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KULIM’S CORE PLANTATION SEGMENT RECORDED POSITIVE EARNINGS AS A RESULT OF RISING CPOPRICES AND FAVOURABLE FFB PRODUCTION.


The year under review was a favourable one for Kulim’s core Plantation Segment. Recovering from the El Nino phenomenon experienced in 2016, FFB production rebounded to 995,129 tonnes in 2017. The prices of CPO also began to trend upwards in the first quarter of the year before soaring to a peak of RM2,900 per tonne in the third quarter of 2017. In the fourth quarter of the year, the bullish trend was capped by record high soybean production. As a result, CPO prices trended lower at RM2,400 per tonne as supplies began to normalise.

FINANCIAL PERFORMANCE

Kulim’s Plantation Segment remained by far the biggest contributor to Group revenue, accounting for 67% in2017. Total revenue earned amounted to RM1.03 billion, an increase of 14.22%f rom RM899.52 million recorded in 2016. The increase in revenue was attributed not only to higher FFB and PK production but also higher prices. Kulim achieved an average CPO price of RM2,852 per tonne in 2017, against RM2,532 per tonne registered the previous year.

TOTAL PLANTATION LANDBANK

Kulim has plantation operationsin Peninsular Malaysia as well as in Indonesia, with a total landbank of 65,505 hectares of this, 50,994 hectares or 78% are located in the southern part of Peninsular Malaysia, with the balance of 14,511 hectares that have been granted with Hak Guna Usaha (“HGU”) status in South Sumatera, Indonesia.

Oil palm planted area as at 31 December 2017:

 

Titled area

(ha)

Mature

(ha)

Immature

(ha)

Total Planted

(ha)

Malaysia

50,994

41,497

5,601

47,098

Indonesia

14,511*

3,524

4,821

8,345

Total

65,505

45,021

10,422

55,443

*Area with HGU

As at 31 December 2017, the Group had a total of 55,443 hectares planted with oil palms, of which 47,098 hectares are located in Malaysia. The total planted area of mature plants stands at 45,021 hectares, of which 41,497 hectares are in Malaysia. We only have 3,524 hectares of mature planted areas in Indonesia.

For the year, total production amounted to 997,194 tonnes of FFB, of which 995,129 tonnes were contributed by our Malaysia operations. Our plantation in Indonesia produced 2,065 tonnes of our total production.

CONSOLIDATING OUR INVESTMENT

The Group is continually evaluating and reshaping its portfolio, not only to ensure it remains competitive but also to unlock the value of its investment when an opportunity arises. Kulim has therefore decided to consolidate its investment in Indonesia with the disposal of its stake in 40,645 hectares of plantation land at Central Kalimantan (“BarUt”). The focus now will be on the development of our plantation in South Sumatera (“SumSel”).

In Defining New Perspectives, plans are also afoot in the pipeline to expand our palm oil business by venturing into uncharted territory that could offer a long-term strategic value.


PLANTATIONS IN MALAYSIA

ESTATES OPERATION

2017 was a bumper year for Kulim’s plantation operations given the more favourable weather conditions, a relatively more stable workforce in combination with various initiatives to boost productivity. For the year, the Group’s Malaysian operations produced a total of 995,129 tonnes of FFB, a 16.88% increase from 851,435 tonnes produced in 2016. Accordingly, Yield Per Hectare (“YPH”) increased to 23.98 tonnes from 20.86 tonnes recorded the previous year. The Group’s FFB performance was by far superior as compared to the average yield achieved by the Industry in Johor as well as Peninsular Malaysia, which stood at 20.66 tonnes and 18.70 tonnes respectively.


The increase in the Group’s FFB production mirrored the general industry trend, when a rebound in production during the first half of 2017 has almost offset the collapse in the previous corresponding year. Our estates also recorded a significant increase in FFB production in the second half of the year, which accounted for 63% of the total FFB production for the year.

To ensure its performance is sustainable, Kulim is committed to a programme of replanting to improve the age profile of its palms and for optimal productivity. In 2017, a total of 2,086 hectares were replanted with high yielding clones. Replanting was undertaken on a staggered basis to maximise the crop’s potential before felling. As at year end 2017, the Group’s planted area in Malaysia comprised 58% prime mature areas, 35% immature/young mature areas with old palms above 23 years making up another 7%.

