US sanctions put Malaysian palm oil giants in a conundrum

This article first appeared in The Edge Malaysia Weekly, on January 11, 2021 - January 17, 2021.
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 (Photo by Bloomberg)

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 (Photo by Bloomberg)

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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.

Many in the dark over ban

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.

Meanwhile, Liberty Shared said that in 2019 and 2020, it interviewed workers from plantations owned and run by both Sime Darby Plantation and FGV, in which the workers described conditions on various plantations owned and run by each of these two companies that satisfied the forced labour indicators set out by the International Labour Organization (ILO).

According to the ILO, forced labour refers to “situations in which persons are coerced to work through the use of violence or intimidation, or by more subtle means such as accumulated debt, retention of identity papers or threats of denunciation to immigration authorities”.

Apart from the companies themselves, many industry players were taken aback by the CBP ban, given the lack of specifics given on the allegations made, especially concerning the Sime Darby Plantation case.

Independent sustainability consultant Teoh Cheng Hai says CBP has the right to issue the WRO on goods produced by forced labour and child labour, preventing the goods from entering the country. However, he says that the action taken against Sime Darby Plantation appears to be unilateral, or even undemocratic.

“The WRO was issued on the basis of a petition filed by Liberty Shared on April 20 last year, requesting CBP to exclude palm oil and palm oil products produced wholly or in part by forced labour and child labour by Sime Darby Plantation.

“In the media release on Dec 30 last year, CBP stated that the issuance of a WRO against Sime Darby Plantation’s palm oil is based on information that reasonably indicates the presence of all 11 of the ILO’s forced labour indicators in Sime Darby Plantation’s production process. However, details of the alleged non-compliance were not given.

“These were also not available in the summary of the petition; the full version of the petition to CBP is not available in the public domain,” he says.

In spite of the lack of clarity on the allegations, Teoh says the executive director of CBP’s Trade Remedy Law Enforcement Directorate stated that CBP does “believe that there are some issues that are systemic across all of Sime Darby’s plantations”.

“As this has serious implications and consequences, CBP should have given the company the details of the allegations and the opportunity to defend itself before taking the punitive action,” he says.

From the summary of the petition by Liberty Shared, Teoh says it appeared that the petitioner had based its petition mainly on interviews with workers and members of civil society and desk reviews and analysis of publicly available documents.

“Given the serious nature of the concerns, Liberty Shared should have undertaken a formal audit, preferably by a third party, on the compliance to the ILO indicators so that it can reach an informed and fair recommendation to CBP.

“In the absence of an objective assessment, CBP could have corroborated the allegations by the petitioner with independent authorities. In this context, the Roundtable on Sustainable Palm Oil (RSPO) should have been consulted as all Sime Darby Plantation estates have been audited against the stringent RSPO Principles and Criteria (P&C) by independent third-party certification bodies, which themselves have been accredited by Assurance Services International (ASI),” he says.

In a Dec 31 statement on the CBP’s WRO order for Sime Darby Plantation, the RSPO said it is concerned about comments made to the media by CBP officials regarding evidence of serious violations of the RSPO P&C 2018.

“We have once again urged CBP to share any information with us that will allow us to properly investigate this matter and report transparently on our findings.

“We can confirm that an initial review of audit findings earlier this year did not generate any red flags against Sime Darby Plantation. We rely on independent auditors to detect violations of this nature and to date, no non-conformances have been identified on any [of the group’s] certified plantations,” it said.

Some believe that CBP’s actions were more of a political play than anything else.

“There was no specifics given by the NGOs or CBP. This is quite concerning, where you issue a WRO but don’t give the exact specific reasons why the WRO was given, and there is just big sweeping statements on how 11 principles were breached. I think that sounds more political than, perhaps, substantial,” says an officer with a plantations company.

The crux of the issue, says a plantations expert, is the fact that the Malaysian plantation sector as well as other sectors in Malaysia continue to rely on foreign workers.

“Around 85% of our plantations’ workforce are foreign workers. This opens a Pandora’s box as they tend to be neglected, they don’t complain and they don’t have unions.

“Another issue in the industry is the use of a contract system to manage workers. A lot of plantation companies have realised that there are many lapses in this system, and have switched to direct employment.

“Some have chosen to maintain contractor companies, but they ensure that all the employees of the contractor are on the company’s payroll. And on payday, the estate or mill pays the contract worker to ensure they are getting the pay they are entitled to, and the agent gets paid a commission based on the productivity of the employees. This ensures that the agent does not pocket a portion of the worker’s pay,” he says.

In a Jan 6 note, Moody’s Investor Service says the move by CBP is credit negative for Sime Darby Plantation as it increases the social risks for the company concerning its palm oil operations.

“The situation could damage its relationship with customers and other stakeholders. Large losses in earnings, if any, as a result of these allegations will weaken Sime Darby Plantation’s credit profile.

“While Sime Darby Plantation has stated that it has not yet received details of the allegations, we expect the company to engage with the US Customs and its various stakeholders to resolve the allegations and take any corrective actions required to protect workers’ rights,” it said.

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