Industry Overview

6. INDUSTRY OVERVIEW 6. INDUSTRY OVERVIEW (Prepared for inclusion in this Prospectus) Frost & Sullivan Malaysia Sdn Bhd(522293W)  Suite E-08-15, Block E, Plaza Mont’ Kiara,  2 Jalan Kiara, Mont’ Kiara,  50480 Kuala Lumpur,  .2 8 MAY 2012  Malaysia. Tel: +603.6204.5800  Fax: +603.6201.7402  The Board of Directors  www.frost.com  Felda Global Ventures Holdings Berhad  Level 3, Balai Felda  Jalan Gurney 1  54000 Kuala Lumpur  Malaysia  Dear Sirs,

Executive Summary of the Independent Market Research Report on the Oil Palm, Sugar and Rubber Industriesj and Selected Key End-User Industries for FELDA Global Ventures Holdings Berhad (“FGVH” or the “Company”) We, Frost & Sullivan Malaysia Sdn Bhd (“Frost & Sullivan”), have prepared the Executive Summary of the Independent Market Research report on the oil palm, sugar and rubber industries; and selected key end-user industries (“Report”) for inclusion in FGVH’s Prospectus dated ~ 1 l’1A.Y 2012 (“Prospectus”) in relation to the initial public offering and the listing of and quotation for the entire issued and paid-up share capital of FGVH on the Main Market of Bursa Malaysia Securities Berhad. We are aware that this Report will be included in the Prospectus and we further confirm that we are aware of our responsibilities under section 214 of the Capital Market and Services Act, 2007. This research is undertaken with the purpose of providing an overview of the oil palm, sugar and rubber industries; and selected key end-user industries. We acknowledge that if we are aware of any significant changes affecting the content of this Report between the date hereof and the issue date of the Prospectus, we have an on-going obligation to either cause this Report to be updated for the changes and, where applicable, cause FGVH to issue a supplementary prospectus, or withdraw our consent to the inclusion of this Report in the Prospectus. Frost & Sullivan has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the limitations of, among others, secondary statistics and primary research, and does not purport to be exhaustive. Our research has been conducted with an “overall industry” perspective and may not necessarily reflect the performance of individual companies in the industry. Frost & Sullivan shall not be held responsible for the decisions and/or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies as mentioned in this report or otherwise. For and on behalf of Frost & Sullivan Malaysia Sdn Bhd:
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I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) © May 2012 Frost & Sullivan The market research process for this study has been undertaken through secondary or desktop research, as well as detailed primary research, which involves discussing the status of the industry with leading industry participants and industry experts. The research methodology used is the Expert Opinion Consensus Methodology. Quantitative market information could be sourced from interviews by way of primary research and therefore, the information is subject to fluctuations due to possible changes in the business and industry climate. This market research was completed in May 2012. This report ;s prepared for inclusion in the Prospectus of Felda Global Ventures Holdings Berhad (FGVH) for submission to the Securities Commission Malaysia and other relevant parties. No part of this research service may be otherwise given, lent, resold, or disclosed to non-customers without our written permission. Furthermore, no part may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without our permission. Frost & Sullivan has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the limitations of, among others, secondary statistics and primary research, and does not purport to be exhaustive. Our research has been conducted with an “overall industry” perspective and may not necessarily reflect the performance of individual companies in the industry. Frost & Sullivan shall not be held responsible for the decisions and/or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies as mentioned in this report or otherwise. For further information, please contact: Frost & Sullivan Malaysia Sdn Bhd Suite E-08-15, Block E, Plaza Mont’ Kiara 2, Jalan Kiara, Mont’ Kiara 50480 Kuala Lum pur. ~~~mlIiillllfl.i_g~~B~’:~~U’:;;:~~~~~’2l!t!”~~~.. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost& Sullivan 2012 75 I Company No.: 800165-P
6. INDUSTRY OVERVIEW (Cont’d) 1 ANALYSIS OF THE OIL PALM INDUSTRY 1.1 INTRODUCTION The oil palm tree, also known by its scientific name Elaeis guineensis, is a type of tropical plant that bears oil palm fruits. Each oil palm fruit comprises a hard shell known as the endocarp, a fibrous oil­bearing outer layer known as the mesocarp, and a single seed (nut) or kernel which is rich in oil. Oil palm fruits grow in bunches known as fresh fruit bunches (FFBs), and are crushed, fractionated and refined to produce two types of oils: palm oil and palm kernel oil (PKO). Palm oil (obtained from the mesocarp) and PKO (obtained from the kernel) have different chemical properties, and are utilised in a wide variety of food and non-food applications. The key activities in the oil palm industry consist of oil palm cultivation, palm oil processing at mills, as well as refining into edible oils and fats, production of oleochemicals and biodiesel. Oil palm cultivation involves the planting and harvesting of oil palm crops to produce FFBs. These FFBs are then milled into crude palm oil (CPO) and crude palm kernel oil (CPKO), and further processed into refined, bleached and deodorised (RBD) palm oil and PKO products. RBD palm oil and PKO are then refined into edible oils and fats, oleochemicals and biodiesel for industrial and household consumption. Felda Global Ventures Holdings Berhad (FGVH) is a global, diversified agribusiness oil palm plantation operator, which is also involved in the downstream processing and refining of palm oil and palm kernel oil into edible oils and fats, oleochemicals and biodiesel. FGVH also holds a 49% equity interest in its associate company, Felda Holdings Bhd (FHB), which is a producer of CPO and CPKO with 70 palm oil mills, of which 58 are locat~d in Peninsular Malaysia and 12 are located in Sabah and Sarawak. In addition to its many uses, palm oil also holds several advantages when compared to other edible vegetable oils. Most importantly, CPO prices have been among the lowest of the edible vegetable oils, such as crude soybean oil, rapeseed oil, sunflower oil and crude coconut oil. Throughout the years 1991 to 2011, average annual prices of CPO, CPKO, crude soybean oil, rapeseed oil, sunflower oil and crude coconut oil have largely moved in tandem with one another, with CPO recording the lowest prices over the 21-year period, In 2011, the average annual price of CPO was recorded at USD1,125 per metric tonne (MT), the lowest when compared to crude soybean oil at USD1 ,299 per MT, rapeseed oil at USD1 ,368 per MT, sunflower oil at USD1,387 per MT and crude coconut oil atUSD1 ,730 per MT. The lower CPO price has rendered it a preferred alternative when compared to the other edible vegetable oils. Palm oil has also been among the most consumed edible vegetable oils when compared to soybean oil, rapeseed oil, sunflower oil and coconut oil. In 2005, palm oil surpassed soybean oil to become the most consumed edible vegetable oil, and consumption levels have continued to grow strongly since then. At the same time, PKO has also consistently shown higher consumption rates as compared to coconut oil, rapeseed oil and sunflower oil. Consumption of edible vegetable oils is commonly measured by the volume of processed and refined oil consumed as opposed to consumption of its crude form. The global consumption of palm oil has increased from 11.7 million MT in 1991 to 49.2 million MT in 2011, growing at a compound annual growth rate (CAGR) of 7.5% over the period. PKO consumption has also recorded high growth over the same period, increasing from 1.4 million MT in 1991 to 5.3 million MT in 2011 at a CAGR of 6.7%. In comparison, over the same 21-year period, consumption of soybean oil grew at a CAGR of 5%, rapeseed oil at 5.2% and sunflower oil at 2.2%. Coconut oil, the most comparable edible oil to PKO in terms of its lauric acid content and therefore in its applications, has registered a negative growth over the period, growing at a negative CAGR of 0.1 %.
Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 76 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Average Price of Selected Edible Vegetable Oils (Global), 1991-2011 2,000 1 ­

1.800 ——————————————————“”JI <l) , ! ~Ii~ j:~~~ f_~~:_~~~~~::~:~:::~~~~~~-:::~:::~~~:~:::~~~:~~~:::~~~:~~~~~::-:~~:~~~:-~:::-:;:::-:::::,~1 > 0.’ , Il.~ i« c 800 -‘———————————–­-enI ,; I ~ 2-~~~ r——~~ ~ __: ~~ ———-_’ ___t~:::::::::::::::::::~~:i’-ll: I …. « 200 T——————————————-~————————————————–j o IIII I IItt( ! iIIII IIItrI ~~~*~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~ ~.-CPO “‘””‘*-CPKO -‘-Crude Soybean Oil -;~ Sunflower Oil __Rapeseed Oil ……….. Crude Coconut Oil Note: Price points refer to average annual price for the calendar year Source:Extracted from the Independent Market Research report prepared by Frost & Sullivan Consumption of Selected Edible Vegetable Oils (Global), 1991-2011
~PKO ~SoybeanOil .~=!!;~ Rapeseed Oil -;~ Sunflower Oil -.i.-Palm Oil ~Coconut Oil Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 1.2 ANALYSIS OF OIL PALM CULTIVATION 1.2.1 Oil Palm Cultivation Oil palm cultivation refers to the commercial agriculture of oil palm crops from which FFBs are harvested. FFBs can only be harvested from mature oil palm crops and it generally takes three years from planting, for oil palm crops to mature. A typical mature oil palm tree will remain productive for up to 25 to 30 years. Oil palm crops flourish in countries along the equator, or within 10° to 20° off the equator, as it only grows in tropical climates where there is little seasonal variation with constant .11_ JlSI I.,”” •• I n _:_ IS.II I. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & Sullivan 2012 77 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) temperature, rainfall, humidity and sunlight throughout the year. As such, the cultivation of oil palm is centralised in countries in Asia, Africa, Central and South America as well as parts of the Oceania region. Oil Palm Plantation Indicators (Global), 2011
Note: Central and South America: Colombia, Ecuador, Brazil, Venezuela, Honduras, Guatemala, Costa Rica, Dominican Republic, Mexico, Nicaragua, Panama and Peru Africa: Nigeria, Ivory Coast, Cameroon, Ghana, Sierra Leone, Angola, Benin, the Democratic Republic of Congo and Republic of Congo Asia: Malaysia, Indonesia, Thailand, Philippines and India Oceania: Papua New Guinea and the Solomon Islands Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan
1.2.2 Planted Area and Growth Trends Globally, there has been an upward trend in terms of mature oil palm planted area or harvested area, which expanded by 9.6 million hectares or 250.4%, from 3.8 million hectares in 1991 to about 13.4 million hectares in 2011, representing a CAGR of 6.5%. This was largely owing to the increasing demand for palm oil due to the competitiveness in its pricing as compared to other types of edible oils, its versatility of use in food and non-food based products as well as the respective Government initiatives and efforts to increase the usage and supply of palm oil as a form of renewable energy. [The rest of this page is intentionally left blank] URE I Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 5 © Frost & Sullivan 2012 78 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Mature Oil Palm Planted Area (Global), 1991-2011 16,000 I VI-I Q) ~ 14,000 +————————————————————————————————————————————-_._.———.——_.——–..-. —_.._-{CI:l… (,) I Q) —. ——-.–.—.-.–.———–…12,000 t—————.—.——————————————.–.—–5% —————-­–jF–‘ G. o ?.t: 1~:~~~ -===::=-_=~~.::: .•…­
o ….-
6,000 1·———————-·———.—————————–­4,000 —.——–­2,000 o +-“-+—I–+_-+—+—4-‘–+—~L+JIL+—+JIy…;~—+_L+_-_i–+_L+–J–__+__.ILj ~~~~~*~~*~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Growth in the global mature planted areas is strongly driven by Indonesia and Malaysia. In 2011, both Indonesia (6.1 million hectares) and Malaysia (4.3 million hectares) collectively accounted for 77% of total mature planted areas worldwide. Thailand (620,000 hectares), Nigeria (450,000 hectares) and Ghana (270,000 hectares) complete the remaining top five countries in terms of mature planted areas. The mature oil palm plantation areas in Malaysia are spread’ across Peninsular Malaysia and East Malaysia (Le. Sabah and Sarawak), with the expansion for the latter growing at a faster pace. Between 1991 and 2011, the mature oil palm plantations in East Malaysia grew at a CAGR of 11.1 % from 255,000 hectares in 1991 to 2.1 million hectares in 2011. Mature palm oil plantations in Peninsular Malaysia grew at a CAGR of 1.7% from 1.6 million hectares in 1991 to 2.2 million hectares in 2011. Overall, mature oil palm plantations grew from 1.8 million hectares in 1991 to 4.3 million hectares in 2011, recording a CAGR of 4.4%. The higher growth rate in East Malaysia is attributed to the higher availability of land for plantation and agricultural purposes compared to Peninsular Malaysia. New development areas for oil palm plantation are limited and scarce in Peninsular Malaysia. As such, the Government of Malaysia is trying to expand and develop new oil palm areas in East Malaysia. Both of Sabah and Sarawak have ample undeveloped land presenting opportunities to the oil palm sector. [The rest of this page is intentionally left blank} Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 79 6. INDUSTRY OVERVIEW (Cont’d) Mature Oil Palm Planted Area (Malaysia), 1991-2011 —–1
I :.~::::.::.::.: ‘”>-1 I . .. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 1.3 COMPETITIVE LANDSCAPE OF THE OIL PALM INDUSTRY 1.3.1 Competitive Landscape Oil palm trees flourish in tropical climates along the equator and as such the global oil palm industry is largely centralised in the regions of Asia, Africa and Central and South America. Oil palm particularly thrives in Indonesia and Malaysia, where it is a significant crop that contributes to these national economies. In 2011, Indonesia reported a mature planted area of 6.1 million hectares. Meanwhile Malaysia reported a mature planted area of 4.3 million hectares. As such, key players within the global oil palm industries are largely based in Indonesia and Malaysia where oil palm plantations, mills and refineries are present. This industry is largely dominated by large public listed companies due to high investment costs, and these companies are typically vertically integrated, with operations in all three core activities of the oil palm industry (Le. oil palm cultivation, milling as well as refining of edible oils and fats and oleochemicals). The industry is highly regulated and growth in this industry is driven by the increasing demand from key end-user industries as a result of economic and population growth. Frost & Sullivan also notes that the global oil palm industry is capital intensive, proving to be a strong barrier to entry for new entrants. [The rest of this page is intentionally left blank] Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 80 [ Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) 1.3.2 Profiles of Key Industry Playersliij (Global), 2011 . . Boustead Holdings Berhad Felda Global Ventures Holdings Berhad(e) First Resources Limited ,” –_ _ -.._ -. GentinQ Plantations Berhad1d)
Golden Agri~Resciurces Ltd Hap Seng Plantations Holdings Berhad IJM Plantation,s Berhad 101 Corporation Berhad ! Indonesia Malaysia
Malaysia Singapore
: Malaysia , Kuala Lumpur Kepong Malay~ia : Berhad’ … Executive Summary of the IMR on the Oil Palm, Sugar, Rubber and Cocoa Industries; and Selected End-User Industries 8 © Frost & Suflivan 2012 81 ICompany No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) KULIM (Malaysia) MalaysiaBhd(d) PT N:;tra Agro L.estari, . i IndOnesia
‘Tt:>t”””.'”, .,. “””‘~””’r PT Bakrie Sumatera ‘ Plantations Tbk(d) PTPerkebunan Nusantara .111(9)

 

pT’Perkebunan Nusantara IV O)(d), Indonesia i… ., .’. Indonesia Indonesia .(P.I::~§’~.F3… , ..-……–, : , ,.,.:'”i:!’:c,.:T01i’i’iFS? PT PPL:()ndon Sumatra : Indonesi!3 ‘ Ind6rie~ia Tbk ‘. .. ….. . PTSallmivomas”‘” i Indonesia : Pr.C3tC3.Q’l.?”, … ~, .. ,’idi”:….. “…. ,. j PT Sampoerna Agro ( ….. PT Sinar Mas Agro Resources and Technology Tbk SimeDarby Berhad Socfin Group(d)(h) lridone~ia Indonesia ….J … __ MC\laysia Malaysia, Indonesia, Ivory Luxembourg Coast, Nigeria and 86,521 75,731 10,790 N/A
N/A Cameroon, Executive Summary of the /MR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 9 © Frost & SuI/ivan 2012 82 ~pany No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d)
Notes: N/A -information not publicly available
(a) Includes key industry players with total planted area of 50,000 hectares and above or milling capacity of 1 million MT per annum and above or refining capacity of 1 million MT per annum and above.