The Malaysian plantation sector continues to experience a tight labour market, which was impacted by additional controls imposed by the Government on the recruitment of foreign workers. This has caused plantation owners to resort to all possible means to attract and retain workers. In 2017, Kulim recruited 1,382 new foreign workers for the Group’s estates.

MILL OPERATIONS

During the year under review, Kulim’s five (5) palm oil mills processed a total of 1,467,696 tonnes of FFB, including 312,962 tonnes sourced from external smallholders and outgrowers. This represented an increase of 9.56% from 2016, attributed mainly by an increase in FFB supplied by the Group’s estates.

Total CPO production from our mills amounted to 299,981 tonnes, a 9.74% increase from 273,354 tonnes recorded in 2016. During the same period, total production of PK also increased by 12.91% to 79,071 tonnes. Our OER improved to 20.44%, from 20.40% achieved previously. As in previous years, our OER is higher than the industry average of 19.21% for Peninsular Malaysia and 19.72% for Malaysia as a whole. We also achieved a higher KER of 5.39%, against 5.23% recorded in 2016.

COST MANAGEMENT AND PRODUCTIVITY INITIATIVES

Being a commodity, palm oil products are largely price takers, as opposed to price makers. Many factors are beyond the control of palm oil producers and they are unable to significantly influence or affect market prices. Given this scenario, producers like Kulim have no option but to look into cost control and productivity improvement measures to enhance their bottom line. For the year under review, the Group was successful in containing field costs at RM251 per tonne FFB, which was lower by 13.66% compared to the budget estimates of RM290.71. We also beat our own 2017 estimate to lower milling costs by 7.94% to RM44.62 per tonne FFB.

As a counter-measure to rising wage costs, it has long been an integral part of the Group’s balance strategy to enhance efficiency and productivity. This is being achieved through the adoption of Good Agricultural Practices and Manufacturing Practices in our plantation operations. These practices have been endorsed by the Food and Agricultural Organisation (“FAO”) of the United Nations and cover an entire spectrum of activities from nursery preparation, field planting, application of fertilizers at appropriate times and quantity, restoring soil organic content, right up to FFB harvesting, transportation and processing.

Over the years, the Group has progressively stepped up its mechanisation and automation programmes to reduce reliance on manual labour. Innovations such as the Scissor Lift Tractor and Bin Systems are now widely deployed throughout the Group for quicker and more efficient loading and evacuation.

Under the 11th Malaysia Plan, 2016-2020, the Government through the MPOB has launched an incentive scheme to promote the ownership and use of machinery on oil palm plantations, especially in harvesting and transportation of FFB. Known as the Oil Palm Industry Mechanisation Incentive Scheme (“OPIMIS”), the incentive is given to approved applicants who stand to reduce the cost of purchase of machinery by some 20%. Kulim’s estates have benefitted from this scheme through the purchase of the mechanical buffalo.

To improve work efficiency at the estate level, Kulim has introduced an In-Field Data Execution and Analytics System (“IDEAS”). The system is designed to capture and record daily data on workers’ attendance, bunch count numbers, loose fruit records and total bunch numbers. Portable digital barcode terminals facilitate the collection and processing of the field data.

RENEWABLE ENERGY PROJECTS

A waste-product in the production of CPO is Palm Oil Mill Effluent (“POME”), which produces huge amount of methane gas from its anaerobic process and has 21 times the Global Warming Potential (“GWP”) compared to other gases. However, the high organic content of POME carries great potential for biogas production, a source of renewable energy. In killing two birds with one stone and to achieve its goal of reducing the Group’s overall carbon footprint to 58% by 2020, Kulim will establish biogas plants at all of its five (5) mills by 2025. At end-2017, three (3) biogas plants have already been installed, with two (2) of them in operation.

The Group’s first biogas plant at the Sedenak Palm Oil Mill commenced operations in 2014. During the year under review, it produced 1,586,552.34 cubic metres of biogas for power generation and flaring and clocked 2,284 hours of operation.

