Operations Review
Tropical Oils
(Plantation, Manufacturing and Merchandising)
The Tropical Oils (Plantation, Manufacturing and Merchandising) segment comprises the Group’s entire value chain of palm oil assets from plantations and palm oil mills to processing, merchandising, branding and distribution of palm oil and laurics related products including oleochemicals, specialty fats and biodiesel.
Plantation
We are one of the world’s largest oil palm plantation owners with a total planted area of 239,935 hectares (ha) as at 31 December 2017. Around 68% of our total planted area is in Indonesia, 24% in East Malaysia and 8% in Africa. Through joint ventures, we own plantations in Uganda and West Africa of approximately 46,000 ha. Wilmar also directly manages 34,772 ha under smallholder schemes in Indonesia and Africa, and another 149,000 ha under smallholder and outgrower schemes through the joint ventures and associates in Africa.
The medium to long-term growth of our plantation operations is supported by the relatively young plantations with an average age of 11 years. Around 58% of the plantations are at the prime production age of seven to 18 years and 23% are at age six years and below.
Sustainability
Sustainability is an integral part of our business and operations. Since announcing our No Deforestation, No Peat, No Exploitation Policy in December 2013, we have continued to further our commitment to drive sustainable practices and encourage collective action to accelerate supply chain transformation.
In 2017, we launched our Child Protection Policy to enhance the welfare of children living in oil palm plantations where their parents work. The policy will be implemented throughout our global operations, including our joint ventures, third-party suppliers and contractors.
In a first for the palm oil industry, we announced a collaboration with ING Bank which pegs our sustainability performance to the interest rate of an existing facility. We believe that incorporating sustainability metrics into various aspects of our business, from daily operations to corporate financing, is key to creating value for our stakeholders.
For more information on our sustainability efforts, please refer to the Sustainability chapter.
Plantations Geographic Locations as at 31 December 2017
Plantations Age Profile as at 31 December 2017
Manufacturing and Merchandising
We are the world’s largest processor and merchandiser of palm and lauric oils, processing palm and lauric oils into refined palm oil, specialty fats, oleochemicals and biodiesel. The crude palm and lauric oils are sourced from our own plantations, smallholders under the Plasma and Outgrowers schemes as well as third-party suppliers.
Through economies of scale and commitment to best practices in production, we have been able to sustain as one of the most cost-efficient producers in the industry. This efficiency is complemented by our strategically located facilities found near the coastal areas of both origin and destination markets, which enable us to manage transport, logistic and operational costs effectively. Together with an extensive distribution network and sales touchpoints spanning more than 50 countries, Wilmar is well-positioned to capitalise on market intelligence acquired throughout the entire supply chain to meet the ever-changing demands of our customers.
Within the Tropical Oils segment, our activities also include manufacturing, merchandising and distribution of consumer pack branded tropical oils. We are the leading producer and seller in markets such as India, Indonesia, Vietnam, Bangladesh, Sri Lanka and several African countries. In the key locations of India and Indonesia, we have a market share of around 20% and 35% respectively.
In June 2017, we entered into a conditional joint venture agreement with Lion Corporation (Lion) for the manufacture and sale of methyl ester sulfonate (MES). MES is used in the manufacture of products such as soaps and detergents. Lion, which is listed on the Tokyo Stock Exchange, is engaged in the manufacture and sale of toothpastes, toothbrushes, soaps, detergents, hair and skincare products, cooking-related products and pharmaceuticals. The transaction will be completed upon approval from all relevant authorities and certain conditions being fulfilled.
In August 2017, we announced the establishment of a joint venture with Aalst Chocolate Pte Ltd (Aalst Chocolate), a homegrown chocolate manufacturer in Singapore. Combining our expertise in the manufacturing of specialty fats used in the production of chocolates and compounds, with Aalst Chocolate’s long experience in chocolate and compound-making, this partnership aims to expand Wilmar’s offering and services to bakery products and confectionery manufacturers.
