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DBA's Analysis of Salient Human Rights Issues in the Palm Oil Value

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DBA's Analysis of Salient Human Rights Issues in the Palm Oil Value IMVO value chain – II INTERNET CONSULTATION VERSION DBA’s analysis of salient Human Rights issues in the Palm Oil Value Chain (Part I – interim report) The Hague, August 2018 Work in Progress Public Consultation Version ▪ While working on this document, which will outline DBA’s analysis of salient Human Rights issues in the Palm Oil Value Chain it transpired that the analysis will benefit from external review ▪ This will contribute to improving the analysis, correcting any possible errors still included and make it more comprehensive along the way ▪ This consultation version of the presentation is shared externally with these thoughts in mind ▪ With this version we invite any party that beliefs it can contribute to improving this version to do so and reach out to us with the proposed changes, corrections and/or other suggestions with regard to the underlying analysis ▪ Feedback can be submitted until the 30th of the September, 2018 to following email address: [email protected] Preliminary remarks This document is an excerpt of the ongoing work The analysis presented here describes the overall of the DBA working group on value chains whereby global value chain of the palm oil sector. It the focus is on the salient human rights issues in describes the various steps and activity of the the palm oil value chain’. This document is the value chain, as well as the (type) players that are output of a collaborative effort of the parties of found in these steps. Although palm oil is being the Dutch Banking Agreement grown in many different countries and continents most of the oil palms are grown in Indonesia and This document is a living document and still work Malaysia, therefore data of these countries is used in progress. Any feedback or suggestions will be to clarify the overall value chain. Moving forward very valuable to the working group and is the analysis might also include other geographies therefore very welcome. if this turns out to be warranted. This document is part of an oral presentation and should not be seen The presentation was drawn up with to objective as a standalone document. The Presentation is provided for of identifying the salient human rights issues in the information purposes only and it does not constitute an offer or global palm oil value chain in the light of the DBA. commitment by the Group to enter into any transaction nor are the information or documents contained herein meant to serve as a basis for any kind of contractual or other obligation. The The analysis is based on desk research and Presentation does not form, and should not be construed as, the interviews (with representatives from stakeholders basis of any credit analysis or other evaluation an investment or lending recommendation, advice, a valuation or a due diligence in the working group) and a group expert meeting. review. The information contained in the Presentation is for indicative purposes only. 3 Outline I. An introduction to Palm Oil II. The Palm Oil Value Chain III. The Salient Human Rights Issues in Palm Oil IV. What role can the Dutch Banking Agreement play? V. Next Steps 4 I - An introduction to Palm Oil Palm Oil 101 – General Description and Developments 5 Palm oil is an edible vegetable oil the production of which has increased dramatically over the last decades Production (million MT) Global palm oil production 1964-2017 Palm oil consumption 2017 Yield (MT/HA) (% of global consumption) 80 5 4.5 70 4 Indonesia 60 Other 19% 3.5 24% 50 3 40 2.5 2 Egypt 3% 30 Nigeria 3% 19% India 1.5 3% 20 Bangladesh 1 7% 10 0.5 Malaysia 10% 0 0 13% China European Union Indonesia Malaysia Rest of the World Indonesia - Yield Malaysia - Yield Sources: US Department of Agiculture 6 Indonesia and Malaysia remain lead exporters of Palm Oil while the importer side is becoming more diffuse Global Palm Oil Exports 2013-2017 Global Palm Oil Imports 2013-2017 (Thousand Metric Tons and % breakdown) (Thousand Metric Tons and % breakdown) CAGR 43,194 47,371 43,734 45,819 47,158 41,900 44,793 42,607 43,791 45,507 CAGR 100% Other 0% Guatemala +14% 39% 40% 40% 41% 41% Other +3% 75% 37% 36% 37% Malaysia 0% 40% 38% USA +3% Bangladesh +7% 50% Pakistan +3% 13% 13% 11% 11% 11% China -3% 55% 55% 54% 17% 15% 16% 15% 14% EU -2% Indonesia +4% 50% 52% 19% 20% 21% 21% 21% India +5% 2013/14 2014/15 2015/16 2016/17 2017/18 2013/14 2014/15 2015/16 2016/17 2017/18 (Sept) (Sept) Sources: US Department of Agriculture/ please note that imports and consumption may differ due to e.g. re-exports 7 The oil is derived from the African oil palm tree, today mostly cultivated in Malaysia and Indonesia • Oil palms, or Elaeis, were brought to Southeast Asia from West Africa, at the beginning of the 20th century; they flourish where heath and rainfall are abundant • Palm oil is extracted from the pulp of the fruit, is edible and used primarily in food products • Palm kernel oil is extracted from the seed of the fruit and is used mainly in the manufacture of soaps and cosmetics, • Palm kernel expeller (i.e. what remains after pressing) is used as a feed for livestock and biofuel for generating electricity. • A contemporary, productive oil palm is a hybrid tree breed, has an average life of 25 yrs. and bears fruit after 3 years • Crude palm oil (CPO) is refined to remove colours, odours and flavours and then processed into olein and stearin to produce a variety of oils and fats Source: European Palm Oil Alliance - https://www.palmoilandfood.eu/en/what-is-palm-oil 8 Palm oil is used in many consumer goods ranging from food to cosmetics and as feedstock for biofuel Please note that the working group Palm Oil use in Europe continues to look for more recent use data 1000 tonnes in EU and further specifications 8000 6000 45% Biodiesel 4000 Electricity and heating 2000 Food Percentage will be lower once its not limited to Industrial use packaged goods and fresh 0 products are also included Animal feed 2010 2011 2012 2013 2014 Sources: Rabobank (2017), Transport & Environment (2016), Interviews 9 The attractiveness of palm oil comes in part from its product characteristics • Good cooking properties [palm oil fats are solid at room Yields in ton/ha/year Production indicators temperature and therefore to 100% solidify–as would be for the 6% other oils–no need for hydrogenation, with associated Soybean 0.38 Palm unhealthy changes 36% saturated/unsaturated as consequence] Sunflower 0.48 • Good ingredient particularly in baked products, thanks to 94% smooth and creamy texture and Rapeseed 0.67 Other absence of smell (sunflower, 64% rapeseed • Preservative effect that extends and soy oil) shelf life of products Palm Oil 3.74 • Currently GMO-free • Highest-yielding and cleanest Land Use Production vegetable oil crop Source: Rabobank, RSPO 10 The palm oil sector is a significant source of export revenues and employment When assumed that this doesn’t include indirectly associated workers or informal workers, the number would be considerably higher For comparison: In 2016 the exports of the Indonesian palm oil sector amounted to USD 18.6 billion (~13% of total exports – meaning it has a significant impact on the overall Balance of Payments1) Sources: Malaysia: Department of Statistics Malaysia (2015), Indonesia: Central Statistical Agency (2015), 1) Gapki (2017)/ World Bank (2018) 11 After a couple of tumultuous years the price for palm oil has returned to historical levels Palm Oil Monthly Price (1987 – 2017) Financial crisis pushed up the prices 1400 of commodities 1200 Prices for vegetable oils followed the price increases of regular oil that reached 1000 an all time nominal high 800 600 400 US$ cents per metric ton metric per cents US$ Current nominal (!) prices are comparable 200 to those realized 20 Possible lagged years ago consequence of Asia Crisis 0 Jul-87 Jul-00 Jul-13 Jan-94 Jan-07 Jun-99 Jun-12 Oct-90 Oct-03 Oct-16 Apr-97 Apr-10 Sep-89 Feb-95 Sep-02 Feb-08 Sep-15 Dec-92 Dec-05 Aug-88 Aug-01 Aug-14 Nov-91 Nov-04 Mar-96 Mar-09 May-98 May-11 Source: World Bank/ Index Mundi (2017) 12 The public debate on the environmental and social issues surrounding Palm oil production has intensified 13 II - The Palm Oil Value Chain From soil to end-consumer 14 The palm oil value chain is most lucrative upstream and has various large backward integrated players Growers Mill Refinery Traders Manufacturer Retailers Consumer Financing needs Growing Pressing Refining Trade Production Selling Consumption Harvest replanting finance Capital expenditures Capital expenditures Trade and commodity (overcoming cash-dip) Working capital Working capital finance Location 85%: Indonesia, Indonesia Indonesia Singapore (75%), Country of consumption Globally Globally Malaysia Malaysia Malaysia Malaysia Integrated players Concentration 30% of production Larger plantations More than 70% of Trade is the most Highly fragmented Highly fragmented Indonesia: 19%, India: comes from (60%) usually have refining capacity is concentrated, however 19%, EU: 13%, China: smallholders their own mills controlled by 8 players diminishes as separate 10%, Malaysia: 7%. activity Revenue/ton $10-20/ton RSPO: +$20-40/ton $100-300/ton $10-50/ton (1,5 – 6%) Financing Small plantations: local banks at low interest syndicates with some The further forward in the value chain, the more internationally active many internationally rates. Larger plantation companies: many internationally active banks are involved active banks internationally active banks banks Sources: Above insights and data are best estimates derived from interviews, IDDRI (2017) 15 In Indonesia and Malaysia, production takes place by smallholders and plantation companies Growers Mill Refinery Traders Manufacturer Retailers Consumer • Smallholders • Independent: own/ use less than 50 ha (definition: RSPO) • Tied: contracted to a plantation company • Tied+: own both tied and independent small holdings • Small growers manage 50 to 500 ha (incl.
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