The biogas plant located at Pasir Panjang Palm Oil Mill was commissioned in July 2017. It produced a total of 1,258,159.10 cubic metres of biogas that was utilized as a secondary fuel in the boiler. Our third biogas plant, located at the Sindora Palm Oil Mill, was completed in December 2017.

As another waste product of our milling operations, about 92,650 tonnes of Palm Kernel Shells (“PKS”) were produced. A total of 14,406 tonnes were sold for external use as a replacement for fossil-based fuels.


PLANTATION IN INDONESIA

The 40,645 hectares of plantation land at BarUt was acquired by the Group in early 2014 to diversify its geographical presence into other locations suitable for the cultivation of oil palm. Since then, the conversion of the BarUt land to HGU status has been stalled. In view of the ongoing challenges, Kulim has opted to consolidate its plantation operations in Indonesia.

Kulim and its partner PT Graha Sumber Berkah (“GSB”) mutually agreed that it would be implausible to procure the HGU in North Barito as per the Shareholder Agreement dated 14 February 2014 within the stipulated time period. Both parties have therefore agreed to dispose 95% share of PT WIN in PT Sawit Sumber Rejo, PT Harapan Barito Sejahtera and PT Wahana Semesta Kharisma to GSB. The disposal was completed on 28 December 2017 when GSB signed a Settlement Agreement to fully refund the total amount invested by Kulim in the venture.

In South Sumatera, the rehabilitation process has been carried out according to the programme schedule. PT Tempirai Palm Resources (“PT TPR”) completed 95% of the 2,500 hectares field rehabilitation whilst PT Rambang Agro Jaya (“PT RAJ”) completed 77% of the 2,500 hectares field rehabilitation. PT RAJ’s programme was disrupted by heavy rainfall of more than 45 days during November and December 2017 causing inundated fields.

Progress was also made in infrastructure development, PT TPR has completed 14.7 km of access roads, desilted 27 km of the main canal, completed staff quarters and fertilizer and chemical stores. While, PT RAJ completed 25 km of access road, desilted 39.7 km of main canal, completed staff quarters, weighbridge unit, fertilizer and chemical stores. All construction activity was carried out in compliance with the RSPO’s Principles and Criteria.

Out of 3,222 hectares available in PT TPR under HGU, 2,500 hectares has been identified for development. In meeting with RSPO’s New Planting Procedures (“NPP”), PT TPR will engage RSPO certified consultants to carry out respective assessments and determine suitability of futher development on the identified area. Rest assured, PT TPR will also communicate to respective stakeholders.

Another positive development is the construction of the Jakarta to Palembang toll road, which is expected to be completed in 2018 and will cut across 63 hectares of PT RAJ. This will consequently increase land valuation in the surrounding areas.


RESEARCH & DEVELOPMENT

Research and Development (“R&D”) is the game changer for the global palm oil industry. Thanks to R&D, what was once basically a wild crop has been transformed into one that now dominates the world trade in oils and fats. 

Kulim has long invested in R&D to stay at the fore-front of the business. This is epitomized by the establishment of a dedicated R&D centre known as the Kulim Agro-Tech Centre in Kota Tinggi, Johor. The R&D centre is supported by a team of highly trained and research personnel with expertise in agronomy, remote sensing, microbiology, seed production, plant breeding, biotechnology and chemistry, among other relevant disciplines.


PRECISION AGRICULTURE AND ANALYTICAL SERVICES

The Kulim Agrotech Information System (“KATIS”) is based on the concept of precision agriculture. It aims to optimise field-level management by combining the Global Positioning System (“GPS”), Geography Information System (“GIS”) and the Oil Palm Monitoring Programme to capture agronomic and management data. The data collected gives a quick overview of an estate’s performance so under-performing areas can be identified and remedial actions taken.

Drones are deployed to capture high-resolution aerial photographs, which are then integrated into available GPS digital maps. Apart from the drone, the system is equipped with avionics-autopilot, an imaging sensor (digital camera or any advance sensor) and a cradle system, ground control points and photogrammetric processing software.

