FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 39 Our priority in 2017 is to maintain optimal product margins as the global slowdown in economic activity will likely result in lower sales volumes for our products. This problem will be further compounded by the projected lower harvest of palm kernel, an essential input for our businesses, in both Malaysia and Indonesia in 2017. While we see pockets of opportunity in our FMCG venture, particularly in terms of exports to the region, we expect sales in our home market of Malaysia to become more muted owing to inflationary pressure. Demand for retail products from Asia Pacific (APAC) countries is expected to grow 4.6% in 2017, with particular emphasis on edible oil and fats, and ready-to-cook products. In regards to oleochemicals production, greater competition from other companies in the region, especially Indonesia, will put pressure on our sales volumes and pose a direct threat to our US entity TRT-US. We expect to see an over-supply of both crude and refined glycerine as the continued depression of crude oil prices has resulted in drastic reductions of demand for oilfield and other oil production-related chemicals. On the biodiesel front, we expect to see demand for Palm Oil Methyl Ester (PME) to increase by 20% in the event that the government implements its CLUSTER PERFORMANCE: PALM DOWNSTREAM June decision to allow the use of B7 for the industrial sector. The export market remains challenging in view of low crude prices against high CPO prices. However, we do see growing opportunities for biodiesel in the niche market arising from the implementation of Greenhouse Gas (GHG) policies by the EU and the emerging markets such as India, which is projected to have an annual requirement of 6.75 billion litres of biodiesel by 2022. The Cluster remains a priority under SP20. FGV's downstream footprint is relatively small when compared against competitors, and has significant potential for further growth particularly in the FMCG and oleochemicals markets. The SP20 outlines a number of strategies and 2020 targets for the Cluster in response to the global challenges. The table below provides an overview of the strategy. The Cluster will be grouped as a department under the Plantation Sector following a Group reorganisation in 2017. The Cluster will be operated alongside the Palm Upstream, RD&A and FGVT businesses in order to take full advantage of the entire palm value chain. The grouping of FGV's palm-related businesses together enables greater segmental reporting, improved decision making and will result in greater cost savings moving forward. To become a FMCG regional leader in key destination markets. Develop effective distributorship plan and policy in areas of marketing and product reach. Move further up the value chain towards oleo-derivatives and bio-chemicals to capture premium markets. Build integrated operations in identified markets through collaboration with bulk oils, storage and trading. Consolidate & rationalise excess refining / biodiesel capacity and sub-optimal investments to contain potential financial exposures. PALM DOWNSTREAM CLUSTER Aspiration: Top 20 FMCG in APAC for packed foods, optimise oleochemicals position and venture into high-value innovative palm-based products CHALLENGES STRATEGIES 2020 TARGETS Managing performance of distributors, agents & partners. Identifying destination market strategy in light of tight margin and localised issues especially regional scene. Excess processing capacity in refineries and biodiesel plants due to unfavourable market conditions. Challenging margin from basic oleochemicals and the need to move further to oleo-derivative market space. Fast resolution of recent sub-optimal investments and partnership. FMCG Volume: 0.54 million MT Oleo Volume : 0.35 million MT KEY RISKS TO THE CLUSTER The Cluster faces a number of challenges ranging from the volatile price of feedstock to disruptions in trade agreements. A discussion of the key risks affecting our business is published in our SORMIC. MANAGEMENT DISCUSSION & ANALYSIS More information about the key risks is available on pages 136-137