by Romain Pirard, Nils Schulz and Jason Benedict
Indonesia is the world’s biggest producer of palm oil, exporting close to 28 million tons of crude and refined palm oil in 2018, according to Trase data. The industry has long faced calls to improve its sustainability, but new analysis exposes the extent of this challenge.
Working in partnership with researchers at the University of California, Santa Barbara and Auriga, the Trase team has produced the first map of Indonesian palm oil supply chains that links individual producing districts to global markets for the entirety of Indonesia´s exports for 2015.
Using these data, we can explore the structure of the palm oil industry, looking at the key players along the supply chain, from exporters through to the companies owning the refineries, mills and plantations.
Corporate groups and their role in the supply chain
We found that while a small number of corporate groups (i.e. parent companies that own subsidiaries at various stages of the supply chain) dominate the export and refining stages of the supply chain, the same groups are less evident upstream, with mills owned by hundreds of companies and supplied by thousands of growers.
This means that refineries often source from beyond their group, and so have less control of what happens at the milling and growing stages — creating a challenge for the companies involved when it comes to delivering on traceability and sustainability commitments.
Who do the big corporate groups source from?
Looking at the 10 biggest refinery operators in Indonesia, Wilmar tops the chart, with capacity to refine 13 million tons of crude palm oil per year. Like most of the biggest refiners, Wilmar has far less milling capacity — 2.7 million tons of crude palm oil equivalent per year — and so must buy crude palm oil from other groups’ mills (or from independent companies) to feed its refineries. This highlights the distinct control of the two stages of the supply chain and suggests there is limited integration between the mill and refinery stages.
Coupled with their limited share of planted area (Figure 1) this suggests that the biggest groups operating refineries have very little involvement in or control of the oil palm production process. While they are not directly responsible for the standards under which the palm oil they buy is grown, their buying power allows them to exert considerable influence on their suppliers, including regarding the adoption of sustainability standards.
The diverse number of relationships between refineries and mills creates a traceability challenge as it makes it difficult to identify refinery sourcing patterns.
Our research also reveals substantial “grey areas”, where ownership information is not available or in some cases, where information about ownership may even be deliberately obscured by the use of shadow companies (a company that does not appear to be officially part of a group, but which is controlled by the group) — making traceability even more of a challenge.
The major corporate groups do publish traceability reports, disclosing which mills each refinery has sourced crude palm oil from for a given year. This information should help show where palm oil is being sourced and also whether sustainability commitments are being implemented.
Yet there is a gap in the information. While the refining companies list the mills they source from, they do not reveal how much palm oil they source. So it is impossible to trace quantities back to the mill level, and accurately identify the main suppliers for a given company — particularly given that the refinery owners often source from a large number of mills, sometimes in the hundreds.
Furthermore, these change year-on-year, further obscuring their sourcing patterns.
Planning for growth
Our analysis reveals that there is currently considerable over-capacity in Indonesia’s palm oil mills (85 million tons of CPO-eq), compared to the current production of 41 million tons CPO-eq in 2018. While some of this capacity may not yet exist — except on paper — this latent mill capacity suggests the potential to expand plantations.
If plantation companies are seeking to expand production, potentially at the expense of forest (around 1.5 million hectares of forest are in forest areas released or allocated for palm oil production), refining companies with zero deforestation commitments need to be able to identify where the mills are sourcing from.
This is particularly crucial given the large number of plantation owners and smallholders involved, and the lack of transparency in the sourcing patterns between mills and plantations.
If the palm oil industry is to embrace the challenge of sustainability, it is clear that it will also need to embrace far greater transparency. Palm oil traders — including big groups with zero deforestation commitments — need to be able to show not only where they source their supplies of crude palm oil, but also how much they source from different mills.
The large number of mills supplying the main refineries and the dramatic changes year-on-year mean that existing traceability reports do not deliver the information needed to effectively discriminate the supply chains of different buyers.
Until palm oil traders can provide this level of transparency, the consumer goods manufacturers and retailers that also made zero-deforestation commitments will not be able to guarantee that their supplies are deforestation-free.