(b) Definitions of mature and immature plantation differ for each company, with mature plantations generally being above 3-4 years. The definition of mature plantation is not publicly stated for all companies.
(c) Of which PT Inti Indosawit Subur is a subsidiary.
(d) Latest publicly available information is 2010.
(e) Planted area includes all oil palm planted area managed and leased by FELDA (Federal Land Development Authority).
(f) Latest publicly available information is 2011.
(g) Latest publicly available information is 2009.
(h) Of which PT Socfindo and Socfindo SA are subsidiaries.
(i) Although United Plantations Berhad has no publicly available information on its milling capacity, its production volume of 169,000 MT suggests that its

milling capacity should be above 1 million MT per annum. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 10 © Frost & Sullivan 2012 83
I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) 1.3.3 Market Share and Ranking 1.3.3.1 Planted Area Indonesia is home to the largest mature oil palm planted area worldwide, with a market share of 45.2% in 2011. In 2011, Indonesia accounted for 6.1 million hectares of mature oil palm planted area worldwide. The mature oil palm plantation size in Malaysia was 4.3 million hectares, and this comprised 31.9% of global mature planted area in 2011. Other key countries in terms of mature planted area included Thailand (620,000 hectares, 4.6%), Nigeria (450,000 hectares, 3.3%) and Ghana (270,000 hectares, 2%). Market share in the oil palm industry in terms of mature planted area is determined by the mature planted area size in 2011, as reported by each industry player in publicly available documents. Based on publicly available data, the key players in the global oil palm industry in 2011 were Sime Darby Berhad (468,668 hectares, 3.5%), Golden Agri-Resources Ltd (390,759 hectares, 2.9%), FGVH (288,442 hectares, 2.1 %), PT Astra Agro Lestari Tbk (217,343 hectares, 1.6%), Wilmar International Ltd (216,623 hectares, 1.6%), PT Salim Ivomas Pratama (158,163 hectares, 1.2%), Kuala Lumpur Kepong Berhad (148,358 hectares, 1.1%), 101 Corporation Berhad (139,582 hectares, 1.1%), PT Sinar Mas Agro Resources and Technology Tbk (125,122 hectares, 0.9%) and KULIM (Malaysia) Berhad (100,185 hectares, 0.7%). There are possibly thousands of industry players involved in the cultivation of oil palm crops. Despite the large number of competitors in the industry, FGVH was the third largest oil palm plantation operator in the world in 2011, with 2.1 % global market share in terms of mature planted area. FGVH’s Market Share in terms of Mature Planted Area (Global), 2011 PT Astra Agro Lestari Tbk 1.6% Remaining Top 10 Industry Players 5.0% Notes: Market share is calculated based on publicly available information. Remaining top 10 industry players refer to PT Salim Ivomas Pratama, Kuala Lumpur Kepong Berhad, 101 Corporation Berhad, PT Sinar Mas Agro Resources and Technology Tbk and KULIM (Malaysia) Berhad*. *Latest publicly available information is in 2010. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 84 6. INDUSTRY OVERVIEW (Cont’d) In Malaysia, FGVH was the largest oil palm plantation operator in Malaysia, in which it held a 6.7% market share with a mature planted area of 288,442 hectares in 2011. Sime Darby Berhad had the second largest mature oil palm plantation in Malaysia with 6.5% market share or 279,912 hectares in 2011. Based on latest publicly available data on mature planted area in Malaysia, other key players included Kuala Lumpur Kepong Berhad (148,358 hectares, 3.5%), 101 Corporation Berhad (139,582 hectares, 3.3%), Tradewinds Plantations Berhad (70,166 MT, 1.6%), Boustead Holdings Berhad (67,631 MT, 1.6%), Genting Plantations Berhad (57,693 I\I1T, 1.3%), Wilmar International Limited (56,255 MT, 1.3%), Hap Seng Plantations Holdings Berhad (32,576 MT, 0.8%) and United Plantations Berhad (29,449 hectares, 0.7%). FGVH’s Market Share in terms of Mature Planted Area (Malaysia), 2011
Sime Darby FGVH Berhad Kuala Lumpur 6.7% 6.5% Kepong Berhad 3.5% 101 Corporation Bhd 3.3%
—__Tradewinds . PlantationsBerhad* 1.6% Remaining Top 10 Industry Players 5.7% Notes: *Latest publicly available information is in 2010. Market share is calculated based on publicly available information on mature planted area in Malaysia.
Remaining top 10 industry players refer to Boustead Plantations Bhd, Genting Plantations Berhad*, Wilmar International Ltd, Hap Seng Plantations Holdings Berhad* and United Plantations Berhad.
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 1.3.3.2 FFB Production Total FFB produced in Malaysia can be measured in terms of the volume of FFBs that are harvested and received by the local mills. Based on a total of 93.8 million MT of FFBs harvested and received by mills, FGVH garnered about 5.5% market share in Malaysia in 2011, with a FFB production of 5.2 million MT. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & SuI/ivan 2012 85 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) 1.4 KEY 5L1PPLY CONDITIONS AND DEPENDENCIES Weather Conditions
The productivity of oil palm and the quality of FFBs are influenced by prevailing weather conditions. Oil palm crops thrive in tropical parts of the world, whereby temperature, sunlight and availability of moisture determine the crop’s growth, yield and quality of output. • Temperature: 25°C-33°C throughout the year
• Humidity: -80%-85%
• Rainfall: -2,000 millimetres of evenly distributed annual rainfall
• Sunlight: -5-7 hours per day throughout the year
• Soil: pH level < 7.5
• Prime cultivation area: within 10°-20° off the equator

Availability of Land for Oil Palm Cultivation The oil palm industry is dependent on the plantation of oil palm crops for the constant supply of intermediary raw materials to the oil palm industry. With the absence of oil palm plantations, FFBs cannot be harvested and this would, in turn, affect the supply of FFBs to the mills and refineries to be processed into palm oil and PKO products. Hence, the continuous growth of the oil palm industry is relianton the availability of suitable and arable land for oil palm cultivation. Availability of Labour, Equipment and Infrastructure A major issue which can potentially affect the supply of oil palm is the shortage of skilled harvesters to harvest ripe FFBs. The issue of shortage of the labour force is common in the agricultural sector in Malaysia and there is currently a reliance on foreign labour, whereby according to the Minister of Plantation, Industries and Commodities, 52% of the total workforce in the plantation sector in 2009 was .. made up of foreign labour. As such, the lack of skilled labour could potentially affect the output of FFBs, and consequently, the production of CPO and CPKO. CPO and CPKO processing is a highly automated process. Equipment utilised in mills to produce CPO and CPKO include, amongst others, cooker, screw press, digester and clarifying centrifuge. Edible oils and oleochemical refineries meanwhile employ more sophisticated machinery such as boilers and fractionation tanks. In addition, bulkers are required to handle the logistics and transportation of palm oil and PKO products. As such, the availability of such equipment and infrastructure are viewed as key supply dependencies. Factors Affecting Productivity Oil palm productivity levels are commonly measured in terms of FFB yield and oil extraction rate (OER), which depicts the amount of FFBs harvested per mature hectare as well as the efficiency of the mills in extracting CPO and CPKO. Productivity levels may be influenced by various factors such as weather conditions, pest attacks and crop diseases, skilled labour availability, efficient management of plantations by sourcing and utilising quality planting materials, ensuring sufficient land area for oil palm crops, maintaining oil palm plantations by weeding, pruning, soil fertilisation and harvesting FFBs at the optimum period as well as utilising efficient production techniques in the process of extracting CPO and CPKO. Increase in oil palm yields higher OERs would lead to larger volumes of CPO and CPKO produced. Therefore, productivity levels playa significant role in determining the supply of palm oil. .~millfl!!f_W!lil1ili~.i.H ~~ . _lBll!lRl:r.~~III!lWli5!~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 13 © Frost & Sullivan 2012 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Pest Attack and Crop Diseases One of the major challenges in the cultivation of oil palm crops includes managing pest attacks and crop diseases as oil palm crops are susceptible to a variety of pests as well as diseases. Among the pests that attack oil palm crops include rats, squirrels and ‘rhinoceros beetles’. On the other hand, fungal diseases such as ‘ganoderma basal stem rot’, ‘fusarium’ and ‘fatal yellowing’ as well as bacteria­related diseases like the ‘endophytic bacteria’ are examples of diseases that typically infect oil palm crops. These pests and diseases can cause a loss in yield, and in some cases, these attacks could terminate a wide spread of oil palm crops. In the event of pest attacks or diseases, the supply of FFBs would be adversely affected, leading to low production of CPO and CPKO. Stock Count from Previous Year(s) In many instances, the amount of CPO and CPKO to be produced in a year is determined by the remaining stock count from previous year(s). When consumption patterns remain stable, CPO and CPKO surpluses will typically lead to decreased output, while a deficitin stock count from the previous year will lead harvesters to increase acreage and yield to meet consumers’ demand levels. A surplus or deficit in end-of-year stock levels can also exert upward or downward pressure on market prices, following which industry players will react by decreasing or increasing output in order to stabilise prices. 1.5 RELIANCE AND VULNERABILITY TO IMPORTS IN MALAYSIA Oil palm cultivation is not reliant and vulnerable to imports of its intermediary raw materials which include planting. materials such as oil palm seeds which are available locally. Many large local plantation operators have their own seed cultivation division and thus, would not face any difficulty in obtaining them. Additionally, other materials such as fertilizers are also available from local distributors. The oil palm industry, as a whole, has a long history in Malaysia and primarily serves as a supplier to the local palm oil mills. Malaysia has historically had one of the largest mature oil palm planted area as well as been among the largest CPO and CPKO producers globally. As such, the oil palm industry in Malaysia is not dependent on imports, with local production of CPO and CPKO largely satisfying local demand. In 2011, imports only constituted 7.3% of the total CPO input used domestically. Likewise, imports of CPKO comprised 15.9% of total CPKO consumption. Hence, this illustrates that a large portion of the demand for CPO and CPKO is satisfied domestically, and imports of CPO and CPKO supplements any shortfall in local supply. 1.6 RELEVANT LAWS AND REGULATIONS IN MALAYSIA Malaysian Palm Oil Board Act 1998 The Malaysian Palm Oil Board Act 1998 was enacted to repeal the Palm Oil Registration and Licensing Authority (Incorporation) Act 1976 and the Palm Oil Research and Development Act 1979 as well as to dissolve the Palm Oil Registration and Licensing Authority, the Palm Oil Research and Development Board and the Palm Oil Research Institute of Malaysia with the establishment of the ‘Malaysian Palm Oil Board’ (MPOB). Under this Act, among the functions of MPOB include conducting and promoting research and development activities relating to oil palm activities; regulating, registering, coordinating and promoting all palm oil related activities from cultivation to milling, to storage, testing and distribution as well as developing and maintaining markets for oil palm products. ~~~~~_;I.I….’~:~ll.WUllnillgPll!lllllllij§:IlW!I\TilII!!lIIIiII;S!~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 14 © Frost & Sullivan 2012 87 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Malaysian Palm Oil Board (Licensing) Regulations 2005 The Malaysian Palm Oil Board (Licensing) Regulations 2005 prohibits producing or distributing oil palm products without first obtaining a license from MPOB. This includes the production of oil palm planting material, selling or transporting oil palm planting material, FFBs, palm oil, palm kernel, palm fatty acids and palm oleochemicals, purchasing of FFBs, palm oil and palm kernel, commencing construction of palm 011 mills and milling. Malaysian Palm Oil Board (Quality) Regulations 2005 The Malaysian Palm Oil Board (Quality) Regulations 2005 specifies that IVIPOB has the right to determine the quality of all activities pertaining to the oil palm industry including the production and management of planting materials, agronomical practices in oil palm plantation estates, grading of FFBs, milling of CPO and CPKO, refining and fractionation of palm 011 and PKO products, surveying, inspecting, testing, examining and analysing of oil palm products as well as the storing, transferring, handling and transporting of oil palm products. Failure to comply with the specifications set out by MPOB would cause an industry player to be liable for a fine not exceeding RM200,000 or imprisonment for a term not exceeding two years or both. Environmental Quality Act 1974 Malaysia’s Department of Environment (DOE) is responsible for the implementation and monitoring of Malaysia’s environmental regulations and policies. The Environmental Quality Act 1974 prohibits industrial activities which cause air, sound, soil, and water pollution without obtaining a valid license. Therefore, the burning of waste or rubbish or any open burning is prohibited without obtaining the necessary licenses or permits. Under this Regulation, effluent shall not be diluted, whether raw or treated, at any time or point after it is treated, without first obtaining a written authorisation which approves treatment of effluent according to the terms and conditions. Environmental Quality (Prescribed Premises) (Crude Palm Oil) (Amendment) Regulations 1982 The Environmental Quality (Prescribed Premises) (Crude Palm Oil) (Amendment) Regulations 1982 came into force on 1 July 1982. The amendment that took place with the enactment of this Regulation was pertaining to the conditions limiting the parameters of effluent to be discharged from the prescribed premises. Under this Regulation, the amount of biochemical oxygen demand (BOD), which is the quantity of oxygen utilised in the biochemical oxidisation of materials present in effluent during a specified period, is limited to 100 mg/I, while the amount of suspended solids present in the effluent must not exceed 400 mg/1. The amount of oils and grease and ammoniacal-nitrogen present in effluent is limited to 50 mg/I and 150 mg/I respectively, and the total nitrogen present must not be higher than 200 mg/1. Additionally, pH levels of effluent must be between 5.0 -6.0 and its temperature must not be higher than 45°C at all times. 1.7 KEY DEMAND CONDITIONS AND DEPENDENCIES 1.7.1 Industry Drivers Oil palm cultivation is driven by the demand of the end-products of the mills, namely CPO and CPKO. Hence, higher demand for CPO and CPKO will ultimately lead to an increase in cultivation of oil palm crops and this would subsequently lead to a decrease in FFB production. ~u.~~~”~llInall=”‘~’I_Il!mIl~llli..1 .~~_I!