Sawit Sumbermas Sarana: Supplying The Palm Oil Leakage Market, Risks For Purchasers

Jun. 14, 2017 7:44 AM ETUL, UN
Gabriel Thoumi, CFA profile picture
Gabriel Thoumi, CFA


  • Sawit Sumbermas Sarana (SSMS) lost 81 percent of its customer base in 2014 to 2015 because of non-compliance with buyers NDPE policies.
  • Unilever is among SSMS’ new buyers, and its importance has grown in Q1 2017.
  • SSMS transition to supplying the ‘leakage market’ resulted in 17% to 20% underperformance vs. peers, May 2015 to April 2017.
  • SSMS valuation premium versus peers has declined, but remains above its peers.

As reported by Chain Reaction Research, the palm oil industry's transformation towards sustainability gained traction in 2013 when major purchaser Unilever engaged SE Asian refiners and traders to embrace 'No Deforestation' policies. As a result, in 2013, Wilmar was the first SE Asian refiner or trader to adopt a No Deforestation, No Peat, No Exploitation (NDPE) policy. Many other trading companies in SE Asia, Europe, U.S., and Latin America followed suit. Currently, most large international palm oil traders and refiners have NDPE policies.

However, a segment of the market continues to produce or purchase palm oil from recently deforested plantations and cleared peatlands, creating a 'leakage market' for unsustainable palm oil. Leakage is defined as any activity in the palm oil industry, production, trade and/or consumption, that is not compliant with NDPE policy requirements. Leakage creates an unlevel playing field and slows and dilutes industry transformation, thereby incurring various financial and reputational risks. The history of Sawit Sumbermas Sarana (SSMS) is instructive.

Key Findings

  • Due to non-compliance with its buyers' NDPE policies, Sawit Sumbermas Sarana (SSMS) lost 81 percent of its customer base in 2014 to 2015. Nonetheless, it has been able to continue operations and marginal profitability. SSMS restructured contested land bank assets while securing new clients in the 'leakage market'.
  • Unilever is among SSMS' new buyers, and its importance has grown in Q1 2017. Unilever awaits the outcomes of an independent review on sourcing policy compliance to decide on next steps following SSMS's alleged continuing deforestation and peatland. Next steps could include suspension of sourcing, posing further material risks to SSMS. Unilever's trading relationship with SSMS commenced after large SE Asian palm oil traders suspended SSMS for non-compliance with their NDPE policies. Notwithstanding the outcomes of the independent review, Unilever's trading relation might damage its sustainability reputation.

This article was written by

Gabriel Thoumi, CFA profile picture
Gabriel Thoumi, CFA, FRM, is Director Capital Markets, Climate Advisers. He has 13+ years' experience as a mainstream investment research manager and analyst.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: This article was written by Chain Reaction Research, a coalition of Aidenvironment, Climate Advisers, and Profundo.

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