Palm-Oil Springs in Africa

oil palm plantation
A massive oil palm plantation in Nigeria

Asian and European industries are storming the African continent in search of arable land. Palm-oil represents a great opportunity as long as agricultural development does not threaten the environment.

West and Central Africa have, in a few years, become the main target for foreign investments in palm oil. From 2009-2011 the industry raked in more than $5,9 billion. Only in Liberia the two world leading producers, Malaysian Sime Darby and Indonesian Golden Agri-Resources, committed to invest some $4.7bn to develop close to 450.000ha fields for the oil seeds. The former plans to invest close to $3,15bn on a 220.000 hectare concession, while the latter is seeking to provide $1. 57 billion for an area that is pretty much the same size.

Singapore’s Olam, which already has a presence on the continent (it holds shares, together with its national peer Wilma, in Ivorian Sifca that is invested in palm-oil production in Côte d’Ivoire and Liberia) managed to obtain the exploitation rights of close to 300.000 hectares in Gabon. The objectives are clear: produce more than one million tonnes of palm-oil per year and make Gabon the continent’s number one palm-oil producer, thereby surpassing Nigeria’s 900.000 tonnes by 2020.

But the Asian group does not stop there. “We are currently discussing with investors in Liberia, Cameroon, Congo, Zambia, DRC, and some other countries where palm-oil is an important food constituent,” said Ranveer Chauhan, Olam’s Africa director general.

The in-storm of Asian investors is in part explained by the fact that Indonesia and Malaysia, who alone represent 85 percent of the world’s palm-oil production, no longer dispose of land enough to meet the demand of a market that is currently estimated to $52, 2 billion a year. A recent study, by Japanese banking group Nomura, predicts that the Asian dragons will no longer dispose of arable land in nine years’ time (2020 for Malaysia and 2022 for Indonesia).

Today a palm-oil producer earns some $3 000 per hectare a month

In addition, and in response to the pressure put on them by environmental NGOs, the authorities in these countries have toughened their laws governing land, thereby complicating the conditions for acquiring land. In parallel, Greenpeace has warned that palm-oil plantations deforested a staggering 20m ha in Indonesia between 1990 and 2007.

Very profitable crops

Be it in Cameroon, Congo, Angola, Côte d’Ivoire, Tanzania or Mozambique, more than 2,5m hectares have already got caught in the pockets of agro-businesses in search of arable land for the highly profitable palm-oil. “Today a palm-oil producer earns some $3 000 per hectare a month,” explains Alain Rival, researcher at CIRAD (the French Institute for Agricultural Research for Development).

Between 2000 and 2011 the price of palm-oil was multiplied by four. The trend is expected to continue along the same lines, considering that the demand for this natural resource, which is widely used in the food industry (chocolate, biscuits, cooking oil), cosmetics and energy sector (bio-fuels), increases around three percent each year.

The global palm-oil production, reaching an approximately 45 million tonnes a year – 34 percent of the total 133 million of tonnes of edible oils – is struggling to meet the current demand. “The market is really tight, because supply no longer meets the demand. There are no palm-oil stocks at the moment and this is the first time it is happening,” Alain Rival maintains.

Despite its agricultural potential, Africa remains a marginal producer with only two million tonnes produced per year. But the continent has a golden opportunity to take advantage of the growing global demand. And it is above all the tropical and equatorial regions that will profit, thanks to favourable climatic conditions and accessible land, as well as a conducive legislation.

It is projected that the global demand for edible oil will have increased by 28 million tonnes by 2020, and palm-oil appears to be best adapted to meet this demand. While soya crops would need 42 million hactares, the needed land for palm-oil is only 6, 3 million hectares. In addition to that there are only 5 million more hectares that should be added to meet the Chinese and European demands on bio-fuel.

Western groups are already present on the African continent, which is a consequence of the European Union (EU) directive stating that bio-fuels should represent 10 percent of the EU’s total energy consumption by 2020. The continent’s leading oil-producer, Italian ENI, has already reached an agreement with the Angolan government to develop palm-oil plantations. The group is also present in Congo, where it obtained a contract in 2009 for 70.000 hectares of land and has committed to invest $345 million.

In terms of Asian actors, Chinese telecoms operator ZTE has launched a 100.000 hectare plantation in the Democratic Republic of Congo. Several Brazilians and Indians are also knocking on the door.

One should not have a one-sided view point of this deal

The question now is how will the continent profit from the massive influx of investment. According to Ranveer Chauhan, “Africa represents a very important palm-oil market, and is currently importing 4,5 million tonnes a year. Kenya is presently importing edible oils for more than $140 million a year. Thus Kenya is its second most important import hub,” adds Mouhamadou Niang, head of the agricultural division at the African Development Bank (AfDB).

In other words, a significantly increased demand could considerably improve the trade balance of these countries, now that agro-businesses are hoping to rake in profits from Africa’s one billion consumers in the long-term.

The lifting of trade barriers

However, Alain Rival considers that the most important aspect of it all is “rural development”. Palm-oil production in both Indonesia and Malaysia has contributed to the emergence of a middle class that didn’t exist in the 1980s and 1990s. The World Bank estimates that with an increase of once percent of arable surface, the poverty rate of the populations concerned could decrease by 0.2 percent.

On top of that, the sector would create one job for every five hectares where plantation starts. According to Sifca, their 44,000 hectares of estate generates 8,600 direct jobs and 25,000 indirect jobs. Still, these successes are inherently dependent on the role of public administrations in managing and developing the sector – equity investment, legislation, control, etc.

The palm-oil craze is confronted with a strong resistance from local populations and NGOs. Much criticism has been raised against exploitative contracts. The most recent controversy is the contract signed between Cameroon and Herakles Farms. The company is also present in Ghana, where it has secured a 90-year exploitation contract to develop palm-oil on 73.000 hectares, at a price of only $1 per year and hectare.

“One should not have a one-sided view point of this deal,” explains Mouhamadou Niang, arguing that the AfDB (Africa Development Bank) is currently considering a possible loan to finance the project. “One should also consider the global socio-economic effects,” he continues. “But what about the infrastructure for transports? And the number of jobs created? The fiscal laws that are applied? The compensation rates of displaced populations?”

According to Niang, large industrial projects are not incompatible with development, as long as they involve small-size exploitations and they respect the RSPO-norm (Roundtable on Sustainable Palm Oil), that takes into account all dimensions of sustainable development, thereby adding the environmental and social dimensions.

Nonetheless, bio-fuels that are exclusively produced for exports should be banned. The discourse is the same at the World Bank which suspended its investments in the sector in 2009. The Breton Woods organisation’s strategic document released on March 31 said that the World Bank no longer finances palm-oil projects, as they cause severe deforestation. The document also said that it will support plantations on debased land that aim to improve the productivity of existing estates. In other words, state governments have a role to play and it is up to them to make sure contracts are balanced and fair.