~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 15 © Frost & Sullivan 2012 88 6. INDUSTRY OVERVIEW (Cont’d) . The key demand drivers for the oil palm industry are: Growing Demand for Food The growing demand for food worldwide is driven by population and economic growth. • Population growth World population in 2010 was approximately 6.8 billion, having grown by 28% from 5.3 billion in 1990. Higher population growth rates were especially witnessed in developing countries. The agricultural industry is faced with the need to produce sufficient food and fibres to feed and clothe an increasing world population, as well as to increase the daily food intake of the existing undernourished population in underdeveloped countries. The agricultural industry has seen a general uptrend in all major crops production within the last decade. Frost & Sullivan anticipates that the demand for food will increase significantly over the longer term despite the slower population growth rate. Farmers globally are expected to increase investments in seeds, fertiliser and crop protection products in order to continue meeting the growing demand for food and clothes. • Economic growth The global economy has continually witnessed positive growth trends, with the exception of periods of economic slowdown, for example in 1997/98 and 2008/09. The world has continued to witness strong demand and higher prices for energy and primary commodities, including food. The growth in per capita income worldwide has led to a shift in dietary intake, which has moved away from staple product such as cereals, roots and tubers and pulses towards livestock, vegetable oils and fruits and vegetables. In 2010, the average world urbanisation rate, which is used here as an indicator for wealth, was estimated at approximately 50.5%. The urbanisation rate for the more developed regions, less developed regions and least developed countries are 75.2%, 45.1 % and 29.2% respectively. Higher urbanisation rates were witnessed in the less developed regions and least developed countries between 1950 and 2010, compared to the more developed regions. Moving forward, higher increases in urbanisation rates can be expected in the least developed countries by an estimated increase of 25.5 percentage points between 2010 and 2050. In comparison, the estimated increase for most developed and less developed regions are 11.1 percentage points and 20.8 percentage points respectively. The forecast average world urbanisation rate in 2050 is 68.7%, an increase of approximately 18.2 percentage points from 2010. Continuous Government Efforts to Drive the Oil Palm Industry The expansion in oil palm cultivation has led to the expansion in palm oil production. In 2011, Malaysia accounted for apprOXimately 37.7% of the world’s CPO production and 46% of the world’s exports of palm oil. Additionally, Malaysia accounted for 38.1 % of global production of CPKO in 2011 and 36.8% of total exports of PKO. Therefore, Malaysia plays a critical role in fulfilling the growing global need for palm oil products. It is noted that the oil palm industry matches the New Economic Model’s (NEM) major goals of high income, sustainability and inclusiveness. The oil palm industry is able to impact the nation’s economy by virtue of its economic contribution to Malaysia’s Gross Domestic Product (GDP). In 2009, this industry contributed RM17 billion or 3.3% to the nation’s GDP, and accounted for RM49.6 billion in exports. According to the Performance Management & Delivery Unit (PEMANDU), a unit under Malaysia’s Prime Minister’s Department, the oil palm industry is the fourth largest contributor of Malaysia’s economy, accounting for RM53 billion of the nation’s Gross National Income (GNI).
Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 89 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) ~~!<“ft<f:;,.1t,.;;;;~~~~g~~~g””‘]”~~~!¢~~’lf,,~<‘~~~~’P~*~~~~~i7.M0″:”‘C’4~”‘~!t!l.\$’!m(~” The Economic Transformation Programme (ETP) identified palm· oil as a major component of Malaysia’s economy over the next 10 years. In view of the economic importance of this sector to the nation’s economy, the Government is focusing on improving oil palm cultivation productivity and sustainability, and ensuring the productivity and sustainability of the industry under the ETP. This is in line with the Government’s efforts to increase the total GNI contribution of the i17dustry by RM125 billion to RM178 billion by 2020. The 10th Malaysia Plan (2011 -2015) targets to increase the economic contribution of the oil palm industry from RM17 billion to RM21.9 billion, with export earnings of RM69.3 billion, by 2015. Wide Range of Uses for Oil Palm and its Related Products Palm oil is a key sustainable global commodity because it can be used in food and non-food applications. Palm oil has a wide range of food uses due to its versatility and fat content, which extends shelf life, shortens cooking time, and contributes to texture as well as flavour. Palm oil is used in the process of producing food such as cooking oil, margarine, bakery shortening, and confectionery fats. In addition, palm oil is also used in non-food products such as soap, detergent, toiletries and cosmetics. In addition, a relatively new application has been discovered for palm oil in producing polyols, which is used for making polyurethane, a plastic material with multiple applications in various industries such as building and construction, automotive, furniture and electrical and electronics. Palm oil is also widely used as feedstock for the generation of renewable energy, such as biofuels (biodiesel) and biomass. Biofuels are increasing in popularity due to their numerous advantages over petrol, as they are renewable and widely available, with environmentally friendly processing techniques .. which do not emit large amounts of greenhouse gases. Biomass is used as feedstock for biomass boilers to generate electricity in agricultural and oil palm mills. The renewable energy generated from biomass may also be sold to electricity companies, thereby increasing the revenue of mill owners. Lower CPO Prices Compared to Crude Oil and Other Edible Oil Prices With glob~1 crude oil prices reaching historically high levels over the past several years, the global demand for alternative sources of fuel is growing. The price of crude oil started to rise after 1999 from an average of. RM57 (USD15) per barrel due to increased demand. Crude oil price registered at USD43 per barrel in January 2005, and began to grow steeply, doubling to USD91 per barre) in January 2008. Crude oil prices then peaked at an all time high in July 2008 at USD146 per barrel before steadying at USD76 per barrel in September 2010 and then exceeding USD116 per barrel in March 2011· amidst the unrest in the Middle East and rising demand expectations. Prices have moderated since then, averaging around USD95 per barrel in 2011. The high prices of other edible oils such as soybean oil and rapeseed oil have also driven the oil palm industry in Malaysia. Between 1991 and 2011, CPO recorded lower prices globally compared to other edible vegetable oils. On average, the annual price of CPO in 2011 was USD1, 125 per MT, the lowest when compared to soybean oil at USD1 ,299 per MT, rapeseed oil at USD1 ,368 per MT, sunflower oil at USD1,387 per MT and coconut oil at USD1,730 per MT1. Hence, the comparatively lower cost of CPO serves as a demand driver for the consumption of palm oil products. Increase in Use of Biodiesel Depleting crude oil reserves have spurred the use of biodiesel as a source of energy in various parts of the world. As palm oil is a form of feedstock utilised in biodiesel, it possesses several benefits over 1 World Bank ~~~~~iU~~~~.1iIl··”‘r:;l’l~~~”eb~~~~~. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 17 © Frost & Sullivan 2012 90 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cant’d) fossil fuel such that it is renewable,less harmful to the environment and biodegradable. Thus, many Governments have legislated the use of biodiesel in vehicles, usually in a blend with diesel, to reduce dependence on crude oil as well as to reduce carbon emissions. Countries such as the United States, member countries of the European Union, Australia, Brazil, as well as countries in Asia which include Malaysia, Indonesia, Philippines and Thailand have introduced legislations regarding biodiesel. 1.7.2 Industry Restraints Pressure from Non-Government Organisations (NGOs) on Deforestation and Emission Control Oil palm cultivation has raised concerns over widespread deforestation that destroys biodiversity, degrades eco-systems, and emits greenhouse gases which contributes to global warming. The continuous expansion of oil palm plantations in Malaysia has led to active deforestation, which has raised concerns among the NGOs. These NGOs are of the opinion that deforestation in developing countries should be stopped. However this will adversely impact the nation’s economy, causing lower national inc;;ome and stifling the development of palm oil production. Nevertheless, the Government of Malaysia is of the view that oil palm offers better emission savings in terms of carbon credits, compared to the production of biofuels. According to the Malaysian Palm Oil Council (MPOC), Malaysia allocated 12.0% of its land area for the plantation of palm oil in 2009, which formed 66.0% of the agricultural land use in the country. Malaysia maintains more than 50.0% of its land area under permanent forest reserve. Lack of Manpower With the recently rapid expansion of palm oil production, plantation owners are facing manpower shortages. There is a reliance on foreign labour in the oil palm industry, especially labour from neighbouring countries such as Indonesia, Vietnam and Cambodia, as locals are typically reluctant to work in this industry. As the harvesting of FFB is labour intensive, the lack of participation from the locals has caused the Government to employ foreign labour. At the same time, the cost of labour has been increasing, resulting in higher production cost. According to the Minister of Plantation, Industries and Commodities, 52.0% of the total workforce in the plantation sector in 2009 was made up of foreign labour. The employment of foreign labour in the plantation sector grew by 58.8% between 2000 and 2008, and has been increasing since then. 1.8 PRODUCT SUBSTITUTION Palm oil and PKO can be used in a variety of food and non-food applications which is hard to be matched by other vegetable oils. Palm oil and PKO are commonly utilised in the manufacturing of various food applications such as cooking· oil, margarine, shortening, vanaspati, ice cream, cocoa butter substitutes and confectionery fats. In these applications, vegetable oils such as coconut oil, rapeseed oil as well as selected animal fats are possible substitutes for palm oil and PKO. Palm oil and PKO are also used as key ingredients by the oleochemicals sector for the manufacturing of personal and household products such as detergents, toiletries and cosmetics. In these applications, palm oil and PKO can be substituted with other types of vegetable oils such as coconut oil, soybean oil and rapeseed oi/. Although there are plenty of substitutes available for palm oil and PKO, it is noted that palm oil and PKO remain as the preferred choice of vegetable oils due to their availability in large volumes which surpasses other· vegetable oils such as soybean oil, rapeseed oil, sunflower oil and coconut oil. ~~~;$.’i’~~~~~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 18 © Frost & Sullivan 2012 91 I Company No.: B00165-P 6. INDUSTRY OVERVIEW (Cont’d) Moreover, palm oil and PKO are cost competitive. Throughout the years 1991 to 2011, CPO consistently emerged as the most cost competitive vegetable oil when compared to soybean oil, rapeseed oil, sunflower oil and coconut oil. Meanwhile, PKO prices have been comparable to rapeseed oil, sunflower oil, crude coconut oil and crude soybean oil between the years 1991 and 2011. 1.9 PALM OIL AND PALM KERNEL PRODUCTION AND CONSUMPTION Cultivation of oil palm crops and production of FFBs are very much driven by its end-products, namely CPO and CPKO. An increase in demand for CPO and CPKO would consequently lead to an increase in oil palm planted area in order to increase production of FFBs, and this would subsequently increase in CPO and CPKO production. 1.9.1 Palm Oil Production and Consumption 1.9.1.1 CPO Production and Growth Trends Global production of CPO has seen a steady increase at a CAGR of 7.7% in the past two decades. CPO production volume worldwide was recorded at 11.5 million MT in 1991, and increased by 338% to 50.2 million MT in 2011. CPO production is dependent on various supply factors affecting the cultivation of its crop, such as weather conditions, fertility of soil, oil palm planted area, stock count, pest attack and crop diseases, labour, equipment and infrastructure availability, as well as general economic conditions and market prices. Throughout 1991 to 2011, global CPO production exhibited stable growth patterns apart from a slight dip in 1998 due to adverse weather conditions. In 1998, the continuous dry weather climate in South East Asia caused by the EI Nino phenomenon instigated a decline in production volume that year, with productlon falling by 4.3%. The industry quickly recovered in 1999 as the improved weather conditions led to an increase in CPO production by 20.9% to 20.7 million MT. Global CPO production is strongly driven by Asia for the last 21 years, where it accounted for 88.6% of worldwide CPO production in 2011. From 1991 to 2011, CPO production in the Asian region grew from 9.1 million MT to 44.5 million MT with a CAGR of 8.3%. The CPO production in the Asian region was mainly contributed by Indonesia, Malaysia and Thailand, which collectively supplied 88.3% of worldwide CPO production volume. [The rest of this page is intentionally left blank] ~i:M~~~~~~iUjl!lllil~~ii1i.lIiI!..•.~~l!\1l~’f<q~~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 92 6. INDUSTRY OVERVIEW (Cont’d) Production of CPO (Global), 1991-2011 60,000  I  … :=  50,000 t’-“—-,..””–“-…. —-.. —-….-..—–…..,.”””,,,,.–“”,.”””,-“,’ “….”, o  o  ~  40,000 .t—.—-..—..–..——-­ —-.—-..–.——-…—-.——–··….—–..·10/0..—————··..  …..——–.–……–….-­ –..  —-.  .—­ -­
c 1 o I cp.GW. . ”;:: (,) 30, 000 +—..———……–….–..—.–.———..—..—…–..—-. —.—–……—-….—..—-……-­::::l “‘0 n. 20,000 j———-..-.—.—-.–..-.—…—–…—-.—-………… —­..-­.-… –. o n. U ….o10,00: ![ttttl ,.” -,-‘, .’–” ‘”
.—­..–­….. —-. …-..-.. ..-­.-.-­-…. –.-. .,…,.,. ~~~ ~~~~~~~ ~~~ ~~~~ ~~~ ~ ~***~*~*~*~~~~~~~~~~~~~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan In 2011, the top five CPO producing countries were Indonesia, Malaysia, Thailand, Colombia and Nigeria. These countries are able to produce high production volumes of CPO as the FFBs that are milled into CPO are mostly harvested domestically due to the availability of arable land and favourable climate conditions for oil palm cultivation. Production of CPO in Indonesia grew from 2.7 million MT in 1991 to 23.9 million MT in 2011, while the amount of CPO produced in Malaysia grew from 6.1 million MT in 1991 to 18.9 million MT in 2011. Prior to 2006, Malaysia was the world’s largest producer of CPO before being replaced by Indonesia. In terms of exports of palm oil products, Malaysia was the largest exporter globally between 1991 and 2008. Although Indonesia surpassed Malaysia by 1.1 million MT in 2009, Malaysia emerged as the world’s largest CPO exporter again in 2010 and 2011, overtaking Indonesia by 214,000 MT and 743,000 MT respectively; Between 1991 and 2011, Malaysia’s exports of palm oil increased from 5.8 million MT in 1991 to 18 million MT in 2011, with a CAGR of 5.9% during this period. Exports of . Indonesia’s palm oil products grewwith a CAGR of 12.5%, from 1.6 million MT in 1991 to 17.3 million MT in 2011. In 2011, Malaysia and Indonesia accounted for 46% and 44.1 % of total exports worldwide. Exports from other notable countries include Papua New Guinea, Thailand and Ecuador which accounted for 1.3%, 1% and 0.6% of total exports in 2011, with 510,000 MT, 391,000 MT and 250,000 MT respectively. The volume of FFBs that were received by mills in Malaysia increased from 31.4 million MT in 1991 to 83.9 million MT in 2011, recording a CAGR of 5.6%. [The rest of this page is intentionally left blank]
Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 93 6. INDUSTRY OVERVIEW (Cont’d) FFBs Received by Mills (Malaysia), 1991-2011 -120,000 T—–~————–~——-··–·-·——-~·—·–~-­f­~
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Similar to the global CPO production trend, CPO production in Malaysia witnessed an upward trend with CPO production volume growing from 6.1 million MT in 1991 to 18.9 million MT in 2011 with a CAGR of 5.8%. CPO production volume in Malaysia exhibited a slight cyclical trend over the past 21 years, relating closely to the growth trends of FFBs received by mills,due to the influence of factors such as replanting cycles, weather conditions as well as other market forces, namely pricing and availability of other types of vegetable oils. Production of CPO (Malaysia), 1991-2011 20,000 ,————————-~~ f­:2: 18,000i 16,000 r-·—····_·_···· __
. ”;:; (.)::l .­”C o… Q.