In November 2017, Wilmar and Cargill entered into an agreement for the purchase of Cargill’s edible oil facilities in Kuantan, Malaysia, which include a palm oil refinery and a neighbouring storage facility. This acquisition marks our first presence in the east coast of Peninsular Malaysia. Located in the Kuantan Port, these facilities will strengthen our sales and distribution network in Malaysia and serve as a strategic location for regional exports. The sale will be completed upon approval from all relevant authorities and certain conditions being fulfilled.
As at 31 December 2017, the Group has plants in the following countries:
| Refinery | Oleochemicals | Specialty Fats | Biodiesel | ||
|---|---|---|---|---|---|
| Subsidiaries | |||||
| Indonesia | 25 | 4 | 4 | 11 | |
| Malaysia | 14 | 3 | 1 | 2 | |
| China | 51 | 10 | 6 | 0 | |
| Vietnam | 4 | 0 | 2 | 0 | |
| Europe | 0 | 2 | 0 | 0 | |
| Africa | 2 | 0 | 2 | 0 | |
| Others | 4 | 0 | 1 | 0 | |
| Total no. of plants | 100 | 19 | 16 | 13 | |
| Total capacity (million MT p.a) | 30 | 2 | 2 | 3 | |
| Associates | |||||
| India | 39 | 2 | 5 | 0 | |
| China | 7 | 2 | 2 | 0 | |
| Russia | 4 | 0 | 1 | 0 | |
| Ukraine | 2 | 0 | 1 | 0 | |
| Malaysia | 3 | 0 | 0 | 0 | |
| Africa | 10 | 0 | 4 | 0 | |
| Bangladesh | 2 | 0 | 0 | 0 | |
| Europe | 6 | 1 | 1 | 0 | |
| Others | 0 | 0 | 1 | 1 | |
| Total no. of plants | 73 | 5 | 15 | 1 | |
| Total capacity (million MT p.a) | 13 | < 1 | 1 | < 1 | |
Industry Trend in 2017
In 2017, global palm oil production recovered strongly as the impact of El Nino faded, with production growing 14% from 59.1 million MT in 2016 to 67.1 million MT. The two largest producing countries, Indonesia and Malaysia, accounted for about 84% of global palm oil production. Indonesia’s production grew 13% to 36.5 million MT and Malaysia’s production increased 13% to 19.6 million MT.
Global demand for palm oil grew 4% to 64.9 million MT in 2017. Demand in Indonesia decreased marginally to 9.1 million MT partly due to the lower deliveries of biodiesel in May and June of 2017. Demand in India remained steady, with a slight increase of 1% to 9.3 million MT, affected by an import tax hike in November 2017. Demand in China declined 2% to 5.0 million MT due to rising edible oils inventories after record soybean imports and strong purchases of rapeseed oil.
Crude palm oil (CPO) prices weakened significantly towards end-February 2017 due to the strengthening of the Malaysian Ringgit and expectations of improving palm oil production. Prices remained on a general downward trend for the first half of the year. In July, CPO prices started to rise due to expectations of strong export demand coupled with weaker than anticipated supply. However, prices eased in November as Malaysian palm oil production was larger than expected. CPO prices closed at RM2,503 at the end of 2017, down 21% from RM3,163 at the beginning of the year.
Our Performance
In 2017, pre-tax profit for the Tropical Oils division declined 38% to US$426.2 million from US$689.2 million in 2016. The weaker performance was mainly due to lower processing margins in the downstream businesses.
In Plantations, production yield improved 4% to 19.7 MT per ha from 19.0 MT per ha in 2016 and led to a 3% increase in total fresh fruit bunches to 3,922,904 MT from 3,817,969 MT in 2016.
Sales volume for the manufacturing and merchandising businesses declined marginally to 23.2 million MT from 23.4 million MT in 2016. Higher CPO prices in the first nine months of the year led to an overall 7% increase in segment revenue to US$18.07 billion from US$16.86 billion in 2016.
Outlook and Strategy
Global palm oil production is expected to increase 5% to 69.3 million MT for the marketing period from October 2017 to September 2018 as production continues to recover. We remain positive about the long-term prospects of palm oil with the rise of global demand for our food and non-food applications such as oleochemicals, specialty fats and biodiesel.