SE Asia smog 'may spark palm oil group clampdown'

The uproar over the smog blamed on the burning of Indonesian forests to clear ground for oil palm trees could prompt a clamp down on plantation groups, prompting a slowdown in output of the vegetable oil.

Indonesia's president, Susilo Bambang Yudhoyono, has already apologised to Malaysia and Singapore for the extent of the haze, which has forced hundreds of schools to close, and brought pollution levels to record highs in some area.

A Singapore pollution index, which sees anything above 300 as hazardous, reached a record 401.

The extent of the pressure on Indonesia to act to prevent further extreme smogs could prompt the country into measures to curtail the slash-and-burn agriculture strategy blamed for the extremity of this year's haze, Singapore-based broker Phillip Futures said.

Potential action

"With pressures from neighbouring countries to mitigate the haze issue, the Indonesian government might be prompted to tighten regulations on palm oil companies," Phillip Futures analyst Sim Han Qiang said.

"There is a high probability they will do something to prevent certain agricultural practices going forward," he told Agrimoney.com.

Potential measures Indonesia might adopt include removing palm oil licenses from groups deemed not to meet sustainability criteria, besides capping the number of palm oil licences issued.

"As such, the palm oil supply from the world's largest palm oil producer is likely to fall in the future," Mr Sim said.

Too big to punish?

Action to curtail palm oil production would threaten an industry which has grown into a huge earner for Indonesia, where output has soared eightfold over the last 20 years, with exports rising more than 10 times above 20.0m tonnes a year.

Indeed, the country, which overtook Malaysia around seven years ago to claim top rank in palm oil output, may baulk at cutting back on such a strong earner, an analyst at another Singapore bank said.

"The government may make a big song and dance about it, but when it comes down to actually taking action, I can't see them doing much that would really hurt the industry," the analyst said.

In Singapore too, where many leading palm oil groups are listed, "it is unlikely that they will come down hard at all on such important companies".

'Not just a supply effect'

However, Mr Sim flagged that some slowdown in Indonesian output could hold benefits to palm oil groups, in supporting prices, given a weaker demand outlook in the face of stuttering Chinese economic growth.

"There is more than just a supply effect at work in the crude palm oil market," he said.

"Demand also needs to be considered because of what is happening in China."

The economic slowdown highlighted on weak manufacturing data is "likely to affect demand for crude palm oil" from a country which is the second-ranked importer.

Corporate involvement?

A number of major palm oil groups have been accused of having a role in the forest burning behind the haze, including Sinar Mas, which is controlled by powerful Indonesian interests, Malaysia-based Sime Darby ?and Singapore-based Wilmar International.

However, these groups have said they operator strict no-burn policies, switching blame to local operators and smallholders.

Source: http://www.agrimoney.com/news/se-asia-smog-may-spark-palm-oil-group-clampdown--5989.html

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