o Q. U 2,000 t .—.-.——.—–­o.J –:-‘–: .. ;–‘ . .__…_ _ –I­.­I’-1 _;.–+-_ ~~~~~*~~*~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan l!i”‘Wq/>I!IN!I!~r~~’~”~~f.l>.-~..,. ~1l!I;Il!~PlI!~~~~lI&~~~~_ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 94 6. INDUSTRY OVERVIEW (Cont’d) 1.9.1.2 Palm Oil Consumption and Growth Trends The demand for end-products from the milling process can be measured by the amount of consumption of palm oil products (Le. RBD palm oil, RBD palm olein and RBD palm stearin). Consumption data is recorded for total palm oil as opposed to its specific sub-products. Global consumption of palm oil products has been seen to exhibit steady growth between 1991 and 2011 registering a CAGR of 7.5% over this 21-year period. In 1991, global consumption was recorded at 11.7 million MT, and since then has grown by 321.6% to 49.2 million MT in 2011, with growth trends influenced by several factors such as market prices ofpalm oil and CPO, availability and prices of other edible oils as substitutes, as well as increasing demand from end-user consumer industries. Additionally, as palm oil products solidify in cold weather, consumption of palm oil is also affected by seasonality, particularly in countries with cold climate. Consumption of Palm Oil (Global), 1991-2011
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Regionally, the main palm oil consuming countries in 2011 were from the Asian region. Asia accounted for 63.8% of global palm oil consumption, while Africa consumed 12.9% and Europe consumed 10.90//. In 2011, the top five palm oil consuming countries by volume were India (6.8 million MT), China (6.3 million MT), Indonesia (6.2 million MT), Malaysia (2.2 million MT) and Pakistan (2 million MT). This consumption was measured by taking into account local production net of imports and exports. The consumption of CPO, as opposed to the consumption of palm oil, refers to the amount of CPO that is being processed by refineries into palm oil. In Malaysia, the consumption of CPO by local mills has been on an uptrend over the years 1991 to 2011, growing at a CAGR of 5% over this period. Domestic CPO consumption increased by 162.9% from 6.3 million MT in 1991 to 16.4 million MT in 2011. Overall, domestic consumption of CPO displayed a stable upward trend, notwithstanding the slight decline in 1998 and 2007 as it was influenced by the Asian economic crisis and a slower growth in supply of CPO. In 1998, CPO consumption in Malaysia experienced a year-on-year decline of 5.3% to 2 OIL WORLD Iiml!li’!fillli!l~~’~’~~~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & Sullivan 2012 95 6. INDUSTRY OVERVIEW (Cont’d) 8.5 million MT due to the Asian financial crisis which affected demand for CPO. The consumption of CPO in Malaysia recovered in 1999 with a growth rate of 19.3% to 10.1 million MT, and continued growing on an upward trend until 2007, where it experienced a decline of 1.1 % from 14.5 million MT to 14.4 million MT. The decrease in CPO consumed by the mills in 2007 was mainly attributed to the slower growth in CPO production due to flooding in Johor which affected overall consumption due to a shortage in supply. In Malaysia, palm oil consum ption was 685,000 MT in 1991, and this increased to 2.2 million MT in 2011. Palm oil consumption in Malaysia illustrated a relatively more cyclical growth pattern between 1991 and 2011. From 1991 to 1996, domestic palm oil consumption grew from 685,000 MT to 1.2 million MT, but declined in 1997 by 3.6% and 17.3% in 1998. In 2009 and 2010, palm oil consumption fell by 8.1 % and 12.6% respectively as a result of the economic financial crisis which began late 2008. Additionally, the decrease in consumption of palm oil could also be attributed to the shortage of supply due to adverse weather conditions which was brought upon by the EI Nino and La Nina phenomena. Nevertheless, palm oil consumption recovered by 6.6% to 2.2 million MT in 2011. Malaysia’s palm oil is exported to more than 150 countries around the world, underpinning its significance both domestically and internationally. In 2011, China (4 million MT, 22.1 %) was Malaysia’s largest export market, followed by Pakistan (1.8 million MT, 10.1 %), India (1.7 million MT, 9.3%), the United States (1.0 million MT, 5.9%), and Egypt (710,000 MT, 3.9%). 1.9.2 PKO Production and Consumption 1.9.2.1 CPKO Production and Growth Trends The total world production of CPKO has exhibited steady growth over the past 21 years. Global supply of CPKO increased from 1.4 million MT in 1991 to 5.6 million MT in 2011, registering a CAGR of 7% over the period. Global production of CPKO is influenced by several factors, which include weather conditions, fertility of soil, oil palm planted area, stock count from previous year(s), pest attack and crop diseases, availability of labour, equipment and infrastructure, as well as market prices and the prevailing global economic climate. Generally, global production of CPKOhas displayed stable growth patterns over the 21-year period, albeit with slight dips caused by unfavourable weather conditions and cyclical stress. For instance, the EI Nino phenomenon that occurred in 1998 instigated a minor decline in production volume that year, with output falling by 1.3% from the previOus year. The EI Nino phenomenon led to persistent dry conditions, and subsequently affected output. Production was once again affected by the EI Nino and La Nina phenomena which lasted from mid-2009 till mid-2011. As a result, there was a slower growth in global production of CPO in 2009 and a decline in production volumes of 0.1 % in 2010. Nevertheless, global CPO production recovered and increased by 7.5% to 5.6 million I’v1T in 2011. ~;~~~~~~~:’Q~’1″~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 96
I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Production of CPKO (Global), 1991-2011 .-7,000 -i,.——–~———————-I ~ …. I,:, 6,000 —————..————-.———.—-.—..–..—–.—-.-.–.—.—————..-..–.-.–.-.————–.–.-.–..—.—–.—..-.-.——.—–…—..———-. ·—–1 ,:, ,:, _.I~ 5 000 ————–.—..–.—–.———..—-.–..——-.–..-..–..-.———.—-.–..–…—-.———-.—..­o’ 1 0°/0E 4, 000 -…-.-…–..–.–..-._..-…..–…-_.._-….-.–…-·_··_-_·-··-·-····C.p.G~ ..: •–“—“‘-“‘-“‘-“-‘ ::J ‘0 o l­ii­i) f; ~ 1,000

Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan The top five CPKO producers in 2011 were Indonesia (2.6 million MT), Malaysia (2.1 million MT), Nigeria (244,000 MT), Thailand (142,000 MT) and Colombia (84,000 MT), whereby these five countries collectively accounted for 92.1 % of global CPKO production in that year. The high production volume in these countries is attributed to the availability of arable land and favourable climate conditions for oil palm cultivation, which thrive in tropical conditions. Malaysia was the largest global exporter of PKO from 1991 to 1996. From 1997 to 2004, Malaysia and Indonesia contended. for the position as the largest PKO exporter. However in 2004, Indonesia surpassed Malaysia by 124,000 MT and has since been the largest exporter of PKO worldwide. In 2011, it accounted for 53.9% of total exports of PKO worldwide. In 2011, Malaysia was the second largest exporter after Indonesia, accounting for 36.8% of global PKO exports. Malaysia’s PKO exports increased from 629,000 MT in 1991 to 1.2 million I\I1T in 2011, registering a CAGR of 3.2% over the 21­year period. Other notable PKO exporting countries in 2011 included Thailand (80,000 MT, accounted for 2.5% of global PKO exports), Colombia (44,000 MT, accounted for 1.4% of global PKO exports) and Papua New Guinea (36,000 MT, accounted for 1.1 % of global PKO exports). Malaysia’s production of CPKO displayed an upward trend over the past 21 years, increasing from 782,133 MT in 1991 to 2.1 million I\I1T in 2011 and recording a CAGR of 5.2% over the period. Malaysia was previously the global leader in CPKO production, having been eclipsed by Indonesia in 2009. As with CPO, CPKO production growth trends in Malaysia have proven to be cyclical over the past 21 years, relating closely to the growth trends of FFBs received by mills, as it ;s subject to factors such as growth in mature planted area, weather conditions and labour availability. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 6. INDUSTRY OVERVIEW (Cont’d)
2500 i————————-·—-·—-···———-·—–.-.–.—-.——.——.————.-.–.–.-.–.——–.——————.-.–.-.——-..–.—-..—-..–.———–.. . —-I -.———-.–.—.—…—.—.-..–.—.-.———··—·—-·–····–·····——··-·····–··J:l/o—-·—–.-…. –.—-..–….-…–..—.—-..–­-….. .-… .. Cp..G~·’ S. ‘.. . -..-.-..—-.. …-. ‘-” ‘-“. …-­–..-.­-.. I­:E o 2000 o E l: 1500o ”;:; (,) :::l 1000″‘C o… a. 500 ‘ o ~ a. U Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 1.9.2.2 PKO Consumption and Growth Trends Consumption In each country is reflected by the volume of PKO’ products that have been refined and fractionated in the mills, and is to be utilised locally for further processing in the oleochemicals and edible oils and fats refineries as well as biodiesel plants, PKO products refer to RBD PKO, RBD palm kernel olein and RBD palm kernel stearin. Over the past 21 years, global consumption has generally exhibited a positive trend. Global consumption levels increased from 1.4 million MT in 1991 to 5.3 million MT in 2011, registering a healthy CAGR of 6.7% over the period. Consumption is typically affected by market prices of CPKO, availability and prices of other edible oils as substitutes, as well as demand from end-user industries, Additionally, as palm oil products solidify in cold weather, consumption is also affected by seasonality in weather. Consumption of PKO (Global), 1991-2011 7,000 “”1—————————–, I–6,000:E o ~_ 5,000 –.-..-..–..—..—-.–..–.—..—–..—–tjJ.–..–.–……… . —–.—..-..–..