From the data collected, we can efficiently improve land utilisation, control precisely the fertilizer recommended, map fields accurately, monitor crop health for signs of diseases and pest infestations.

The Group has also ventured into computerised terrain modeling using digital elevation data taken from an airborne Interferometric Synthetic Aperture Radar (“IFSAR”) sensor. A Digital Elevation Model (“DEM”) is a digital geographic dataset of elevations in xyz coordinates. The elevations for ground positions are sampled at regularly spaced horizontal intervals. The data obtained can be used to improve land preparation during replanting.

ANALYTICAL SERVICES

Kulim’s Ulu Tiram Central Laboratory (“UTCL”) specialises in the chemical and physical testing of samples, making agronomic and fertilizer recommendations to improve productivity and effluent testing for palm oil mills. It is equipped with the latest testing equipment such as the Inductive Coupled Plasma-Optical Emission Spectrophotometer (“ICP-OES”), Atomic Absorption Spectrophotometer (“AAS”), Flame Photometer, UVspectrophotometer and Nitrogen Auto Analyser to ensure fast and reliable analytical results for both in-house and external customers.

As an assurance of quality, UTCL has maintained its accreditation to MS ISO/IEC 17025 SAMM (Skim Akreditasi Makmal-Makmal Malaysia), the main ISO standard for testing and calibration laboratories. It also participates in the National Crosscheck, an annual event organised by Agricultural Lab Association of Malaysia (“AgLAM”).

UTCL’s expertise has been widely acknowledge and recognised globally. This is underpinned by the Mutual Recognition Agreement (“MRA”) endorsed by the International Laboratory Accreditation Cooperation (“ILAC”). ILAC is the international organisation for accreditation bodies operating in accordance with ISO/IEC 17011 and is involved in the accreditation of conformity assessment bodies including calibration laboratories, testing laboratories, medical testing laboratories and inspection bodies. Over 90 accreditation bodies from more than 80 countries have signed the ILAC MRA.


AGRONOMY

Agronomy is the science and technology of soil management and crop production. Kulim has a database built up over more than 20 years to gauge the performance of different planting areas, provide analysis and recommendations on best practices, identify sites for new agronomy trials and put forward suitable measures to overcome outbreaks.

Kulim’s Agronomy Unit has expanded its responsibilities from merely providing technical advice and services to undertaking full-fledged R&D activities. Its research findings are shared with estates across the Group to enhance the monitoring of field performance and facilitate bench-marking against the high-performers.

MAXIMISING YIELDS

By applying the best management practices, Kulim, like many other plantation companies, is increasingly turning to agronomic services to maximise yields and outputs in a sustainable manner :

• Nutrient management as well as soil characterisation and conservation are deployed to improve soil management.

• Long-term fertilizer studies look into the efficiency of specific nutrient applications and evaluate the use of pesticides for effectiveness and cost competitiveness, whist ensuring it is less toxic and more environmentally friendly.

• One of the primary tasks of Kulim’s agronomists and chemists is to closely monitor the fertilizers used at all its estates to ensure that they are of a good quality.

• Emphasis is also placed on achieving an optimal balance of inorganic and organic fertilizers so as to promote efficient energy usage and sustainably achieve higher oil palm yields. This will also enhance soil ameliorant, thus improving soil fertility and health.

• In the wake of increasing prices of inorganic fertilizers, biocompost produced from the Group’s milling operations have enabled the efficient use of by-products covering larger planting areas.

• Whilst it has been proven that achieving high yields of above 30 tonnes per hectare is possible with good terrain and rainfall, the challenge in going forward is to sustain the high yields.

• Cognizant of the importance of water, especially in the drier zones of the Segamat area, Kulim has embarked on studies utilizing available water resource to irrigate small sections of its plantation under a yield intensification initiative.

