Food

China’s market influence can make or break green supply chains

Without sustainability indicators, its commodity exchanges could undercut other country’s efforts to green supply chains, writes Robert Hii
An oil palm plantation in Sabah, Malaysia (Image: Ramlan Abdul Jalil / Alamy)
An oil palm plantation in Sabah, Malaysia (Image: Ramlan Abdul Jalil / Alamy)

China’s influence on many commodity markets is without parallel because of its size. As a nation it is the largest importer of soy and the second largest of palm oil. This positions it well to drive sustainability. Indeed, its influence could make or break the ambitions of other countries to eliminate deforestation from their supply chains.

Yet China provides a market for a wide range of agricultural commodities with high deforestation risks. For example, between 2013 and 2017 its imports of Brazilian soy were linked to 223,000 hectares of deforestation, according to monitoring group Trase. And a recent report by Chain Reaction Research details how Chinese palm oil actors lag behind those from other nations in sustainability commitments and transparency.

This demonstrates the need for Chinese companies and investors to raise sustainability up their list of priorities. It also means countries importing goods from China must take a close look at their supply chains to ensure they are not complicit in deforestation. The EU is an important example. Despite being a vocal opponent of consumer goods linked to deforestation, the bloc has a long way to go to reduce its imports of deforestation-linked goods, both directly from producing countries and via third countries like China.

China asserts it is being responsible and proactive in the fight against climate change. It has been taking steps to reduce and remove its carbon emissions, in part through tree-planting. But at the same time it has been offloading its impact on deforestation to other countries. Addressing this is of the utmost importance if China is to stop the re-export of imported deforestation.

How could China reduce its deforestation impact?

China should match the EU’s new laws requiring companies to undertake due diligence on deforestation and other environmental harms in their supply chains. It knows what needs to be done from its experience regreening its own country. Now it must extend this perspective to the countries it imports from. Failure to do so would run against the spirit of its pledge to be carbon neutral by 2060, a target already complicated by support for fossil fuels in its Covid-19 recovery spending.

China is strengthening its position to influence global commodity markets by trading large enough volumes to become a price maker. In December, for example, China gave foreign investors access to trade its palm oil futures contract on the Dalian Commodity Exchange. There was no stipulation that the oil be certified as sustainable. This is creating a “leakage market” for unsustainable palm oil and soy which is threatening the greening of global vegetable oils. Going forward, China’s commodity exchanges can help green global supply chains by incorporating sustainability indicators.

What is a futures contract?

A contract for assets (especially commodities or shares) bought at agreed prices but delivered and paid for later. Futures contracts have a long history of use in agricultural markets, by farmers and consumers (such as food manufacturers) as a way of hedging volatility risk. However, these contracts are today also used for speculation, where traders or investors – often far away from traditional commodity exchange centres – buy and sell contracts in an attempt to make profits from price changes.

What impact would this have on producing palm oil sustainably?

It may take a few years for China to displace Bursa Malaysia as the global benchmark for palm oil futures. If it does, and China starts setting palm oil prices based solely on profit, Malaysia’s commitments to sustainable palm oil will be hard to maintain. It would undermine Bursa Malaysia’s initiative to help the industry transition to a more sustainable model, and could derail Malaysia’s efforts to produce sustainably through its Malaysian Sustainable Palm Oil (MSPO) scheme.

Malaysia’s government has made firm commitments to protect its biodiversity and ensure the sustainability of its palm oil industry. These efforts include a No Deforestation No Peat No Exploitation (NDPE) pledge which its buyers in Western countries demand.

The ambitions of palm oil producing countries like Malaysia to protect their forests and biodiversity will need a counterbalance from other powerful economies like the EU or the US. US investments in Malaysia have soared in recent years due to the wider US–China disputes but this geopolitical struggle has no bearing on the sustainable production of palm oil in Malaysia.

The European Union, as the third largest importer of Malaysian palm oil after India and China, has a commanding say on how Malaysian palm oil is produced. The historical conflicts between the EU and Malaysia on palm oil as a biofuel for the EU needs to be resolved in the EU ASEAN Joint Working Group on vegetable oils this year.

Malaysian palm oil has the potential to become a global model of a sustainable vegetable oil. But all this could come to naught if China wastes its influence on global sustainability and starts to call the prices on palm oil as a mere commodity.