o .6.1 0 l: ~()~.o 4,000 –..——-..–..-..–.—..-_.-.–C. –..–..­–.­”j .~ 3 000 ~..—–..—–. .-.–..-.. –.. -.-. -. ‘—“—-.-‘­j~:::: ftuIul[nI~ ~-~ -~~’–+-“”-‘-i–“”‘-+-“””‘-+”‘”-i-…….j

 

Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 6. INDUSTRY OVERVIEW (Cont’d) In 2011, the top consuming countries of PKO were Malaysia (1.4 million MT), Indonesia (790,000 MT), China (392,000 MT), the United States (296,000 MT) and Germany (271,000 MT). These countries collectively accounted for 59.6% of global demand in 2011, largely attributed to the development of their domestic oleochemical industries as well as the presence of refineries and end-user industries. In this context, consumption of CPKO refers to the volume that is further processed into PKO by the refineries. In Malaysia, consumption of CPKO has generally displayed healthy growth over the past 21 years. CPKO consumption stood at 546,224 MT in 1991, and this has since increased to 2.4 million MT in 2011, registering a CAGR of 7.8% over the period. By and large, domestic CPKO consumption exhibited positive growth trends throughout the 21-year period, albeit a slight dip in 1998 caused by a sharp increase in the local market price of CPKO. Domestic market price of CPKO registered a 46.7% increase from 1998 to 1999 as a result of a slowdown in production due to unfavourable weather conditions (Please refer to Section 1.10 -Price Trend Analysis). This then resulted in consumption falling by 1.3% from 1,095,013 MT in 1997 to 1,080,579 MT in 1998. Local consumption of CPKO continued to grow strongly since then, despite the numerous fluctuations in market prices, emphasising the strength in demand from the oleochemical plants and end-user industries and resilience to adverse economic conditions. Meanwhile, consumption of PKO (Le. RBD PKO, RBD palm kernel olein and RBD palm kernel stearin) refers to the amount of CPKO that has already been refined and fractionated in the refineries, and is to be utilised locally for further processing in the oleochemical plants and edible oils and fats refineries. Local PKO consumption grew at a higher rate than CPKO, increasing from 192,000 MT in 1991 to 1.4 million MT in 2011 at a CAGR of 10.4% over the period. As PKO is typically utilised in end-user industries for the production of consumer goods, its consumption has followed a more fluctuating trend and responded to fluctuations in market price due to changes in the economy and income levels, when compared to consumption of CPKO. Malaysia exports its PKO to more than 100 countries around the world, rendering it as an important exporter of PKO worldwide. The top five major destinations for Malaysia’s PKO in 2011 were the United States (288,742 MT, 24.6%), China (176,961 MT, 15.1%), Japan (98,320 MT, 8.3%), Egypt (54,093 MT, 4.6%) and Brazil (58,964 MT, 5%). 1.9.3 Competitive Landscape The industry players in the oil palm industry is largely dominated by large public listed companies that are vertically integrated, with operations in all three core activities of the oil palm industry (Le. oil palm cultivation, milling as well as refining of edible oils and fats and oleochemicals). As such the industry players found in Section 1.3.2 are also involved in this segment of the oil palm industry. MARKET SHARE AND RANKING IN TERMS OF CPO PRODUCTION Indonesia was the largest producer of CPO with a market share of 48.2% in 2010. In 2010, Indonesia accounted for 22.1 million MT of CPO produced worldwide. Malaysia ranked second with a CPO production volume of about 17.0 million MT in 2010. Relative to the global CPO production, Malaysia alone comprised about 37.1% of CPO produced. Other key producing countries in 2010 included Thailand (1.4 million MT, 3.0%), Nigeria (885,000 MT, 1.9%) and Colombia (753,000 MT, 1.6%). Based on latest publicly available data, FHB, of which FGVH holds a 49% equity interest and is an associate company of FGVH, is the leading CPO producer globally. FHB held a market share of 6.6%, Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 99
6. INDUSTRY OVERVIEW (Cont’d) in terms of its actual production volume of approximately 3.3 million MT in relative to the global CPO production volume of 50.2 million MT in 2011. The other key players in this industry in 2011 were Sime Darby Berhad (2.4 million MT, 4.9%), Golden Agri-Resources Ltd (2.2 million MT, 4.3%), Wilmar International Ltd (1.8 million MT, 3.5%), PT Astra Agro Lestari Tbk (1.3 million MT, 2.5%), PT Salim Ivomas Pratama (838,000 MT, 1.7%), PT Sinar Mas Agro Resources and Technology Tbk (829,000 MT, 1.7%), PT Perkebunan l\Jusantara IV (PERSERO) (702,000 MT, 1.4%), 101 Corporation Berhad (686,917 MT, 1.4%) and KULIM (Malaysia) Bhd (607,653 MT,1.2%). FHB’s Market Share in CPO Production (Global), 2011 Golden Agri­Resources Ltd 4.3% Wilmar Internati anal Limited 3.5% PT Astra Agro Lestari TBK 2.5% Remaining Top 10 Industry Players 7.3% Notes: Market share is calculated based on publicly available information. Remaining top 10 industry players refer to PT Salim Ivomas Pratama, PT Sinar Mas Agro Resources and Technology Tbk, PT Perkebunan Nusantara IV (PERSERO)*, 101 Corporation Berhad and KULIM (Malaysia) Bhd*, *Latest publicly available information. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan In the Malaysian context, FHB, of which FGVH holds a 49% equity interest and is an associate company of FGVH, was the leading CPO producer with production volumes of approximately 3.3 million MT in 2011. In 2011, FHB held a market share of 17.4% relative to the CPO produced in Malaysia which was about 18.9 million MT. Based on publicly available data, other key players included Sime Darby Berhad (1.5 million MT, 7.9%), 101 Corporation Berhad (686,917 MT, 3.6%), Tradewinds Plantations Berhad (250,726 MT, 1.3%), Boustead Holdings Berhad (237,078 MT, 1.3%), United Plantations Berhad (169,337 MT, 0.9%), Hap Seng Plantations Holdings Berhad (168,027 MT, 0.9%), KULIM (Malaysia) Berhad (163,233 MT, 0.9%) and kiM Plantation Berhad (151,096 MT, 0.8%). Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 100 6. INDUSTRY OVERVIEW (Cont’d) FHB’s Market Share in CPO Production (Malaysia), 2011
Industry Players Berhad 3.4% 1.3% Notes: Market share is calculated based on publicly available information on CPO production volumes in Malaysia. Remaining top industry players refer to United Plantations Berhad, Hap Seng Plantations Holdings Berhad, KULIM (Malaysia) Berhad* and IJM Plantations Berhad. * Latest pUblicly available information is in 2010. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan MARKET SHARE AND RANKING IN TERMS OF CPKO PRODUCTION VOLUME In 2011, global production of CPKO stood at 5.6 million MT. Malaysia’s production of CPKO was recorded at 2.1 million MT that year, accounting for 38.1 % of total production worldwide and leading it to rank second after Indonesia. Indonesia remained as the largest producer of CPKO in 2011 with production volume reaching 2.6 million MT that year and garnering 45.6% of the global CPKO production market share. Other key producing countries of CPKO included Nigeria (244,000 MT, 4.3%), Thailand (142,000 MT, 2.5%) and Colombia (84,000 MT, 1.5%). Market share in terms of CPKO production is determined by the production volume of CPKO in 2011, as reported by each industry player. Based on latest publicly available data, the key players in this industry in 2011 were FHB (840,746 MT, 14.9%,), Sime Darby Berhad (550,326 MT, 9.8%), Golden Agri-Resources Ltd (487,298 MT, 8.7%), Wilmar International Limited (413,554 MT, 7.4%), PT Astra Agro Lestari Tbk (269,299, 4.8%.), PT Salim Ivomas Pratama (195,000 MT, 3.5%), 101 Corporation Berhad (165,701 MT, 2.9%), PT Sinar Mas Agro Resources and Technology Tbk (157,990 MT, 2.8%), KULIM (Malaysia) Bhd (148,143 MT, 2.6%) and PT Perkebunan Nusantara IV (PERSERO) (132,000 MT,2.3%). In 2011, FHB, of which FGVH holds a 49% equity interest and is an associate company of FGVH, is the leading CPKO producer globally, based on latest publicly available data. FHB garnered a market share of 14.9% based on CPKO production of 840,746 MT, relative to the global CPKO production volume of 5.6 million MT in 2011. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & Sullivan 2012
6. INDUSTRY OVERVIEW (Cont’d) FHB’s Market Share in CPKO Production (Global), 2011 Sime Darby Berhad Others 9.8% 40.3% Golden Agri­Resources Ltd 8.7% .~ Wilmar I Remaining Top 10 ~International L 14.1% LestariTBK 7.4%I_n_d_u_s_tr_y_p_la_y_e_r_s P_T_A_s_tr_a_A_g_r_O L_im_ite_d —.J4.8% Notes: Market share is calculated based on the information made pUblicly available. Remaining top 10 industry players refer to PT Salim Ivomas Pratama, 101 Corporation Berhad, KULIM (Malaysia) Bhd*, PT Sinar Mas Agro Resources and Technology Tbk and PT Perkebunan Nusantara IV (PERSERO)*. * Latest pUblicly available information is in 2010. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan In Malaysia, FHB, of which FGVH holds a 49% equity interest and is an associate company of FGVH, held a 39.2% market share in Malaysia with about 840,746 MT of CPKO produced in 2011 and was the leading CPKO producer in terms of production volumes in Malaysia that year. Based on pUblicly available data on the volume of CPKO produced in Malaysia, other key players include Sime Darby Berhad (352,420 MT, 16.4%), 101 Corporation Berhad (165,701 MT, 7.7%), and Tradewinds Plantations Berhad (62,283 MT, 2.9%) and Boustead Holdings Berhad (54,269 MT, 2.5%). The following chart illustrates the market share for these key players in the oil palm industry in Malaysia based on CPKO production volumes. [The rest of this page is intentionally left blank] Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 102
6. INDUSTRY OVERVIEW (Cont’d) FHB’s Market Share in CPKO Production (Malaysia), 2011 FHB 39.2% Remaining Top Industry Players 6.7%
Boustead Holdings Berhad 2.5%
Tradewinds Plantations /01 CorporationBerhad* Berhad2.9% 7.7% Sime Darby Berhad 16.4% Notes: Market share is calculated based on publicly available information on the volume of CPKO produced in Malaysia. Remaining top industry players refer to KULIM (Malaysia) Berhad*, United Plantations Berhad, Hap Seng Plantations Holdings Berhad and IJM Plantations Berhad. * Latest publicly available information is in 2010 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan MARKET SHARE IN TERMS OF MILLING AND REFINING CAPACITY As the largest CPO and CPKO producer in Malaysia and internationally, FHB, of which FGVH holds a 49% equity interest and is an associate company of FGVH, has a milling capacity that comprises a large percentage of the total milling and refining capacity in Malaysia. In 2011, the total milling capacity in Malaysia was 99.4 million MT of FFBs per annum. Of this, FHB held a market share of 20.5% with a milling capacity of 20.4 million MT per annum. Additionally, FHB also has a substantially large refinery capacity. Based on the total refinery capacity of existing and operating refineries in Malaysia in 2011 of 23.7 million MT per annum, FHB’s market share was approximately 10.5% with a refinery capacity of 2.5 million MT per annum. 1.10 PRICE TREND ANALYSIS CPO and CPKO prices in Malaysia are similar to global patterns as Malaysia is one of the top producers of CPO and CPKO and a change in Malaysia’s growth patterns of production would playa part in influencing global prices as well. The domestic prices for both CPO and CPKO are influenced by the availability of supply and factors affecting supply including replanting patterns, weather conditions as well as pest and crop diseases. Additionally, CPO and CPKO prices are also determined by other market forces, namely economic conditions, changes in regulatory conditions as well as pricing and availability of other types of substitute vegetable oils. These factors cause prices of CPO and CPKO to exhibit a cyclical growth trend historically. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 103 6. INDUSTRY OVERVIEW (Cont’d)
CPO and CPKO grew to RM1 ,474.60 per MT and RM2,015.90 per MT respectively from 1996 to 2000. Although the five-year average annual prices for CPO and CPKO from 2001 to 2005 fell to RM1,361.20 per MT and RM1 ,698.60 per MT respectively, these prices recovered rapidly from 2006 to 2010, with a five-year average of RM2,353.50 per MT and RM2,826.1 0 per MT. Annual Price of CPO (Malaysia), 1991-2011 3,000 l/lCI) 2,500 (,) ‘C a.. ­2,000Cl)J­01:2: «l …. …. CI) 1,500 ~ a. «:2:

-0::1,000rtl_ .L-~::J C 500 jt-‘ —-‘——-;———-,—–­c « 0 ~~~~~~~~*~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~ ……….AverageAnnualCPOPrices(RMperMT) –5-yearAverageCPOPrices(RMperMT)
Note: Price points refer to average annual price for the calendar year Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Annual Price of CPKO (Malaysia), 1991-2011
……….AverageAnnualCPKOPrices(RM perMT) –5-yearAverageCPKOPrices(RM perMT)
Note: Price points refer to average annual price for the calendar year Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan As weather conditions improved after April 2011, production of CPO and CPKO began to increase, addressing the issue of the lack of supply in the previous two years. Hence, this resulted in the reduction in global prices, as illustrated by the downward trend of the monthly domestic prices for CPO Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & Sullivan 2012
6. INDUSTRY OVERVIEW (Cont’d) and CPKO. l’Jevertheless, the overall average prices for CPO and CPKOin 2011 reached a 21-year high between 1991 and 2011 at RM3,219 per MT and RM4,611 per MT, respectively. Monthly Price of CPO and CPKO (January 2011 -December 2011) 8,000.—————————-­7,000 hiiiiL:~~——————-­(1) ‘L: 0.._ (.) 6,0005,000 t=:~==::~==:i:==~S;ta:=============(1)1­Cl::E
Rl’ … 3,0004,000 t~==~::::~::;;;;:;;;;;;;~~::=::=~S;;~~~:::=… (1) I ~ Q. 2,000 jf————————–­«::E >-0:::::2­-l: 1,oog~f–__._-___,_–_,____-,____________,-_____r-___,_-____,___-____,____-____,__-___._________. o ::E ,,” ,,” ,,” ,,”~~ ~~ ~~ ~’V (f”‘V. ~’V ~-::>’b’ 52>’b’ •”,t§ ~ ‘)’b’ «.~ ~.
