Under the Radar: How sandalwood is transforming crime and commerce in Asia
The boom in sandalwood prices is creating opportunities in Australia, India and beyond but high prices are also driving a boom in crime as well.
Sandalwood has become a boom market, as rising demand combined with a supply shortage has led to between 20 and 25% annual price increases, resulting in a litre of sandalwood oil retailing five times higher than an equivalent amount of silver. While sandalwood products are consumed globally, Asia is the largest growth market, with China alone accounting for half of expected global demand growth – set to increase fivefold to 20,000 tonnes per year by 2025. Sandalwood’s importance in traditional medicine, woodworking, Hindu and Buddhist rituals, pharmaceuticals and perfumes means there is ample demand, allowing the few companies operating in this sector to reap substantial profits.
The global sandalwood boom
Mature sandalwood trees weigh around 100 kg, of which 20 kg is the aromatic heartwood, which in turn produces between 600-700ml of oil per tree. That may not sound like a lot, but one litre of oil sells for around $3,000 – even the waste chippings sell for $1,000 per ton. Moreover, sourcing hurdles allow companies to charge almost 100% premiums on top of global prices to provide consumers with legal and sustainable supplies. Currently, 95% of global production comes from India, yet 90% of this enters the market from wild and mostly uncontrolled jungle harvesting, and is often fraudulently cut with lesser woods.
As a result Indian sandalwood is almost extinct in the wild, and harsh government regulations have seen official Indian production fall from 4,000 tonnes in 1970 to just 250 tonnes in 2016.
This trend has allowed other countries, notably Australia, to enter the sector, creating world leading companies such as TFS Corp and Santanol. 2017 is a very important year for Australian producers, as initial investments made 15 years ago are only now coming online, as the slow-growing trees take a long time to mature. To meet global demand, TFS is seeking to increase production thirty-fold to 10,000 tonnes from its 12,000 hectares worth of plantations (home to 5.4 million trees) in northern Australia. Combined with Sanatol’s 2,200 hectares, the assets of these two companies dwarf the amount of cultivated land in India, which stands at just 6,000 hectares.
Even tiny Fiji is jumping on the sandalwood bandwagon, with USAID supported operations beginning on the island chain. Interestingly, alongside the millions of dollars islanders are expecting to earn in the coming years, sandalwood cultivation is being used as a means to save marine ecosystems, by diversifying income streams and thus lessening the pressure from fishing and marine resource exploitation.
While many restrictions on the cultivation and felling of sandalwood remain in India, local governments have in recent years undertaken some measures to increase legal production and maintain India’s hitherto monopoly. For decades all sandalwood trees in India, including those on private land were considered state property, yet recent reforms have relaxed some restrictions leading to an increase in private and commercial cultivation, with a growing number of landowners coming forward and declaring their sandalwood plots. India is aiming to increase cultivation by 2,000 hectares a year, yet given the long growing period large, predominately Australian companies will continue to dominate the market for the foreseeable future.
The new oil wars
Sandalwood is increasingly being referred to as ‘liquid gold’, and as such there has been a rise in criminal activity involving the fragrant commodity, especially since the vast majority of global supply stems from unregulated or suspect sources. Indeed, Indian forestry officials recently confronted a sandalwood smuggling gang in Ramakrishnanagar, Mysore, killing one smuggler in the process on February 11th. Sandalwood smuggling in India has substantially increased in recent years, with police killing 20 alleged smugglers in one operation alone in April 2015.
Similarly, on February 16th, Hong Kong police arrested a triad-controlled smuggling ring which had accumulated $3.8 million over the past two years from smuggling red sandalwood and electronics. Police seized 4.5 tonnes of sandalwood logs which the gang was smuggling from Hong Kong into mainland China. Sandalwood sells for as little as $13 per kilogram in various Asian black markets, but sells from more than $130 a kilogram in mainland China. Red sandalwood is also known as ‘red gold’ and his highly prized for furniture and ornamental carvings. $1.1 million worth of red sandalwood was intercepted in just one shipment from Malaysia in 2016, and Hong Kong police confiscated 38 tonnes of red sandalwood in 2015.
Australia has also not been immune to sandalwood related crime, with AustOil boss Stephen Darley in court as of late January for his alleged involvement in large scale sandalwood thefts. After unsuccessfully lobbying the government – which strictly regulates the sector – Darley is said to have conspired with a ring of thieves to steal hundreds of tonnes of sandalwood from crown lands in order to increase production.
Biotech, not bandits the biggest threat
All these incidents highlight a new and growing dimension to international wildlife and flora smuggling, which puts the sector at risk from backlash from eco-conscious consumers. Moreover, the slow maturation rate of sandalwood trees makes the sector especially vulnerable to disease and weather related losses.
With these issues in mind, the largest threat to traditional sandalwood operations is not smuggling or environmental risks, but rather biotech companies using DNA splicing technology. While cheap petrochemical imitations are already available, there are growing efforts to use yeast, bacteria and algae to produce plant compounds from difficult to cultivate, expensive and endangered species. Specifically, DNA from sandalwood trees can be infused into yeast cultures, which can produce the precious compounds in days – instead of years – in the lab. Moreover, by piggybacking on the glut in global sugar production (which the yeast cultures consume), industrial scale production in the laboratory is increasingly feasible.
Chikelu Mba of the UN Food and Agriculture Organization notes that “if there is no difference between perfume that is extracted from a massively cultured (bacterium) in the laboratory and the essential oil you can extract from a plant, why would you not go for the cheaper route?”
While global demand does not appear to be waning, there are a range of risk factors which both potential investors and consumers need to be aware of in order to avoid letting talk of a ‘liquid gold rush’ lead those dreaming of a fragrant fortune into folly.
Under the Radar uncovers political risk events around the world overlooked by mainstream media. By detecting hidden risks, we keep you ahead of the pack and ready for new opportunities.
Under the Radar is written by Senior Analyst Jeremy Luedi.