Malaysia: 3 global giants drop Malaysian palm oil supplier

David Fogarty, The Straits Times AsiaOne 8 Apr 16;

Three of the world's top food and consumer goods companies that make Dove soap, M&M's and Kellogg's Corn Flakes have dropped a leading Malaysian palm oil producer because of deforestation in its plantations in Indonesia.

Unilever, which owns over 400 brands including Dove, announced last week that it has begun cancelling its supplier agreements with palm oil producer and trader IOI Group over evidence of bad environmental practices in Indonesia.

IOI is Malaysia's No. 2 palm oil company by production and a top 10-listed global palm oil firm. Unilever is one of the world's top buyers of palm and palm kernel oil and refined products.

United States food giants Mars and Kellogg's have also announced that they are in the process of removing IOI as a supplier by progressively dropping contracts with IOI's refining subsidiary IOI Loders Croklaan, which has refineries in Malaysia and Holland.

Palm and palm kernel oil are used in most common foods and products - from cookies and ice cream to soaps and cosmetics.

Many major food and consumer product firms have pledged to ensure that their supplies are sourced from companies that do not contribute to the destruction of rainforests, fires or conflicts with local villagers, and have been applying greater pressure on plantation companies to comply.

Unilever said last Thursday that it made the decision after IOI was suspended last week from the Roundtable on Sustainable Palm Oil (RSPO), a group of planters, non-governmental organisations (NGOs) and consumers that sets standards for the global palm oil sector.

The RSPO said it suspended IOI's certification for non-compliance with rules. The suspension took effect on Monday.

The decision follows a year-long investigation under the RSPO's complaints process. Last year, a Dutch NGO lodged a complaint with the RSPO, accusing IOI of causing deforestation and community conflicts at its subsidiary's concessions in West Kalimantan.

"It's all about brand reputation and customer perception. They have no choice but to start disengaging from IOI," plantation company analyst Ivy Ng of CIMB told The Straits Times.

IOI Group chief executive officer Lee Yeow Chor said in a statement last Thursday that the company regarded the RSPO suspension as a "very serious matter and (it) has given rise to new challenges for us". He said IOI has since taken corrective action "to review and enhance our sustainability practices".

The decision to drop IOI is likely to hurt the Malaysian firm. Plantations and its large refining and specialty chemicals subsidiary contributed to more than 80 per cent of earnings in the financial year to end-June 2014.

IOI did not respond to queries on the impact on its business and Unilever would not reveal the size of the supplier contracts with IOI, saying only that the Malaysian firm was one of its larger suppliers in Europe.

"The suspension of IOI Group's RSPO certification appears to have far-reaching impact on its downstream business that is more severe than in our earlier analysis," Ms Ng said in a research note this week. "It has also hurt the reputation of the group."

RSPO's suspension means that IOI can no longer produce certified palm products. The company has a history of complaints from NGOs.

"For the past eight years, NGOs have painstakingly documented IOI's destruction of peatland forest and orang utan habitat in West Kalimantan," Greenpeace Indonesia forest campaigner Annisa Rahmawati said in a statement last week.

"IOI has been given every opportunity to reform and has repeatedly refused to do so, even though its actions were contributing to the fire and haze crisis," she said.

Household names nix Malaysian palm oil company
CK TAN, Nikkei 8 Apr 16;

IOI, one of Malaysia’s largest conglomerates, has been shut out by international household names in food and consumer goods over the environmental cost of its palm oil production.

SINGAPORE -- Malaysia's second-largest plantation company by market capitalization is being dropped as a supplier to such major multinationals as Unilever, Kellogg, and Mars after being stripped of its status as a sustainable producer of palm oil.

The suspension of IOI by the Roundtable on Sustainable Palm Oil, an industry regulatory association, followed complaints a year ago by environmental activists that three subsidiaries in Indonesia had cleared land without permits and beyond permissible boundaries.

"The RSPO is hopeful that the IOI Group will be able to find a solution to address the infringements flagged," the Malaysia-based organization said last Friday.

IOI started life as Industrial Oxygen Inc. in 1969 and has developed into one of Malaysia's largest conglomerates.

The RSPO finally hauled it up for felling more trees than permitted, planting without permits and clearing peat land.

IOI said that it viewed the suspension as a "serious matter" and that it has put remedial measures in place, including firefighting capacity.

"We will actively work with the complainant to jointly verify the issues," said Lee Yeow Chor, IOI's group CEO, in a news release.

The RSPO sets standards for the palm oil industry to ensure that the production process, from planting to packaging, complies with guidelines to reduce environmental damage. The organization's website says it has over 2,000 members, from plantation companies to nongovernmental organizations, representing about 40% of the global industry.

Although the RSPO has probed only the deforestation allegations against IOI over the past year, nongovernmental organizations alleged it to have been involved in violations over a six-year period.

An RSPO spokesperson told the Nikkei Asian Review that this is IOI's first suspension. The sanction took effect on Monday and seriously affects IOI's standing as a producer of sustainable palm oil, which is used by personal care and food companies globally. Palm oleochemicals are used in the production of confectioneries and cosmetics and are often cheaper than other vegetable oils.

U.K.-based Unilever said IOI's suspension infringed its procurement policy for buying from responsible sources.

"In line with our grievance procedure, we are now in the process of disengaging with the supplier," the company said. The procedure will be implemented over three months.

Unilever said it uses a 1.5 million tons of palm oil and related products a year to manufacture consumer goods, impacting about 8% of global production. It did not reveal how much of this it has been sourcing from IOI, which produces over 750,000 tons of certified sustainable palm oil annually, according to TA Securities, a local research company.

Kellogg said it has already replaced 67% of its supply from IOI subsidiary Loders Croklaan. A U.S. household name best known for cereals, Kellogg set out in 2014 to fully map its palm oil supply chain by 2015. Loders is one of its five main suppliers, which also include Cargill and Sime Darby, together meeting 90% of its palm oil needs.

Mars, the maker of M&M's and other candies, said it will not source from Loders "while the suspension is in place."

IOI's appeal against the RSPO decision includes an action plan to address the reasons for the suspension.

"We stand by our responsible operating principles and in particular our sustainable palm oil policy," said Julian Veitch, chief executive of Loders.

IOI could now face sanctions from other customers that use palm oil from certified sources. The group derives over half of its revenue from Europe and North America, according to TA Securities.

Widespread land clearance by burning has made serious air pollution an annual occurrence in Southeast Asia. Indonesian authorities have promised effective action against culprits, including plantation companies.

Greenpeace Indonesia told local media that despite warnings, IOI's actions have contributed to forest fires in Indonesia and haze further afield.

Indonesia and Malaysia together account for about 85% of global palm oil production, and leading plantation companies like Sime Darby and Wilmar International have massive land banks in both countries.

Shares of IOI were down 1.11% at 4.49 ringgit ($1.15) on Thursday after the RSPO announcement.

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