US ban on FGV palm oil may trigger ripple effect

KUALA LUMPUR (Oct 1): While the earnings impact brought by the US Customs and Border Protection (CBP)’s withhold release order (WRO) on FGV Holdings Bhd’s palm oil imports is likely minimal, analysts view that the order could trigger a ripple effect outside the US and in the downstream segment.

CGS-CIMB Research Head of Research and Regional Head of Agribusiness Ivy Ng and analyst Nagulan Ravi said they hold a negative view on the ban as it will restrict market access for the sale of FGV’s palm oil through its refineries and joint ventures, which are involved in refining and the oleochemical businesses.

“In 2019, the US’ share of total global palm oil imports was not big at 2.7% (or 1.49 million tonnes). However, the concern is that this may lead other countries or FGV’s customers to reassess their purchase of palm oil from the group as a result of concerns about environment, social and corporate governance (ESG) practices,” noted Ng and Ravi.

The duo wrote in the research note that the ban also has implications on other palm oil players. CBP Trade Office Executive Commissioner Brenda Smith has indicated that the regulator had received allegations regarding the broader palm oil industry, asking US importers to look into the labour practices of their suppliers.

When contacted by The Edge, Ng said that it was too early to quantify how the ban would impact FGV’s earnings.

“Technically, FGV can divert the palm oil it does not sell to the US to other markets. However this issue is tied to the perception of the company, and its ability to access markets.

“However, while the US is not a big market, other countries could follow suit by launching their own investigations into FGV’s production process. How far ahead this ban would continue would very much depend on how fast they [FGV] move to mitigate this issue,” Ng said.

MIDF Research analyst Khoo Zhen Ye opined that forced labour has been a long-standing sector-wide issue afflicting the plantation industry in the international arena.

According to Khoo, Malaysian palm oil exports to the US only accounts for 3.5% of total export volume.

Reuters reported that the CBP had banned palm oil imports from FGV following a year-long investigation into allegations that the plantation giant uses forced labour. The CBP said that its investigation revealed signs of forced labour such as deception, physical and sexual violence, the retention of identity documents and intimidation and threats were made.

The CBP also raised concerns that forced child labour was potentially being used in FGV’s production processes.

The ban was effective immediately from the announcement yesterday.

In a filing with Bursa Malaysia, FGV said it has been communicating with the CBP through its legal counsel and having submitted evidence of compliance on labour standards that the group has committed to. It said it will continue to clear its name with regards to the CBP’s findings.

It noted that as a member of the Fair Labor Association (FLA), it is implanting a “long-term and comprehensive action plan under its affliction to the FLA” to strengthen its labour practices.

“FGV’s action plan for 2020 was adopted on March 31, 2020 in consultation with the FLA and with various other stakeholders including civil society organisations.

“The action plan was adopted at a time when the COVID-19 situation was rapidly worsening globally, including in Malaysia.”

Despite the unprecedented challenges posed by the COVID-19 pandemic, which forced FGV to realign its priorities to ensure that necessary measures were taken to curb and combat the spread of COVID-19, FGV remained committed to implementing the action plan, and FGV believes that concrete progress has been made in the six months of implementation beginning April 2020.

“FGV is confident that it is on the right track to be able to accomplish the action items due to be completed by the end of 2020,” said the plantation giant.