US Sanctions Put Malaysian Palm Oil Giants In A Conundrum

LAST Thursday, crude palm oil futures breached RM4,000 per tonne for the first time since 2008. But despite this positive upward trend in prices, a cloud still hangs over the industry following another ban by the US Customs and Border Protection (CBP), this time on palm oil and products of Malaysian plantation giant Sime Darby Plantation Bhd on allegations of forced labour. The ban came into effect on Dec 30, 2020.

This would make Sime Darby Plantation the second Malaysian plantation company to be slapped with a CBP ban, the first being FGV Holdings Bhd last September, which saw a withhold release order (WRO) being issued on its palm oil and products also due to allegations of forced labour.

From a financial perspective, exports to the US are insignificant to both Sime Darby Plantation and FGV Holdings. On a whole, exports to the US only make up 3% — equivalent to 494,306 tonnes — of Malaysia’s total exports of palm oil from January to November 2020.

Nevertheless, the CBP ban still places the two companies — and Malaysian palm oil on a whole — in a conundrum due to severe reputational risks as a result of the ban.

“The ban by the US CBP is severe because this is literally a ban by the US government. With the US being the world’s largest economy, its influence is far reaching and this could have an impact on Malaysia’s palm oil trade with some major export destinations such as India and Europe.

“If you look at a company like Sime Darby Plantation, it has major investments in Europe, especially in its downstream activities, and this ban could have huge implications for it as Europe is far more concerned about environmental, social and governance principles compared with the US,” a palm oil industry expert tells The Edge.

He adds that this could also play to the advantage of Indonesian palm oil companies.

“Indonesian plantation companies are definitely going to capitalise on this opportunity to regain some lost market share from their Malaysian competitors. Players with a large interest in Indonesia such as Wilmar International Ltd and Golden Agri-Resources Ltd have investments in the US, which places them in a greater advantage.

“It will be difficult for the Malaysian companies to regain that lost market share, unless they are willing to sell their products at a huge discount,” says the expert.

In its statement on Dec 30 in response to the CBP action, Sime Darby Plantation said that the CBP’s news release does not provide sufficient information to allow the company to meaningfully address the allegations that triggered the issuance of the WRO.

“Nevertheless, we look forward to receiving pertinent information and working with CBP in order to address their concerns and quickly resolve this matter,” it said.

Sime Darby Plantation added that it will continue to engage with Hong Kong-based Liberty Shared, the non-governmental organisation (NGO) that had brought forward the allegations to CBP.

FGV in its response statement to the CBP ban last September said that it is disappointed that such a decision has been made when the company has been taking concrete steps over the past several years to demonstrate its commitment to respect human rights and uphold labour standards.

Note that the petition to CBP against FGV was filed by Grant & Eisenhofer ESG Institute in November 2019.