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UPDATED: Fitch: Palm Oil producers adapting to push for sustainability - BUSINESSDAY

FEBRUARY 12, 2018

Palm oil producers will continue to face gradually rising pressure from consumers, regulators, investors and environmental groups to adopt sustainable operations, which is likely to drive a further increase in the share of certified sustainable palm oil (CSPO) in global output, says Fitch Ratings.

Most producers are already making efforts towards sustainability, but the incentives are stronger for large producers that have the scale to spread compliance costs and product diversity to tap premiums.

Nigeria joined the league of sustainable oil palm producers last year when the Board of Governors of the Roundtable on Sustainable Palm Oil (RSPO) endorsed the country’s National Interpretation (NI) on the Principles and Criteria of RSPO for sustainable palm oil production.

Nigeria is the fifth largest palm oil producer, behind Indonesia with 36 million MT, Malaysia with 21 million MT, Thailand with 2.2 million MT and Colombia with 1.3 million MT, data in the global oil palm industry shows.

Globally, palm oil production has increased by over 60 million tonnes in 2017, from 22 million tonnes in 2000, and the crop now accounts for around 30 percent of global vegetable oil consumption.

The rising importance of palm oil has increased scrutiny on its impact on biodiversity and tropical forest cover, as well as its social consequences, particularly in the two countries that dominate production – Indonesia and Malaysia.

The push for sustainable palm oil operations mainly comes from the EU, which consumes around 11percent of the world’s palm oil. High consumer awareness and non-government organisation activism has led many corporates to commit to sustainability and put pressure on EU lawmakers to enact legislation.

End-users are less environmentally aware and more price-sensitive in the main Asian markets – India, Indonesia and China – and it is unlikely they will demand sustainable palm oil sourcing in the medium term. In any case, multi-national corporations that operate in these countries are likely to adopt more sustainable practices due to their global commitments for responsible sourcing.

The rising emphasis on sustainability is reflected in the increasing share of CSPO in global output, which reached around 20 percent in 2016, and this trend should continue.

Sustainability compliance adds to producers’ costs but also brings benefits. Costs include initial outlays for environmental and social impact studies, corrective action expenses, annual audits and handling and storage costs for the segregation of CSPO from non-certified volumes.

On the positive side, compliant producers receive better access to developed markets, and can earn premiums for certified products. Premiums earned are likely to exceed compliance costs, particularly for larger companies that have the infrastructure to segregate and process crude palm oil further to earn higher premiums.

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