Fitch Ratings: Credit Profiles of Asian Palm-Oil Producers Resilient Against Non-Certification

Golden Agri-Resources

28/02/2020 03:23

(The following statement was released by the rating agency)


Fitch Ratings-Singapore-February 27: Fitch Ratings believes that risks for 
Malaysian and Indonesian palm-oil producers whose operations remain uncertified 
with international sustainability standards, including weaker market access, 
lower financial flexibility and social disputes, are likely to rise as more 
buyers and financial institutions focus on sustainability, but are manageable 
and should not affect the companies' credit profiles. Several of the palm-oil 
producers aim to become fully certified to improve global-market access, but 
others remain focussed on regional product and financial markets to avoid 
incurring certification-related costs.

 

Palm oil majors, such as Sime Darby Plantation Berhad (SDP, BBB/Stable) and 
Golden Agri-Resources Ltd (GAR), are focused on compliance with standards issued 
by the Roundtable on Sustainable Palm Oil (RSPO), which is recognised globally 
for its environmental and social criteria and has over 4,000 members across the 
palm-oil value chain, including producers, traders, consumer companies, 
financial institutions and non-government organisations. RSPO members include 
large consumer-goods manufacturers, such as Unilever NV (A/Stable), Nestle SA 
(A+/Stable) and PepsiCo, Inc. (A/Stable), as well as global banks, including ABN 
AMRO Bank N.V. (A+/Negative), BNP Paribas S.A. (A+/Stable), Credit Suisse Group 
AG (A-/Positive), HSBC Holdings plc (A+/Stable), Standard Chartered Bank 
(A+/Stable) and UBS Group AG (A+/Stable).

All palm oil produced by SDP, the world's largest palm-oil producer, with 
planted acreage of around 600,000 hectares spread across Malaysia, Indonesia and 
Papua New Guinea, is Certified Sustainable Palm Oil (CSPO) under RSPO standards. 
Indonesia's GAR - the world's second-largest producer, with planted area of 
around 500,000 hectares, including land held by smallholders - has RSPO 
certified around half of its planted acreage. 

Adherence to international standards, such as RSPO, allows companies to improve 
market access, especially to developed markets in Europe and North America. They 
are also able to tap a larger base of banks and investors for funding. Certified 
palm oil volumes can also earn a premium. However, premiums have been declining 
with increasing certified volumes from producers and are partly offset by 
certification and compliance costs. 

RSPO certification is gaining currency worldwide, but progress has been slower 
than industry participants expected. In addition, developed countries are seen 
as driving the adoption of international standards, with fast-expanding Asian 
markets not yet prioritising sustainability; just 58% of palm oil declared by 
assessed companies was certified, according to the Palm Oil Buyers Scorecard 
published by WWF in January 2020. This was an improvement from 29% in 2013 and 
39% in 2016, but reveals that many companies that had pledged to buy 100% CSPO 
by 2020 have been slow in moving toward the target. The report also indicated 
that less than a third of assessed companies are extending their influence by 
holding suppliers accountable for issues such as deforestation and palm-oil 
traceability. 

Smaller companies, such as PT Tunas Baru Lampung Tbk (TBLA, B+/Stable), which 
owns around 45,000 hectares of planted oil-palm acreage in Indonesia, are not 
keen to incur the costs associated with RSPO-certification and are focusing on 
the domestic and price-sensitive Asian markets, such as India and China. Such 
companies also enjoy funding access to domestic and regional banks that are not 
RSPO members and are likely to continue lending to the sector in light of its 
importance to the local economy and trade. We believe risks related to social 
conflict with local communities are mitigated by the companies' long operating 
experience. 

TBLA's rating adequately factors in risks associated with limited market and 
funding access against peers that demonstrate better adherence to global 
sustainability. However, these risks could weigh on its credit assessment should 
other aspects of its operating and financial profile, such as size, yield and 
leverage, improve.   

Contact: 

Akash Gupta

Director

+65 6796 7242

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay

South Tower #22-11

Singapore 048583

 

Erlin Salim

Director

+65 6796 7259

Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: 
peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, 
Email: leslie.tan@thefitchgroup.com.

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