FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 51 MOVING FORWARD Procuring rawmaterials remains our main challenge in 2017. To continuously import raw materials from overseas may not be sustainable as there are several potential limitation factors to be taken into account such as distance of source, exchange rate, supply due to weather, government bureaucracy and quality, therefore we are looking to diversify our current products line- up. In addition to Standard Malaysian Rubber (SMR20), we will look into other possible downstream activities such as niche market products and specialised rubber products, i.e. rubber compounding. We also plan to concurrently further enhance and promote Ekoprena & Pureprena, a form of epoxidised rubber or green rubber, an innovation from our collaboration with the Malaysian Rubber Board (MRB). There are also plans underway to enhance our trading unit to venture further into NR trading activities. We are also in the process of increasing the capacity of our rubber processing facility in Tbong Khmum Province, Cambodia from the current 12,000 MT to 48,000 MT annually. This is to take advantage of the abundant raw materials within the province and other neighbouring provinces. CLUSTER PERFORMANCE: RUBBER In regards to the supply of NR, we expect NR production to trend downwards in 2017 as a result of the cease in tapping due to the low trend in NR price. The slowing world economy will also dissuade producers from investing in rubber supply thereby leading to further reduction in rubber surplus to 49,000 MT in 2017 from 93,000 MT in 2016. The Malaysian average price for SMR20 was recorded at RM5,665 per MT in 2016, up by nearly 9% from the 2015 average. NR prices are expected to recover in 2017, but will still be well off their highest in 2012. The World Bank commodities price forecast in USD indicates that Malaysian rubber is expected to hit USD1.44 (RM5.90) per kg in 2017. FGV's vision is to create a sustainable integrated rubber enterprise covering the entire length of the NR supply chain. The table below provides an overview of the challenges, strategies and targets for the Cluster. Under FGV's new organisational structure, the Cluster will be dissolved and be transformed into a department under the LO Sector. The rubber business will be managed by a Head of Department as a unit reporting to the LO Sector's Chief Operating Officer resulting in savings from lower staff cost. To improve utilisation through importation of raw rubber. Rationalisation of low performing assets and investments. No further assets acquisition, continuous review of structure & "scale down to long-term exit strategy" in view of market challenges. Focus on niche and premium markets for Green Rubber products. Collaboration with product manufacturers to establish stable offtakes at better pricing. RUBBER CLUSTER Aspiration: Delivering sustainable business across rubber supply chain CHALLENGES STRATEGIES 2020 TARGETS Shortage of raw material resulting in low utilisation. Weak rubber price driven by crude oil movement. Competition from synthetic rubber and weak consumption growth. Upstream replanting requires fast completion and results. Suboptimal assets and investments call for fast resolution. Rubber Production Volume: 0.27 million MT KEY RISKS TO THE CLUSTER The Cluster faces a number of challenges but the main concerns are the availability of raw material for our rubber processing facilities in Malaysia and the fluctuation of our sales margin attributed to NR market price volatility. A discussion on the key risks affecting the business is published in our SORMIC. MANAGEMENT DISCUSSION & ANALYSIS More information about the key risks is available on pages 136-137