INTEGRATED PEST MANAGEMENT (“IPM”)

Based on experience and integral to its sustainability agenda, Kulim recognises the need for a balanced IPM approach to pest and disease control so as to reduce an over-dependence on pesticides. Kulim has the distinction of being amongst the first industry players to collaborate with well-known Tyto Alba (barn owl) researcher, Dr Chris Small, on the use of owls to control pest population in oil palm plantations in the early 1980s. Barn owls and snakes have a useful role to play in helping keep check on rodent populations, while predatory insects, parasitoids and entomopathogenic fungi keep defoliating insects at bay.

Only in an outbreak situation, where natural predatory controls are inadequate, do we resort to using insecticides. Kulim has also adopted mechanical control techniques in land preparation to minimise the spread of Ganoderma infections. Planting of beneficial plants has also been advocated to provide a conducive environment for parasitoids and predators to deter defoliating insects. Pheromone traps have also been widely used in replanting areas to control the Oryctes rhinoceros beetle population, which can inflict serious damage on young oil palms.

RESEARCH COLLABORATION

Kulim has long collaborated with research institutions such as the MPOB and University Putra Malaysia (“UPM”) for the further advancement of the palm oil industry. A long-standing collaboration is research into a major oil palm disease, Ganoderma, with the aim of determining the possible mitigating factors, which include the use of microbes. Another collaborative project that is in the pipeline involves further research into plant recessive genes to overcome diseases.

ZERO-BURNING REPLANTING

The zero-burning replanting technique has been adopted as the industry standard in palm oil replanting since the early 1990s. As opposed to burning, the environmentally-friendly technique involves the shredding of oil palm stands and leaving them to decompose naturally in situ, thereby recycling nutrients into the soil. Apart from complying with local environmental legislation and RSPO, zero-burning is our contribution to minimize global warming through emissions of Green House Gases (“GHG”).


PLANT BREEDING

CONVENTIONAL BREEDING

The past few decades have seen significant progress in oil palm breeding programmes to increase yields. However, it is important for the sector to continue improving agricultural productivity in the face of increasing competition from other vegetable oils.

While conventional breeding will continue to play an important role in yield enhancements, industry players are continually looking towards advancements in variety improvements, with relatively shorter production cycles and better yields.

The primary objective of Kulim’s palm breeding programme is to produce elite planting materials to achieve high oil yields. To this end, several new crosses were nurtured for the 2017 planting programme.

Experiments were undertaken to find new sources of improved Dura and Pisifera parental palms that can be used as future planting materials.

Besides dami duras, another two different duras of ex-Oil Palm Genetic Laboratory (“OPGL”) selection were used as mother palms for dura population enrichment. Our efforts have resulted in a total of 0.4 million commercial DxP seeds being produced and sold.

TISSUE CULTURE

a) Selection of high yielding tenera clones for recloning

A number of tenera palms with Oil/Bunch (“O/B”) over 33% and oil yield above nine (9) tonnes per hectare per year from three (3) clones of different genetic backgrounds were selected and 24 palms were recloned. A total of 3,500 high yielding ramets were commercially field planted.

b) Cloning of elite dura

A number of seedlings of two (2) elite clonal duras of ex-OPGL selection were laid down in nursery and will be used as mother palms for future semi-clonal DxP seed production. The O/B of the dura clones are 23% and 31%, respectively, which is expected to produce in higher oil yield.

Two (2) embryo-cultured pisiferas of different origins were laid down in nursery and to be planted in 2018 for conservation and further selection for bi-clonal DxP seed production.


TOTAL QUALITY MANAGEMENT

Kulim has embraced Total Quality Management to systematically address every area of its business processes. Five (5) of the Group’s operating units, namely Tereh Selatan Estate, Palong Cocoa Palm Oil Mill, Tereh Palm Oil Mill, Sindora Palm Oil Mill and Sedenak Palm Oil Mill have all earned accreditation to ISO 9001:2008, the International Standards Organisation’s (“ISO”) flagship standard that specifies the requirements for a Quality Management System (“QMS”). Having an ISO 9001 QMS in place enables the Group to continually monitor and manage quality across all its operations and identify ways to achieve and benchmark consistent performance and service. Internationally, it is the QMS of choice, with over 1.1 million certificates issued worldwide.

