika’s business values and services please visit www.monikamaciejewska.com

I Oil World
II The Economic Benefit of Palm Oil to Indonesia
III The Economic Benefit of Palm Oil to Indonesia
IV Mapping and understanding the UK palm oil supply chain (2011)