The high palm oil prices were a result of
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101 CORPORATION BERHAD (9027-W) INCORPORATED IN MALAYSIA I 024 The high palm oil prices were a result of lower availability of palm oil in the global market caused by the continued effect of El Nino and by lower Indonesian exports which pushed prices up from the usual USD500 level to almost USD700 per MT, as well as a result of the exchange rate effect of a weaker Ringgit. Apart from the above factors affecting CPO, PK benefited from increased demand from the local oleochemical industry which has seen significant increase in production capacity over the last two years. The overall operating margin for our Plantation Division for the year under review was 53% as compared to 48% for 1998. The full effects of price increase were not reflected in operating margins because on the flip-side, production cost went up by about RMlOO per MT of CPO or approximately 9% because of the higher cost of imported fertilisers, chemicals and equipment as well as contributions towards the local cooking oil stabilisation scheme. 101 CORPORATION BERHAD (9027-W) INCORPORATED IN MALAYSIA I 025 After the several acquisitions in 1998, there was no significant acquisition in 1999. Total planted area increased by 2,031 hectares to 88,374 hectares as at 30 June 1999, through new planting; of which, oil palm accounted for 85,706 hectares. The total matured area for oil palm increased by 6,437 hectares or about 100/o to 69,323 hectares as at fiscal year end. The average mature area under harvest during the year, which takes into account the actual month immature areas are brought into harvesting and which is a more relevant denominator for yield computation, showed a more pronounced increase of 32% from 50,526 hectares to 66,958 hectares. Past Prime FFB production increased by 35% to l,279,149MT reflecting an average 7.6% 6 , 5 2 4 H a ‘1 Prime yield of 19.10 MT per hectare (vs. 18.80 MT for 1998) which is still on Due 6.3% ‘\\i‘\ 32.7% the low side because of the carry-over effect of El Nino as well as the 28,008 Ha dilution effect of a sizeable portion of low yielding young fields brought into maturity. Young 34.3% 1 29,394 Ha Oil palm operating profit per average mature hectare increased by 28% to RM5,758, with higher palm product prices more than adequate to compensate for the 9% increase in production cost. Oil Palm Hectarage...By Age On the processing side, the 45/90 MT per hour Ladang Sabah palm oil mill (total oil palm area = 85,706 Ha) was commissioned during the year. With this, the Group has a total of 9 CPO mills with a combined processing capacity of about 1,900,OOO MT of FFB throughput per annum. Another mill with a 40/80 MT per hour capacity is under construction at Sakilan Estate, Sabah. Mature 92.7% 29,142 Ha Sabah - 63% Oil Palm Hectarage...By Region Peninsular - 37% (total oil palm area = 54,263 Ha) (total oil palm area = 31,443 Ha) 101 CORPORATION BERHAD (9027-W) INCORPORATED IN MALAYSIA I 026 FFB throughput for the year was 1,445,085 MT which was 25010 higher than the previous year. Extraction rates at 19.49% for CPO and 5.17% for PK, showed scant improvement; on the low side for similar reasons as those affecting FFB yields. As for rubber which contributes only about 1% of plantations earnings, the production for the year was 4,278,OOO kg (vs. 4,097,OOO kg, for 1998) even though total planted area decreased further from 2,750 hectares to 2,348 hectares. On capital expenditure, the Group spent RM39.9 million on new planting (vs. RM68.0 million in 1998) and RM25.0 million (vs. RM65.9 million in 1998) on other capital equipment including mills, agriculture equipment and vehicles, staff quarters and other amenities. The trend for CAPEX is expected to be on the decline as most essential spending has already been done. 101 CORPORATION BERHAD (9027-W) INCORPORATED IN MALAYSIA I 027 During the year, the Group paid the following cess contribution and special taxes to the relevant authorities: PORIM and PORLA cess R M 3,098,OOO PORLA’s cooking oil stabilization scheme R M 8,277,OOO Windfall Profit levy RM 764,000 Sabah Sales Tax R M 2,314,OOO RM 14,453,OOO Rubber cess RM 537,000 RM 14,990,OOO The Division employs about 13,000 employees for the entire plantation operation. For an industry that is labour intensive with numerous remote sites, having sufficient motivated and well trained personnel at all level remains the most important task in estate management. In order to ensure we have the strength in depth, continuity and sufficiency for the future, the Group is setting up a cadet training centre and stepping up on the recruitment of fresh graduates as planting cadets. On the Research Et Development front, the focus is on breeding better planting material, enhancement of propagation techniques including tissue culture, seedling production, enhancement of cost effectiveness of fertiliser applications and recycling or bio-mass waste for fibre production. Overall, estate management is challenged to ensure we continue to improve on yields and extraction rates and to lower costs so as to ensure we remain the most efficient producer. 101 CORPORATION BERHAD (9027-W) INCORPORATED IN MALAYSIA 1 028 Prospects The Group has been able to consistently obtain superior operating margins and returns on its plantation assets even though a substantial portion of its palms are still below their optimum yield potential or even not yielding as yet, mainly because of stringent cost effective agronomic practices and productivity controls. Looking forward, over this next five year period, we can expect a very substantial increase in plantation earnings even if prices do not pick up, because of the following reasons: (i) at least a 15% increase in overall average yield per hectare as the young palms gradually peak; (ii) a 24% increase in mature area when the 16,383 hectares are gradually brought into harvesting; (iii) at least a 10% increase in CPO extraction rates because of change in age profile as well as process quality control measures adopted; and (iv) at least loo/o reduction in unit cost as yields improve and also because of our continuous relentless attention to cost effectiveness.