-.-Average Monthly CPO Prices (RM per MT) Note: Price points refer to average monthly price Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan SUPPLY AND DEMAND BALANCE OF CPO AND CPKO In general, supply and demand of CPO and CPKO in Malaysia largely grew in tandem with global market trends over the years 1991 to 2011. This is mainly attributed to the fact that Malaysia is one of the world’s largest players in the oil palm industry, and hence is able to influence global production, consumption as well as market prices. Domestic CPO and CPKO prices have typically been determined by surpluses and deficits of production and opening stocks for the year, which are subject to factors such as weather conditions, pricing and availability of other edible oils as substitutes, mature oil palm planted area and closing stocks from previous years, as well as external macro forces that include prevailing global economic climate, prices of crude oil and changes in regulatory conditions. Supply and demand for both CPO and CPKO respectively have exhibited similar growth patterns over the 21-year period, with supply and demand increasing very closely with one another. On the other hand, as with most commodities, market prices of both CPO and CPKO have been seen to fluctuate over the period, registering multiple peaks and troughs throughout. It should be noted that among the two, CPO prices have been seen to be more sensitive, largely due to its greater significance in the global market. In light of the Asian financial crisis in 1998, Indonesia imposed export taxes on both CPO and CPKO to discourage industry players from exporting excessively due to the devaluation of the Indonesian Rupiah against the United States Dollar. The resulting decline in worldwide supply of CPO and CPKO, in which total exports of palm oil and PKO in 1998 fell by 8.5% and 0.6% respectively, led to increases in CPO and CPKO prices. This was further exacerbated by poor weather conditions that year that resulted in decreased output in Malaysia and Indonesia. CPO prices were greatly affected,c1imbing by Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & Sullivan 2012 105 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) \~~”””..h::.c~~w~~~~;r,!1i-‘~’~~~~~~~;’~·:·.. ··· : … ,… ~. ~’ ..’.:.:”‘:~~~.ilI’ 75.1% from an annual average of RM1,358 per MT in 1997 to RM2,377.50 per MT in 1998, while CPKO prices increased by 46.7% from RM1, 721 per MT in 1997 to RM2,525.50 per MT in 1998. Global CPO production expanded by 21.0% to 20.7 million MT in 1999, while world CPKO production increased by 17.2% to 2.6 million MT. In addition, the Government of Indonesia then reduced export taxes on CPO and CPKO in 1999, leading to an increase in the nation’s oil palm products in the international market, whereby global exports of palm oil and PKO rose by 24.2% and 23.9% respectively. This increased supply then led to a sharp decline of 39.0% in annual domestic CPO prices, while CPKO prices were relatively more stable, decreasing only by 3.4%. CPO and CPKO output growth continued in 2000 and 2001, resulting in an excess of supply. In 2000, CPO and CPKO stocks brought forward from the previous year increased by 31.9% and 0.8% respectively, while opening stocks in 2001 for CPO and CPKO increased by 8.3% and 63.5% respectively. This excess in supply of CPO and CPKO, coupled with slower global economic conditions post the September 11 attacks in the United States as well as a surplus of vegetable oils which resulted in a decrease in global prices of substitute vegetable oils, led to further falling prices in 2001. Average CPO and CPKO prices in 2001 were recorded at RM894.50 per MT and RM1 ,009.50 per MT, the lowest point throughout the 21-year period. This subsequently led to higher consumption growth the following year, which then placed upward pressure on market prices in 2002. The global oil palm industry continued to expand over the following years, with both supply and consumption of CPO and CPKO registering healthy growth. In addition, CPO began to gain greater demand relative to other edible oils, notably surpassing soybean oil in 2005 to emerge as the highest consumed edible oil in the global market. Market prices of CPO and CPKO have been seen to be closely tied to the market price of crude oil, due to their use as feedstock in the production of biodiesel and hence, serving as a substitute for crude oil. This has been evident since 2007, whereby market prices of CPO and CPKO have moved in tandem with that of crude oil, in addition to being influenced by supply and demand dynamics of CPO and CPKO, because of its use in biodiesel. In mid-2007, crude oil prices increased sharply from a monthly average of USD70 per barrel in August 2007, breaking the USD100 per barrel mark in late February 2008, and peaking at USD146 per barrel on 3 July 2008 before plummeting throughout the remainder of the year, reaching an average of USD41 per barrel in December 2008. The increase in crude oil prices was brought upon by numerous factors including the political tension between the United States and Iran, falling United States currency, increasing demand from the United States, China and India due to its rising population and economic growth, as well as the increase in demand for crude oil in the European countries for heating purposes as a result of a fear of harsh weather. This fed to increases in CPO and CPKO prices that year, along with prices of other edible oils, though it was noted that CPO prices registered lower increases relative to other edible oils. The annual average price of CPO in 2008 was recorded at RM2,777.50 per MT, the highest annual average price in the 2-year period prior to 2011, while prices of CPKO averaged at RM3,437 per MT in the same year. As palm oil and PKO are utilised in a wide variety of end-user industries geared towards consumer goods, the resulting recession in 2008 and 2009 did not adversely impact supply and consumption of CPO and CPKO, though market prices remained sensitive to external forces. Crude oil prices continued to be volatile in 2009, thereby affecting domestic market prices of CPO, which fell by 19.2% to an average of RM2,244.50 per MT that year, while CPKO declined by 31.9% to reach RM2,341.50 per MT. However, unfavourable weather patterns in 2009 and 2010 led to a slowdown in production growth for both CPO and CPKO, with CPKO registering negative growth in 2010. The EI Nino and La Nina phenomena caused prolonged dry and wet conditions in Indonesia and Malaysia respectively, thereby J!$lIIl\~l!!”flJ~!:r~~~~~~~~!Q!!~!Il!>UI~~!iIli!I!lmll~IilIifl_!ftlI\iili!llifll!m~B’lI~iilS!Wo’liill~~m;_l Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 106 6. INDUSTRY OVERVIEW (Cont’d) affecting crop growth and harvesting activities in the two largest producers of oil palm products. Global CPO production registered low growth of 1.2% in 2010, while global CPKO production declined by 0.1 %. Opening stocks in 2010 for CPO and CPKO were also low with a decrease of 1.0% and 9.9%, respectively, from the previous year. Domestic market prices consequently increased in 2010, with average CPO and CPKO prices that year increasing by 20.5% and 55.3% respectively. Due to prolonged adverse weather conditions which lasted till April 2011, global supply of CPO and CPKO was affected in the beginning of the year, and this consequently lead to a further increase in market prices for CPO and CPKO to reach a 21-year high between 1991 and 2011 in February 2011 with RM3,819 per MT and RM6,835 per MT. Global CPO and CPKO production began to recover after April and global production and consumption increased from the previous year by 9.6% and 5.8% to 50.2 million MT and 49.2 million MT, respectively. Despite the increase in production and consumption, CPO and CPKO prices still recorded the highest average annual prices in the past 21 years at RM3,219 per MT and RM4,611 per MT, respectively. 1.12 INDUSTRY OUTLOOK AND PROSPECTS The supply and demand balance (i.e. stock-to-usage ratio) of palm oil has generally been in tandem with market forces. Historically, production and consumption have been seen to display similar growth patterns, resulting in supply and demand balance of palm oil to tie closely with one another. Market prices have typically been influenced by this supply and demand balance. As such, the future outlook of the oil palm industry in terms of oil palm cultivation and milling can be estimated based on the historical correlation between supply, demand and prices, as well as the impact of future drivers of the industry. Global supply and demand of palm oil have exhibited a stable upward growth trend, albeit dips in 1998 due to adverse weather conditions which caused disruptions in supply. Frost & Sullivan forecasts the supply of CPO to continue to grow on a stable upward trend from an estimated 62.7 million MT in 2012 to 74.5 million MT in 2015, with a CAGR of 5.9% oVer the same period. Likewise, demand is also forecast to increase from an estimated 52.7 million MT in 2012 to reach 60.7 million MT in 2015, with a CAGR of 4.8%. [The rest of this page is intentionally left blank] Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 107 6. INDUSTRY OVERVIEW (Cont’d)
80,000 I . ‘j9″/o =’l -70,000 t————————————————–·——————————————————————————;-~\::’2.~—­…..~\~::;;-…~–“”.-… ~ ~~ ~ 60,000 i————————————————————————————————————c:p..G~z.————._———­E 50,000 —————————————————————————–­————–~~~~1-j,oJ~—————-­~  40,000 l—————————————cp..G{(‘\gg~~~—­ ———————————­ ::l  30,000 —————————————­ ———————————————–­ –­ —­ –­ C/J  o D..  20,000 ———­ ——————————–­ U  10,000 -­-1—-1—–­ —­ -­ –­ o 1  :  ::  :  I
–I –I i ~~~~~*~~*~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Historical and Forecast Trend of Palm Oil Demand (Global), 1991-2015(f)
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan The annual average local delivered prices for CPO in Malaysia increased from RM836.50 per MT in 1991 to RM3,219 per MT in 2011_ To estimate the forecast prices for CPO, Frost & Sullivan has used regression analysis on supply and demand, adjusted relative to prices in 2011_ The annual average local delivered prices for CPO in Malaysia is projected to be RM3,323 per MT in 2012, RM3,118 per MT in 2013, RM2,932 per MT in 2014 and RM2,867 per MT in 2015. 6. INDUSTRY OVERVIEW (Cont’d) Forecast of Supply, Demand and Annual Average Local Delivered Prices for CPO, 2012(e)­2015(f)
l_n”_:~~~:~:~~_::~~:::~~;:;~~~~_:_;~~;~_~~~~_~_ic~r_ic_e_s_
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 2 ANALYSIS OF THE GLOBAL EDIBLE OILS AND FATS MARKET 2.1 MARKET SIZE AND GROWTH TRENDS 2.1.1 Supply Analysis Global production of edible oils and fats displayed steady positive growth over the past 21 years, increasing from 80.1 million MT in 1991 to 179.1 million MT in 2011 and registering a CAGR of 4% over the period. As with CPO and CPKO, global production of oils and fats is subject to various factors such as weather conditions, stock count from previous year(s), fertility of soil, planted area, pest attack and crop diseases and availability of labour, equipment and machinery, in addition to market prices and prevailing global economic conditions. In terms of production volume, crude soybean oil registered the highest production among the edible oils and fats over the years 1991 to 2002, before being surpassed by CPO and CPKO collectively in 2003. Market share of CPO and CPKO collectively in terms of global production grew strongly over the past 21 years, increasing from 15.9% in 1991 to 31.2% in2011 at a CAGR of 3.4%. Over recent years, the collective market share of CPO and CPKO increased from 27.8% in 2006, to 28.2% in 2007, to 30.3% in 2008, to 30.6% in 2009, before declining slightly to 29.6% in 2010 as a result of increased production of other edible oils and fats cultivated in the l\lorthern Hemisphere due to favourable weather conditions in that region. Nevertheless, with combined production of 51.1 million MT, CPO and CPKO remained the most produced of the edible oils and fats in 2010, followed by crude soybean oil (accounted for 23.3%), crude rapeseed oil (accounted for 13.8%), crude sunflower oil (accounted for 7.2%) and crude tallow and grease (accounted for 4.8%). In 2011, CPO and CPKO continued to be the most produced edible oils with its contribution of 31.2% to the global edible oils and fats production. ~~N!Mi!~~S~~. 1~~.:’M~.!I:.”””­Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 109 6. INDUSTRY OVERVIEW (Cont’d)
“C 200,000 ~ 180.000 III 160,000 A0°/0i5 140,000 ————————..——–.—-.————————–C1XGR·-•.._-_. CD .0 i=’ 120,000 ~ ~~ 100,000 -0 LL 0 80000 o’ § ::…. 60,000 +:ig 40,000 -g 20,000 Q: O+—–,—,-y–,—,—o—,—,.-L.,—,—,—o—,—-,–.L-,–,-y-,—–,–.L-,–,-y–, ~w~~~*~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~ _CPO and CPKO -Others Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan ·2.1.2 Demand Analysis Over the last 21 years, consumption of edible oils and fats worldwide exhibited continuous growth. Global consumption increased from 81.5 million MT in 1991 to 178.5 million MT in 2011, recording a CAGR of 4% over the period. Generally, consumption is affected by market prices, production volume, availability of product substitutes and. demand from end-user industries. Edible oils and fats are consumed by four main industries, i.e. food, energy (biofuels), oleochemicals and others such as animal feed. In 2005, palm oil surpassed soybean oil to become the most consumed oil of the edible oils and fats, and grew strongly since then, 27.5% of total consumption of edible oils and fats in 2011. Collectively, palm oil and PKO’s market share by consumption volume generally increased over the 21-year period from 16.1 % in 1991 to 30.5% in 2011, albeit with slight declines in 1995, 1998 and 2010 due to slowdowns in production growth and competition from other edible oils and fats. Soybean oil was the next highest of the edible oils and fats consumed in 2011, accounting for 23.5% of total consumption, followed by rapeseed/canola oil (accounted for 13.5%), sunflower oil (accounted for 7.3%) as well as . tallow and grease (accounted for 4.8%). [The rest of this page is intentionally left blank]
6. INDUSTRY OVERVIEW (Cont’d) Consumption of Edible Oils and Fats (Global), 1991-2011 .

Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 2.2 KEY DEMAND DRIVERS AND CONDITIONS Growing Demand for Food The demand for edible oils and fats is directly driven by the growing demand for food as a result of the overall global population and economic growth. Refer to Section 1..7.1 -Industry Drivers of the Oil Palm Industry for more details. Wide Range of Applications of Edible Oils and Fats Edible oils and fats are utilised in a wide range of food and non-food applications. Due to their different chain lengths, various chemical compositions and physical characteristics, edible oils and fats and their derivatives lend their use for various functions and applications. Oils and fats are used as cooking oil, to add flavour and texture to food, as an ingredient in margarines, shortening and spreads, as substitutes for buttermilk and cocoa butter and as a health supplement. In addition, edible oils and fats have found non-food applications in the production of oleochemicals, for use in the manufacturing of various products such as soaps, cosmetics, candles, paints and biodiesel. Increasing Demand from China and India as the Two Largest Consumer Markets China and India are the two largest consuming and importing countries of edible oils and fats worldwide. China represents the largest market for edible oils and fats, with consumption increasing from 27.1 million MT in 2006 to 33.1 million MT in 2011 and registering a CAGR of 4.1 % over the period. Meanwhile India registered relatively higher consumption growth over the past five years, whereby consumption of edible oils and fats increased from 13.7 million MT in 2006 to 18.2 million MT in 2011 at a CAGR of 5.8%. In 2011, China accounted for 18.6% of global consumption of edible oils and fats, with India ranking as the second largest consumer at 10.2%. China is also the largest importer of edible oils and fats, which include soybean oil, palm oil and rapeseed oil. China’s imports of edible oils and fats have risen from 8.0 million MT in 2006 to 9.2 ~.1l11lm111itW’iI!!imlWtll~~~~_~:r~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 38 © Frost & Sullivan 2012 111 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) million MT in 2011, registering a CAGR of 2.7% over the period. India’s imports have grown strongly over the past five years, increasing from 5.1 million MT in 2006 to 8.8 million MT in 2011, recording a CAGR of 11.3% over the period. India’s jump in imports over recent years can be attributed to rising income levels and various Government schemes that encourage demand, such as the Public Distribution System which provides edible oils, such as imported oils, at a subsidised price. In 2011, China’s total imports of edible oils and fats accounted for 13.5% of the global imports, while India’s imports were 12.9%. Increase in Use of Biodiesel Depleting crude oil reserves have spurred the use of biodiesel as a source of energy in various parts of the world. As biodiesel is derived from edible oils and fats, it possesses several benefits over fossil fuel such that it is renewable, less harmful to the environment and biodegradable. Thus, many Governments have legislated the use of biodiesel in vehicles, usually in a blend with diesel, to reduce dependence on crude oil as well as to reduce carbon emissions. Countries such as the United States, member countries of the European Union, Australia, Brazil, as well as countries in Asia which include Malaysia, Indonesia, Philippines and Thailand have introduced legislations regarding biodiesel. These legislations mandate a minimum percentage of biodiesel to replace diesel or petroleum for use in automobiles. In Malaysia, the Government implemented a B5 programme, which rolled out the sale of biodiesel in the Central Region in several stages, including Putrajaya (June 2011), Melaka (July 2011), Negeri Sembilan (August 2011), Kuala Lumpur (October 2011) and Selangor (November 2011). With several countries such as Finland, Bulgaria, Poland and Italy increasing national blending quotas in 2011, demand for edible oils and fats for biodiesel production is expected to continue to rise over coming years. COMPETITIVE LANDSCAPE IN MALAYSIA In 2011, there were about 70 industry players in the edible oils and fats industry in Malaysia. Among these players are major refiners of edible oils and fats such as FHB and Felda IFFCO (Felda IFFCO Sdn Bhd) which are an associate company and joint-venture of FGVH respectively (with combined refining capacity of 3.3 million MT per annum in Malaysia), 101 Loders Croklaan Oils Sdn Bhd (with refining capacity in Malaysia of 2.4 million MT per annum), Lam Soon Edible Oils Sdn Bhd, United Plantations Berhad, Mewah International Inc (with refining capacity in Malaysia of 2.8 million MT per annum), Sime Darby Jomalina Sdn Bhd, Sime Darby Kempas Sdn Bhd and Wilmar International Limited (with estimated refining capacity in Malaysia of 4.7 million MT per annum through PGEO Group Sdn Bhd). Most of these are multinational companies with integrated operations within the palm oil industry value chain and have operations and market presence worldwide. The edible oils and fats market, under the food and health-based downstream segment of palm oil, has been identified by the Government of Malaysia as one of the NKEAs under the oil palm ETP. FHB and Felda IFFCO engage in the refining of edible oils and fats and are significant players in Malaysia based on their combined refinery capacity of 3.3 million MT per annum. As such, FHB and Felda IFFCO are well-positioned to reap the benefits of the growing edible oils and fats industry.
