Investors should reassess their portfolios as the European Union's stringent new regulations targeting deforestation are poised to disrupt companies with exposure to critical commodities, according to analysts at Jefferies Financial Group Inc. The EU’s Deforestation Regulation (EUDR), aimed at curbing global deforestation, places companies dealing in raw materials like rubber, palm oil, cocoa, and livestock products, such as beef, directly in the spotlight.
The EU’s ambitious goal is to halt 10 percent of deforestation worldwide and reduce carbon dioxide emissions by at least 32 million metric tonnes annually. These regulations have far-reaching implications, affecting all investors and businesses that operate within the EU or have trading relationships with the bloc.
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Jefferies analysts, led by Luke Sussams, warned that companies lacking robust policies on deforestation and biodiversity are at risk of being caught out by the EU's increased due diligence requirements. The regulation mandates that companies trace the raw materials used in their products back to their place of origin, ensuring that these commodities were not sourced from deforested lands and that human rights were not violated in the process. Compliance checks must cover materials sourced as far back as 31st December 2020, with substantial fines for non-compliance.
Among the companies potentially affected are DN Automotive Corp., Hankook Tire and Technology Co., Kuala Lumpur Kepong Berhad, Nexen Tire Corp., Golden-Agri Resources Ltd., Darling Ingredients, and SD Guthrie Berhad. The ripple effect of the EUDR is already being felt in global markets. Concerns over supply shortages led to a surge in coffee futures for September delivery, resulting in the widest price spread since trading began in January 2022. Additionally, US papermakers warned in July of rising prices for essential hygiene products, including diapers and sanitary pads, due to the new regulations.
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Despite requests from companies and government officials, particularly from the US, to delay the regulation's implementation due to its extensive scope, the EU has so far resisted amending its rollout timeline. The EUDR is scheduled to come into effect on 30th December, with a six-month grace period for small businesses to comply.
As the regulation looms, investors and companies must prepare for the substantial changes that the EUDR will bring to the global marketplace, reshaping the way businesses operate and how commodities are sourced and traded.
