FGV Annual Report 2015

46 Felda Global Ventures Holdings Berhad Annual Integrated Report 2015 Business Operations Review Palm Upstream A Challenging Year Throughout the financial year, the Palm Upstream Cluster operated under very challenging market conditions and volatile currency fluctuations that subjected palm oil prices to considerable uncertainty. The economic slowdown in China dampened demand for commodities and this is notable given the sheer size of its population and economy. CPO prices experienced further downward pressure, aggravated by the ample supply of oil seeds and collapse of crude oil prices. In August 2015, CPO prices sunk below RM2,000 per MT. Against this backdrop, the upstream business recorded lower profit at RM349 million, declining 55% on a turnover of RM1.9 billion. The Cluster’s performance was primarily impacted by lower average CPO prices, commanding RM2,210 per MT in 2015, where we were able to achieve an average RM2,410 per MT in 2014. Lower yields and higher costs as a result of the dry weather further aggravated the situation. Unusual heavy rainfall towards the end of 2014 and early 2015 triggeredmassive floods which affected some of our estates in the East Coast. As a result, yields were reduced during the first quarter of 2015. The severe flooding had a significant impact on our profitability as about half of FGV’s plantations in Kelantan, Terengganu and Pahang were affected. Homes, roads and other infrastructure were made inaccessible as floods inundated around 36,000 ha of land, of which 10,000 ha belonged to settlers. As a result, we incurred greater operating expenses for flood recovery and about 25,000 MT reduction in FFB production. Group’s FFB production recorded lower volumes for the financial year 2015 at 4.6 million MT, down 7% from 2014. The increased water content in the FFB collected caused a fall in OER. The Cluster’s milling operations reported an average OER of 20.91% in 2015, compared to 21.01% the previous year. FFB yield per hectare fell 5% since 2015 to 17.93 MT, diluted by the low yields from our young maturing plantation land. Consequently, CPO volumes produced during the financial period was slightly lower at 3.10 million tonnes. Aside from the floods, the unusually long drought induced by the El Nino phenomenon later in 2015 disrupted the FFB cropping pattern in our estates. The prolonged dry weather is expected to have multiple laggard impact on FFB production within the next 6 months to 2 years. Our estates, especially in Sabah, have recorded an average decline in rainfall of about 22% for Sabah and 24% for the Group in 2015 compared to the previous year. While El Nino may have a negative effect on our production, it could be a catalyst to boost market prices in 2016. Accelerating our Transformation In the year to come, the Cluster will push ahead with all our existing improvement programmes, making them better and expanding implementation. Our tried and tested best management practices will be replicated and instilled across a larger number of estates to improve our oil yield per hectare. In our endeavour to attain an optimal palm age profile by 2020, the Group will supplement our replanting programme with brownfield acquisitions. In this vein, we added 9,813 ha to our landbank and a 60 MT per hour mill to our portfolio with the acquisition of Golden Land Bhd for RM655 million in March 2016. By 2020, FGV aspires to rank itself among the top five palm players globally in terms of landbank. As available plantation land in Malaysia becomes more scarce by the day, we are opening up our options to grow our Company geographically. Over the next few years, we’ll continue to extend our presence across ASEAN, with particular focus in Indonesia. 22% Immature Young (4-9 years) Prime (10-20 years) Old (21-25 years) >25 years 21% 14% 17% 26% FY15 332,586 ha planted