Q+A: Indonesia torn between forests, expanding oil palm

YOGYAKARTA, Indonesia Thu Jun 3, 2010 9:19am BST

Related Topics

Quotes

   

YOGYAKARTA, Indonesia (Reuters) - When Indonesia last week secured its largest climate change funding of $1 billion from Norway, the Southeast Asian nation spelt out plans to revoke existing forestry licenses held by palm oil and timber firms.

Planters protested the proposals that aim to cut Indonesia's high rate of deforestation, saying they would hurt investments and oil palm estate expansion in the world's largest producer of palm oil.

The industry outcry then prompted the government to partially scale back its plans with assurances of honoring existing concessions.

But the policy flip-flops have unnerved investors who await concrete details on how the climate change funding and other aid from governments will impact the industry that brings in $15 billion in export revenues.

Here are some questions and answers about the issue:

WHERE DOES PALM OIL STAND IN THIS DEAL?

The palm oil industry appears to stand at the center of the climate change pact with Norway. Part of the funds will be used for loans to help small farmers boost yields and provide incentives for planters to use degraded lands to expand.

In the second phase, Indonesia has committed to suspend for two years new concessions for the conversion of its vast rainforests and peat swamps.

Forests absorb enormous amounts of carbon dioxide, the main greenhouse gas blamed for global warming. Peat swamps lock away large stores of carbon, but draining them releases the carbon, leaving them prone to fire.

The aim of the moratorium is to compel planters to expand on the 6 million hectares (15 million acres) of degraded land across the archipelago, which officials of palm oil firms say may still have existing land rights issues and give lower yields.

Also, these lands may be scattered, making it difficult for planters to achieve economies of scale.

SO WHAT ABOUT REVOKING EXISTING FORESTRY CONCESSIONS?

For now, it remains just a possibility, after Chief Economic Minister Hatta Rajasa said the government would not revoke existing licenses.

Agus Purnomo, head of the secretariat of Indonesia's National Climate Change Council, said even if licenses have to be revoked, the government would proceed without "causing harm to the license holders" by offering compensation and land swaps.

Industry officials say planters likely to be affected include holders of lands that are too close to the rainforests and peatlands.

WHAT HAS BEEN THE IMPACT ON PLANTERS' SHARE PRICES?

None for the moment but investors say if existing concessions are revoked, players like Singapore's Wilmar and Malaysia's Sime and IOI Corp will be hit.

Many of these firms have unplanted areas of 100,000 and 200,000 hectares (250,000 to 500,000 acres) in Kalimantan on Borneo island as well as parts of Sumatra island.

The share prices of these firms, which tend to track Malaysian benchmark palm oil futures and have been losing ground over the European debt crisis, could face a beating.

COULD PALM OIL FIRMS SHIFT OUT OF INDONESIA?

Indonesia is still the preferred destination for oil palm expansion, especially for Malaysian planters as well as Wilmar, since oil palm estate conditions there are similar to Malaysia, the second largest palm oil producer in the world.

Almost all the top-five Malaysian listed planters, such as Sime, IOI Corp, KL Kepong and Genting Plantations have built up businesses in Indonesia and shifting out would create a much greater expense.

Plantation officials say they are most likely to negotiate with the government should existing permits be scrapped.

Planters may also consider Papua New Guinea and the Solomon Islands with their rich soils and hunger for investment, but could be deterred by concerns on crime and community anger over foreign firms forcing locals to work in substandard conditions.

(Additional reporting by David Fogarty; Editing by Clarence Fernandez)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.