Industry to Tackle Deforestation

Indonesia

Economic News

22 Jul 2010
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Indonesia's palm oil growers, the world's largest producers of Crude Palm Oil (CPO), announced last week they would put an end to expansion into forested areas.



Speaking to local press, Didiek Hadjar Goenadi, the executive director of the Indonesian Palm Oil Association (GAPKI), said the industry would look to use "idle" land for its expansion plans instead. "We realise the environmental impact by opening all our forests so we will stop touching the forest and just concentrate on the abundant lands which have not been cultivated yet."



The news follows on the heels of increasing criticism, especially in the West, over the widespread destruction of tropical forests, directed in particular towards Indonesia and Malaysia's palm oil industry, which generates more than 80% of global palm oil production. A report published in April by Conservation letters, an online scientific journal, claimed more than half the expansion in palm oil production in those two countries in the past 15 years has been at the expense of forests.



According to the report, Indonesia's palm oil cultivation during that period increased more than 270% to 4.1m ha, while forest cover declined by 28m ha. The report calculates that at least 1.7m ha of deforested land in Indonesia was converted to palm oil production, creating a "detrimental" impact on regional biodiversity.



Since the period examined by the report, an even greater area of land has come under cultivation by the palm oil industry. According to the latest official figures, some 6.7m ha of land is now used for growing palm oil in Indonesia, representing almost 5% of the country's total 137m ha of forest and agricultural land.



Palm oil production in Indonesia is surging, driven by record prices for CPO this year - as high as $1395 a tonne in Rotterdam at one point, against historical prices of $300-$400. Prices have since dropped slightly, but remain high at around $1100 a tonne. As a result of high prices, demand for land and seeds is also soaring: the ministry of agriculture estimates that seed demand will hit 220m tonnes this year, while the country's seven licensed seed producers between them will be able to produce 160m tonnes only. To bridge the gap, some 60m tonnes of seeds need to be imported, potentially driving prices even higher.



Palm oil's increasing popularity is partly attributed to the drastic increase in its consumption in very populous countries such as China and India, as well as tight global supplies of other vegetable oils. Though having a wide range of uses (palm oil is, for example, the key ingredient in instant noodles), it is undoubtedly the area of biofuel that is driving growth in demand for palm oil, pushing its price even higher in line with crude oil's spike above $130 a barrel last week. Palm oil is indeed being increasingly sought as a feedstock for biodiesel, especially in Europe, which has announced plans for biofuels to account for 10% of transport fuels by 2020. As a matter of fact, a number of new refineries are currently under construction in Indonesia: PT Asianagro is planning a 150,000 tonne per year facility, while Bakrie Group and Surya Dumai Group are both building biodiesel plants with a combined capital investment of around $25m-$30m. Indonesia's richest man, Sukanto Tanoto, owner of palm oil, forestry and energy corporation RGM International, has described palm oil as "green gold".



However, concerns about the environmental impact of palm oil plantations have already prompted action in Europe. EU officials have proposed a new law on renewable energies that will ban the import of biodiesel derived from plants grown on recently destroyed forests. The law has to be approved by EU governments before it can take effect.



In response, Indonesia has committed to meet new licensing requirements passed by the EU, in conjunction with the Roundtable on Sustainable Palm Oil (RSPO) - as the industry consortium is known. These requirements involve the process of auditing producers along with some 112 indicators, to ensure that production methods are sustainable, thereby improving the industry's image and averting a consumer backlash. News agencies report that the first shipments of certified palm oil meeting strict environmental criteria are expected to reach Germany in the second half of 2008, although the cost of such products may be up to 10% higher than non-certified palm oil.



According to Didiek, the challenge now is to raise awareness regarding compliance among smaller producers. "Since many oil palm plantations are operated by farmers, many of them still unaware about the RSPO regulations, it is the government's task to educate them," he told local press.



With so much demand and investment globally in the biofuel industry, concerns have been raised about the knock-on effects of using plants for fuel. The reduction in crops farmed for human consumption has led to a sharp rise in the price of basic staples. Indonesia has seen mass street protest over record soyabean prices triggered by US farmers opting to grow corn for the biofuel industry.



As such, the industry is now under the spotlight from two different angles: environmental sustainability and food supply. It is possible that, despite current calls from NGOs and the EU concerning the first aspect, it will in the end be the second that eventually limits the extent of palm oil production.

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