On 22 July, Chain Reaction Research (CRR) held a webinar to present their findings on a rather interesting subject matter: spot markets.
The spot market refers to one-off transactions that occur outside of long-term contracts, and are typically used by suppliers to get rid of surplus stock and buyers to plug shortfalls in capacity. This is antithesis of the usual business models of long-term contracts, and while transactions made via the spot market are estimated to be much fewer compared to the those long-term contracts, the spot market does pose some degree of risk to No Deforestation, No Peat, No Exploitation (NDPE) compliance.
Here are a few key points and findings by CRR:
Unsurprisingly, there is little transparency by companies when it comes to disclosing information regarding spot market transactions. A good case study would be Sime Darby—between 2017 and 2020, seven non-compliant suppliers entered the company’s supply chain via spot purchases, one of which was PT Saraswati Utama, a company that was heavily linked to illegal deforestation. Sime Darby acknowledged the purchase, but maintained that since it was made on the spot market, it does not have any real link to PT Saraswati Utama.
Purchases made by companies on the spot market appears to be opportunistic in nature rather than a preferred business strategy. Genting and Sawit Sumbermas Sarana are two examples of companies that use the spot market but are currently adopting different business models. For suppliers, however, the spot market can be a viable business model, even if the purchases made are materially insignificant for the buyers. An example would be Palma Serasih, a company suspended from the NDPE market after being found to have cleared 6,500 ha of forestland in East Kalimantan between Jan 2016 and May 2020. In the first quarter of 2020, Palma Serasih’s biggest buyers were LDC and Sime Darby, with Sime Darby confirming that it made two spot purchases of insignificant material from Palma Serasih earlier in 2020.
CRR identifies spot markets as a threat to NDPE compliance due to: 1) the lack of transparency; 2) information on the supply base not being provided until after the purchase is made; 3) the nature of a one-off transaction negates the incentives for a supplier to comply with the NDPE; and 4) the limited incentives to commit to NDPE since companies can still generate enough revenue from spot market transactions alone, i.e. Palma Serasih.