Kulim aims to grow its business sustainably. In this regard, three (3) of its operating units namely, Sindora Estate, Sedenak Estate and Sindora Palm Oil Mill, have also earned certification to ISO EMS 14001:2004. The world’s most recognised environmental management system standard. In discharging its responsibility to its stakeholders, Kulim has embraced ISO EMS 14001:2004 as a means to reduce its environmental footprint.

The new revised versions of both ISO QMS 9001:2015 and ISO EMS 14001:2015 have recently been enforced. Beginning March 2017, all of Kulim’s certified units have been transiting to the new standards. 

Apart from a number of new requirements and concepts, the latest editions incorporate new approaches in the Quality and Environmental Management System. In addition to meeting rising stakeholder expectations, the focus will be on performance as opposed to merely managing the processes.


Kulim’s UTCL has also earned certification to ISO/IEC 17025, which is the main ISO standard used by testing and calibration laboratories to be deemed technically competent. During the year under review, UTCL has expanded the scope of testing for fertilizers and water for water quality index or WQI.

Since May 2015, four (4) of our palm oil mills, namely the Palong Cocoa Palm Oil Mill, Tereh Palm Oil Mill, Sindora Palm Oil Mill and Sedenak Palm Oil Mill, have earned Halal Certification for its products, issued by Jabatan Kemajuan Islam Malaysia (“JAKIM”). Our Pasir Panjang Palm Oil Mill was the latest addition to this list, having received Halal Certification for a period of validity of two (2) years starting from 1 February 2017, subject to an annual audit review.

5S CERTIFICATION

JCorp has mandated that all companies within its corporate umbrella be certified to ‘5S’, in a quest to effect continual improvements in the workplace. In embracing 5S as a quality management tool, Kulim strives to attain the following main objectives:

• Improve the corporate image of Kulim

• Ensure the participation of all employees to inculcate good work habits

• Achieve an average score of 75% for all zones

• Set a target of file and item retrieval of 30 seconds

With its origins in Japan, 5S is a management tool to improve workplace efficiency, whilst reducing costs and boosting productivity. Abbreviated from the Japanese words, Seiri, Seiton, Seiso, Seiketsu and Shitsuke, it loosely translates into Sort, Set in order, Shine, Standardise and Sustain.

The 5S principle is premised on the notion that cleanliness and tidiness contributes towards a safe and conducive work environment. This in turn, would have a bearing on performance and ultimately, profitability.

Kulim obtained its QE/5S certification on 8 January 2015 and successfully cleared the first Surveillance Audit on 17 January 2016. Subsequently, internal audits were conducted on 28 August and 27 November 2016. We were also successful in the second Surveillance Audit conducted on 12 March 2017, with Certification Body of Malaysia Productivity Corporation (“MPC”).


OUTLOOK AND PROSPECTS

At the first Palm Oil Internet Seminar (“POINTERS”) organized by the Malaysian Palm Oil Council (“MPOC”) in January 2018, a panel of experts was bullish about CPO prices in the first quarter of 2018. The average price is forecast to settle at a range between RM2,600 and RM2,700 per tonne for the benchmark CPO spot price. However, for the remainder of the three quarters of 2018, the experts anticipate that CPO prices will trend lower, settling at between a range of RM2,500 to RM2,659 per tonne (Source : MPOC, CPO Price Trend for 2018).

The segment will also have to contend with the perennial challenges presented by labour shortages, rising operating costs and dwindling demand in traditional markets. The industry as a whole also has to contend with protectionist moves, such as draft measures being put in place by the European Parliament to ban the use of palm oil in biofuels by 2021.

The Malaysian palm oil industry celebrated its 100th Anniversary in 2017 and the prospects for the industry going forward remain bright. Palm oil is a vital component in the global food security basket. From cookies and icecream to instant noodles, about half of all packaged foods sold in supermarkets contain palm oil and constitutes up to 80% of our daily fat consumption. Contrary to what some lobbyists are advocating, palm oil cannot be taken out of the vegetable oil market altogether and each year, more value-added uses for palm oil are being developed. The challenge for the industry is to enhance the image of palm oil and create better acceptance of the commodity through awareness of various technological and economic advantages and environmental sustainability.