6. INDUSTRY OVERVIEW (Cont’d) MARKET OUTLOOK AND PROSPECTS Frost & Sullivan expects global consumption of edible oils and fats to record healthy growth over the next four years. It is estimated that in 2012, global consumption will increase by 4.2% from 2011 to reach 209.5 million MT, with demand expected to remain concentrated in Asia. In 2011, China remained as the leading consumer of edible oils and fats, accounting for 18.6% of global consumption in 2011, slightly below its 2010 market share of 18.9%. India (10.2% of global consumption), the United States (9.6% of global consumption), Brazil (4.5% of global consumption) and Indonesia (4.1 % of global consumption) also remained as top consumers in 2011. Other expected notable consumers include Germany (3.5%), Russia (2.3%) and France (2.3%). The strong demand is expected to be driven by the wide range of applications of edible oils and fats, continued increasing demand from China and India, global population growth and increase in the global use of biodiesel over the coming years. Frost & Sullivan also expects palm oil to continue to play its vital role as the most consumed edible oil and fat globally on the back of its lower pricing and higher versatility relative to other edible oils and fats. This is expected to be supported by increasing planted area, strong Government backing in Malaysia and Indonesia as well as continuous research and development on genetics and new applications. This strong consumption growth is projected to be supported by strong production growth, particularly for palm oil, which is the most produced and consumed of the edible oils and fats. Changes in export taxes of key producing countries, specifically Indonesia and Malaysia, have an impact on global supply. In late 2011, Indonesia made a move to increase its export tax on CPO to 7.5% from 1.5%, while the export tax on refined palm oil products was decreased to 13.0% from 25.0%, to boost the locaL downstream industry. As a result; Indonesia’s production of refined palm oil products is expected to record high growth over coming years. Meanwhile, Malaysia announced a 3.6 million MT duty free export quota for CPO for 2012, and anticipates an increase in exports. In response to Indonesia’s export tax reduction on refined palm oil products, the Government of Malaysia is looking into providing incentives for its local downstream industry by establishing a fund to assist stakeholders in the downstream segment to ensure Malaysia’s downstream product exports remain competitive. Malaysia maintains a zero export duty policy for refined palm oil products. [The rest of this page is intentionally left blank]
Executive Summary ofthe IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 113 6. INDUSTRY OVERVIEW (Cont’d) 3  ANALYSIS  OF  THE  GLOBAL OLEOCHEMICAL  MARKET  3.1  MARKET SIZE AND GROWTH TRENDS
The global oleochemical industry consumes edible oils and fats as raw materials. In this context, global consumption· is described as the amount of edible oils and fats that is consumed by the global oleochemical industry, which is to be processed into oleochemicals such as fatty acids, fatty acid methyl esters, fatty alcohols, glycerine and their derivatives for use in household products, personal care products and other industrial and consumer goods. Global consumption of edible oils and fats by the oleochemical industry displayed steady growth over the past 21 years, increasing from 8.2 million MT in 1991 to 17.8 million MT in 2011, registering a CAGR of 4% over the period. Consumption is strongly driven by the wide range of applications for oleochemicals and increasing demand from emerging markets, Consumption of the Oleochemicallndustry (Global), 1991-2011
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan The oleochemical industry is largely concentrated in countries that are key producers of edible oils and fats, which include Malaysia, China, the United States, Indonesia and member countries of the European Union, along with Japan. Production and consumption were previously driven by Western markets, but as the availability of palm oil and PKO began to increase at a quicker pace when compared to other edible oils and fats, the bulk of production and consumption of oleochemicals began to shift to Asia.
I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) 3.2 KEY DEMAND DRIVERS AND CONDITIONS Wide Range of Applications of Oleochemicals As basic oleochemicals undergo chemical processes to produce derivatives and specialties with numerous types of properties and functions, they are subsequently applied as building blocks in a wide variety of end-user industries ranging from consumer goods, industrial goods, food and biodiesel. Oleochemicals such as fatty acids, fatty alcohols, glycerine and their derivatives are utilised, among others, as surfactants, emulsifiers, thickeners, lubricants and plasticisers, mainly in non-food applications. These olechemicals are then used as primary input in the manufacturing of household products, personal care products, pharmaceuticals, and other industrial applications. Furthermore, fatty acid methyl esters are used as biodiesel to power vehicles and industrial machinery. The range of functions and applications of oleochemicals, especially as a core ingredient in the manufacturing of a wide range of consumer goods, emphasises its importance in the global market and drives the growth of the industry. Increasing Demand from Emerging Markets Consumption of oleochemicals is growing in emerging markets such as China, India, South East Asia and Central and South America, in line with economic development in these markets. Rising demand for consumer goods such as soaps, detergents, personal care and cosmetics is supported by a growing population and strong economic growth. Emerging markets such as the East Asia and Pacific region, Europe and Central Asian region, Latin America and Caribbean region and South Asian region have registered healthy population increases, along with growth in GOP over the years 2006 to 2010, albeit with dips in 2008 and 2009 as a result of the global economic recession. The growing population and flourishing economies of these emerging markets is expected to spur the growth in demand for consumer goods that contain oleochemicals and their derivatives, thereby driving the consumption of , oleochemicals worldwide. 3.3 COMPETITIVE LANDSCAPE IN MALAYSIA In 2011, the cumulative oleochemical manufacturing capacity of the 18 industry players in Malaysia was estimated at 2.6 million MT per annum. These oleochemical manufacturing entities mainly utilise palm oil and PKO as feedstock. Many industry players have integrated operations within the palm oil value chain, which include plantation and processing as well as supporting services such as bulking facilities and logistics. Malaysia is one of the major producers of palm oil in the world. In 2011, Malaysia produced approximately 18.9 million MT of CPO, eqUivalent to 37.7% of the world’s production. By establishing manufacturing facilities in Malaysia, these industry players have direct and abundant access to palm oil feedstock that is used to produce oleochemicals for the manufacturing of pharmaceuticals, and household and personal care products such as beauty products, soap, shampoo, toothpaste and detergents, as well as industrial product additives for the manufacturing of paints, plastics and chemical coatings, among others. FPG Oleochemicals Sdn Bhd, a joint-venture company of FHB, is a significant player in Malaysia based on its production capacity of 280,000 MT of methyl ester, 80,000 MT of fatty alcohol, 35,000 MT of glycerine and 60,000 MT of detergent in 2011. Its affiliation with Procter & Gamble, one of the largest consumer goods company in the world serves as an added advantage, enabling FPG Oleochemicals Sdn Bhd direct market access to the end consumer market. l\MIII”I!MS~~I~_.I!~~~.~~Wlll1~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 42 © Frost & Sullivan 2012 115 6. INDUSTRY OVERVIEW (Cont’d) Malaysia produced approximately 15% of the global oleochemicals production volume, signifying the nation’s position as a major producer worldwide. The oleochemical industry in Malaysia mainly feeds to the higher value industries for the production of pharmaceuticals, consumer household and personal care products and biofuels. Malaysia is also home to many consumer goods manufacturers that supply consumer goods to domestic markets and across the Asian region. Demand for these products is expected to be driven by the high population and key emerging economies such as China and India as well as the developing countries in South East Asia. MARKET OUTLOOK AND PROSPECTS Frost & Sullivan projects the consumption of the oleochemical industry to witness strong growth over the next four years, increasing from an estimated 18.5 million MT in 2012 to 21.0 million MT in 2015 at a CAGR of 4.3% over the four-year period, in line with expected increasing global demand for oleochemicals. The global market for oleochemicals is expected to be strongly driven by the wide range of applications of oleochemicals along with increasing demand from emerging markets. This strong demand is expected to be supported by increasing capacity in Asia as well as research and development activities for the development of new derivatives and the discovery of new applications. [The rest of this page is intentionally left blank] ~~~~iE’…. i.!.I.’mll~_.j~.~~ __iQq~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 116 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) 4  ANALYSIS OF THE SUGAR REFINING INDUSTRY  4.1  INDUSTRY SIZE AND GROWTH TRENDS  The  sugar  refining  industry  in  Malaysia  witnessed  steady growth  over  the  past  21  years,  with
production volume of refined sugar registering a CAGR of 3.2% over the years 1991 to 2011. In 1991, the annual production volume of refined sugar stood at 895,366 MT, and grew by 85.6% to 1.7 million MT in 2011. The growth trend of local production of refined sugar is highly influenced by several factors, including current world and domestic economic conditions, population growth, availability and global prices of raw sugar, crude oil prices, and weather conditions. Production Volume of Refined Sugar (Malaysia), 1991-2011 …. ttl O’l :l (f) “C Q)c_ \t= ….Q)::E a::: 0 …. 00 0 c­0­’.;: to) ::l “C 0…. Il. 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
L_.___________.__._.___________________._____________.____.___.._._____…___ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan SUGAR CONSUMPTION AND GROWrH TRENDS Global consumption of refined sugar exhibited steady growth over the years 1991 to 2011, registering a CAGR of 1.8% over the 21-year period. In 1991 global consumption was recorded at 109.9 million MT, and since then grew by 43.9% to 158.2 million IVIT in 2011. Consumption is driven mainly by countries in Central and South America, Africa, the Middle East and Asia, with growth trends influenced by several factors such as increased consumer income, population growth, and rising demand for processed foods and drinks containing sugar. As sugar is largely regarded as a staple food item, consumption has not been seen to be adversely impacted during periods of economic crisis. Consumption figures have continued to grow during the Asian financial crisis in 1998, along with the global financial crisis in 2008/2009. Global consumption grew at a CAGR of 1.6% over the years 1991 to 2000, and increased to 1.9% over the years 2001 to 2010. The increased growth rate in the latter decade can be attributed to increased consumer income in developing countries, which constitute the largest consumers of sugar. Global consumption grew at the highest rate in 2007 by 6.0% from 141.8 million MT in 2006 to 150.4 million MT, attributed to a decline in the market price of raw sugar brought about by a surplus in global production. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & SullIVan 2012 117 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) Consumption of Refined Sugar (Global), 1991-2011
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan In 2011, the top five sugar consuming countries by volume “”ere India (23 million MT), China (14 million MT), Brazil (12 million MT) the United States (10.3 million MT) and Russia (5.9 million MT). These countries consumed the highest volumes of sugar by virtue of having a large population. Of the top five countries, all have shown a positive trend over the years 1991 to 2011 with the exception of Russia, whose sugar consumption declin~d at a CAGR of 0.6% over the period. India and China both exhibited high growth in sugar consumption, with CAGRs recorded at 3.5% and 3.6% respectively over the same two decades. High growth in these two countries was due to increasing population as well as growth in the food and beverages processing industry. Brazil and United States also showed steady growth, thol1gh at a more relatively moderate pace, with CAGRs recorded at 2.7% and 1% respectively. In Malaysia, the consumption of refined sugar displayed an uptrend over the years 1991 to 2010, growing at a CAGR of 4.1 % over the period. Domestic consumption grew by 113.9% from 663,000 MT in 1990 to 1.4 million MT in 2010. The increase in sugar consumption is attributed to rising GOP, along with growth in the food and beverages manufacturing and processing industries. Domestic consumption is closely tied to the domestic production levels of refined sugar, as the Government of Malaysia restricts the importation of refined sugar. [The rest of this page is intentionally left blank] Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries ©Frost & SuI/ivan 2012 118 6. INDUSTRY OVERVIEW (Cont’d) Consumption of Refined Sugar (Malaysia}, 1991-2010 1,600 … ctl g 1,400 (J) -g 1,200 c ~ Q) i=’ 1,000D::::::…. ~ g 800 o~._­~ 400 c o o 200 o
i i ——–= ! C{>.G~

Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 4.3 KEY DEMAND DRIVERS AND CONDITIONS Growth of Food and Beverage Manufacturing Industry Sugar is a versatile food ingredient, and has a wide array of uses in food and drinks. Sugar is mainly used as a sweetener to increase palatability, but is also used as a bulking agent and as a preservative in food. As such, sugar is used as an ingredient in the manufacturing and processing of a variety of food and drinks, driving the sugar refining industry forward. The sales values of various food manufacturing industries exhibited high growth from 2007 to 2011. The total sales value of the manufacturing of soft drinks in Malaysia grew from RM855.5· million in 2007 to RM1.6 billion in 2011, registering a strong 83.3% increase over a span of five years. Over the same period, the manufacturing of biscuits and cookies grew by 26.1 %, the manufacturing of bread and other bakery products grew by 79.8% and the manufacturing of chocolate products and sugar confectionery grew by 27.5%. Total sales value of the manufacturing of animal feed, which utilises molasses, grew by 33.4% from 2007 to 2011. The sales value of the manufacturing of sugar grew by 67.7% over the same period, from RM2.2 billion in 2007 to RM3.7 billion in 2011. The production volume of carbonated and non-carbonated sweet beverages also grew strongly over the years 2007 to 2011; Total production volume of non-carbonated sweet beverages grew from 1.8 billion Iitres in 2007 to 2.9 billion Iitres in 2011, registering growth of 65.5%. The production of carbonated sweet beverages grew by 16% from 366.4 million Iitres in 2007 to 424.8 million litres in 2011. The production of sweetened condensed milk also exhibited strong growth, with production volume recording 19.5% growth from 170,136 MT in 2007 to 203,346 MT in 2011. Limited Product Substitution Sugar is a staple food item and is considered a necessity in Malaysia, both in the food and beverages industry as well as for household consumption. Sugar is a natural source of energy for our body and possesses many qualities that are not easily found in other food products. Sugar substitutes generally only mimic the sweet taste of sugar. _ilIliii’l!.. ·r.tI@~I~.I~.~_~~~I~_Ill\’fJiI1lI!:I.I.’l~_ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 46 © Frost & Sullivan 2012 119 6. INDUSTRY OVERVIEW (Cont’d) Sugar substitutes have been available in the domestic market for many years. Aspartame, an artificial sweetener and stevia, a natural sweetener are exam pies of sugar substitutes used by households in Malaysia, while high fructose corn syrup is used for industrial consumption. However these sugar substitutes are not as widely available as sugar itself, and their prices are not controlled by the Government. Hence, the limited options of product substitutes available in Malaysia serves as a driver for the industry. Population Growth Malaysia’s population grew from 18.5 million in 1991 to 28.3 million in 2010 at a CAGR of 2.2% over the 20-year period. Their growth in population supports the demand for sugar in Malaysia, which is consumed by all age groups. In addition, the population growth in Asia Pacific registered a CAGR of 1.1 % from 3.0 billion in 1991 to 3.7 billion in 2010, serving as a driver for sugar consumption in this region 4.4 KEY SUPPLY CONDITIONS AND DEPENDENCIES 4.4.1 Production of Raw Sugar and Growth Trends Global production of raw sugar proved to be volatile over the past two decades, but nevertheless growing at a CAGR of 1.7% over the years 1991 to 2011. Global production of raw sugar from both sugar cane and sugar beet was recorded at 114.4 million MT in 1991, and grew by 41.1 % to 161.4 million MT in 2011. Global production of raw sugar is strongly driven by Brazil, India, China, the United States and Thailand, along with the members of the European Union. In 2011, these sugar producing nations collectively accounted for 61 % of total production of raw sugar worldwide. Brazil, India and Thailand produce cane sugar, while China, the United States and the European Union produce both beet and cane sugar. This is because cane sugar only grows in tropical climate, while conversely beet sugar thrives in temperate climate. Tropical sugar beet has yet to be grown on a wide commercial scale. Production of Raw Sugar (Global), 1991-2011
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cant’d) In Malaysia, raw sugar is solely produced on a commercial scale in Kilang Gula Felda Perlis Sdn Bhd’s plantation in Chuping, Perlis, whereby all of the raw sugar milled will be used as input in its sugar refinery. Locally produced raw sugar accounts for 1% of the total amount of raw sugar used as input in sugar refineries in Malaysia. Domestic production of raw sugar witnessed a decline over the years 1991 to 2011, falling at a CAGR of 7.2%. In 1991, Malaysia produced 50,678 MT of raw sugar, and this has since declined to 11,470 MT in 2011 . The decreasing production level of domestic raw sugar is also attributed to decreasing acreage of land used for sugar cane cultivation. According to the Department of Statistics (DOS) and MSM, the sugar cane plantation area in Malaysia shrunk at a CAGR of 7.5%, decreasing from 22,500 hectares in 1991 to 4,700 hectares in 2011. The sugar cane plantation area remained relatively unchanged from 1991 to 2001, but began decreasing rapidly from 2002 onwards. Sugar cane plantation area has been decreasing since 1991 as a result of a shift to higher value crops, namely oil palm and rubber. COMPETITIVE LANDSCAPE AND MARKET SHARE The players in the sugar refining industry in Malaysia are: • MSM Malaysia Holdings Berhad ~ Kilang Gula Felda Perlis Sdn Bhd (KGFP) ~ Malayan Sugar Manufacturing Company Berhad (MSM) • Tradewinds (M) Berhad . ~ Central Sugars Refinery Sdn Bhd ~ Gula Padang Terap Sdn Bhd The production of refined sugar in Malaysia is closely monitored by DOS. Market share is calculated based upon total production volume of refined sugar released by DOS. In 2011, the total production of refined sugar in Malaysia was recorded at 1.7 million MT. In 2011, MSM Malaysia Holdings Berhad (MSM Holdings), which is subsidiary of FGVH, produced 958,377 MT of refined sugar, of which MSM produced 822,384 MT and KGFP produced 135,993 MT of refined sugar. Hence based on these figures, MSM and KGFP collectively held a market share of 56.9% of the total production volume of refined sugar in Malaysia in 2011, making them the industry leader in 2011. In addition to MSM Holdings, FGVH also holds a 20% stake in Tradewinds. Based on total production volume in Malaysia of 1.7 million MT and MSM’s production volume of 958,377 MT in 2011, Tradewinds’ market share, in terms of production volume, was 43.1 % in 2011 as MSM and Tradewinds are the only two sugar refiners in the country. 6. INDUSTRY OVERVIEW (Cont’d) INDUSTRY OUTLOOK AND PROSPECTS Refined sugar production in Malaysia is forecast to increase at a steady pace from an estimated 1.7 million MT in 2011 to 1.9 million MT in 2015, at a CAGR of 2.9% over the period. Growth in domestic production of refined sugar is supported by increasing levels of domestic sugar consumption, which is a key driver for the sugar refining industry. Frost & Sullivan estimates that consumption of refined sugar in Malaysia will grow at a healthy pace from 1.5 million MT in 2011 to 1.8 million MT in 2015, registering a CAGR of 4.3%. Domestic sugar consumption is expected to exhibit positive growth as a result of increased demand from both industrial as well as household consumers. Growth in the food and beverages manufacturing and processing industries, population growth and limited product substitution are expected to drive sugar consumption, and consequently the sugar refining industry forward. Projected Refined Sugar Production and Consumption (Malaysia), 2011(e)-2015(f)
2011(e) 2012(f) 2013(f) 2014(f) 2015(f) -Production -Consumption Note: Production volume for refined sugar in 2011 is actual production volume for the year. Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan [The rest of this page is intentionally left blank] ..~~..,J’,ii;’~~~~!liI’ .. ~!11.~ Executive Summary ofthe IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 122 6. INDUSTRY OVERVIEW (Cont’d)
5 ANALYSIS OF THE RUBBER INDUSTRY 5.1 PLANTED AREA AND GROWTH TRENDS Over the years 1995 to 2010, Indonesia emerged as the country with the largest total rubber area globally, recording total rubber planted area of 2.4 million hectares in 1995, then increasing to 3.4 million hectares in 2010 at a CAGR of 2.3%. Meanwhile, total rubber area in Thailand grew from 2.0 million hectares in 1995 to 2.8 million hectares in 2010, registering a CAGR of 2.4% over the period. Malaysia remained as a key plantation nation despite recording a smaller total rubber area of 1.0 million hectares in 2010 as compared to 1.7 million hectares in 1995, registering a declining CAGR of 3.3%. This was followed by China, which recorded a total rubber area of 1.0 million hectares in 2010, whereas Vietnam and India, each recorded total rubber areas of 715,000 hectares and 712,000 hectares in 2010. Total Rubber Area of Selected Key Countries (Global), 1995-2010
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Indonesia consistently emerged as the country with the largest tapped rubber area between 2003 and 2010 owing to its large availability of land for plantation purposes and encouraging Government policies. Tapped rubber area in Indonesia increased from 2.3 million hectares in 2003 to 2.8 million hectares in 2010 at a CAGR of 2.4%. Thailand is also a key rubber plantation country with 1.9 million hectares of tapped rubber area in 2010. Vietnam’s tapped area increased from 267,000 hectares in 2003 to 445,000 hectares in 2010, at a CAGR of 7.6% during this period. While Malaysia remains a key plantation nation, its tapped rubber area contracted at a CAGR of 4.9%, from 932,000 hectares in 2003 to 655,000 hectares in 2010, as a result of crop sWitching to oil palm. During this same period of 2003 and 2010, oil palm planted area increased from 3.3 million hectares to 4.2 million hectares at a CAGR of 3.5%. Executive Summary ofthe IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 123 6. INDUSTRY OVERVIEW (Cont’d) Tapped Area of Selected Key Countries (Global), 2003-2010 3,000 ! I I
.. ~.(il 2,500 1 .. • • ••• l-It! I ](1) 2,000I g 1,500 I •••• •••• o I } 1,000 1 ;: ;=:–; ; :; : ;: :7?t st­~ 500 c.. I g. 0 -I I­~/’l;) ~~ ~’o ~’b ~O; ~~ ~ ef ef ~ ef ef efef ef -+-Indonesia _Thailand “””,*,”,”Malaysia ~China ~India …….Vietnam
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 5.2 RUBBER CONSUMPTION AND GROWTH TRENDS Global consumption of natural rubber exhibited a positive trend over the past 21 years, growing from 5.1 million MT in 1991 to 10.9 million MT in 2011 at a CAGR of 3.9% over the period. Global consumption of natural rubber is driven by demand from end-user industries, especially the vehicle tyre and rubber glove manufacturing industries, along with population growth, and is affected by market prices of both natural and synthetic rubber and prevailing economic conditions. Consumption experienced a slight dip in 2009 as demand for end-user rubber-based products experienced a decline due to the 2008/2009 global financial crisis. In 2011, approximately 51.2% of the global demand for natural rubber came from China, India and the United States. Similar to production trends, global consumption of synthetic rubber recorded positive growth over the same period, albeit at a lower rate relative to natural rubber. Global consumption of synthetic rubber increased from 9.2 million MT in 1991 to 14.9 million IVIT in 2011, registering a CAGR of 2.4% over the 21-year period. The percentage share of synthetic rubber over total global consumption of rubber experienced a slight decline over the past two decades, whereby synthetic rubber accounted for 64.6% of total rubber consumption in 1991, and this fell to 57.7% in 2011. Synthetic rubber is widely consumed in countries that are not producers of natural rubber, such as the United States and countries in Europe. Overall global consumption of both natural and synthetic rubber grew at a steady pace from 14.3 million MT in 1991 to 25.9 million MT in 2011, at a CAGR of 3% over the period. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 124 6. INDUSTRY OVERVIEW (Cont’d) Consumption of Natural Rubber (Global), 1991-2011 18,000 -,————————-_——~~­Dluhber 2.4% __ ——­16,000 f'” –.-::;:;;i GR SYIl~’!t!~ ——-° 14,000
t: o ‘;:; c. E ::::l III t: o o o

-Natural Rubber -Synthetic Rubber L-_ Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Natural rubber consumption levels in Malaysia increased from 216,000 MT in 1991 to 401,920 MT in 2011, registering a CAGR of 3.2% over the period. Unlike domestic production trends which were largely fluctuating and cyclical, domestic consumption of natural rubber exhibited a steadier and positive growth pattern over the last two decades, albeit with episodes of declines during periods of low demand. Consumption of Natural Rubber (Malaysia), 1991-2011 o oE. l-Q).0 .0 ::::la::: ~ 2­-~ o ~ t: o :;::c. § III § o 500 450 400 350 300 250 200 150 100 50 o
–r -,­,­Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 125 6. INDUSTRY OVERVIEW (Cont’d) Natural rubber produced in Malaysia is consumed by a wide range of industries to be manufactured into rubber products. Malaysia’s consumption of natural rubber can be segmented into five main consuming industries: latex products, tyres and tubes, manufacturing of footwear, manufacturing of other rubber products and for use in other manufacturing industries. Natural rubber is mainly consumed by manufacturers of latex products in Malaysia, whereby the industry’s consumption of natural rubber increased from 149,016 MT in 1991 to 404,612 MT in 2010 at a CAGR of 5.4%. In 2010, the manufacturing of latex products accounted for approximately 88.2% of domestic rubber demand, which includes the manufacturing of rubber gloves, rubber threads, catheters and other latex products. The tyre and tube industry consumed 8.1 % of domestic demand, while manufacturing of other rubber products, other manufacturing industries and manufacturing of footwear constituted 2.1 %, 1.5% and 0.2% of local consumption of natural rubber in 2010. 5.3 KEY DEMAND DRIVERS AND CONDITIONS Demand from Vehicle Sector Processed natural rubber is manufactured into various end-products such as tyres, gloves, industrial products, and footwear. However, the tyre manufacturing industry is the largest end-user of natural rubber, accounting for approXimately 40% of global natural rubber produced. Tyre companies have a large presence in Asia, especially in China, and this explains the large consumption in this region. China is becoming an important market for tyre producers with its rapidly growing automotive industry. Tyres have an average life span of two years or approximately 30,000 kilometres. Therefore, there is a significantly large tyre aftermarket, as every vehicle purchased would require, on average, four new tyres every two years. Furthermore, commercial vehicles such as lorries and trucks would typically require more replacement tyres, as they endure heavier usage over rougher terrain, amounting to greater wear and tear. Revenue for the global vehicle tyre market grew from RM274.6 billion in 2001 to an estimated RM460.8 billion in 2011, recording a CAGR of 5.3% for that period. With the exception of a contraction of 12.6% in 2009 due to the global economic crisis, the global tyre market registered positive growth rates from 2001 to 2011 as a result of stable demand from the global automotive industry. In line with higher demand for vehicles, the demand for tyres is rising globally especially in Asia where vehicle sales are driven by higher disposable incomes and easier vehicle financing options. The global vehicle tyre market ;s expected to grow further from RM479 billion in 2012 to RM576.1 billion in 2015 at a CAGR of 6.3%. Demand from Rubber Glove Manufacturers Rubber gloves are classified into latex and nitrile gloves. Latex gloves are made from natural rubber and are categorised into both powder and powder-free gloves. Nitrile gloves on the other hand are produced from synthetic rubber, which is an alternative to natural rubber gloves, and suitable for users with protein allergies. Both latex and nitrile gloves are used in the healthcare industry and industrial sectors which include food and beverages, retail and automotive. The global production of rubber gloves grew from 17.1 billion pairs in 2001 to 36.8 billion pairs in 2010, recording a CAGR of 8.5% for that period. Growth in this industry was on an upward trend for the past ten years with peaks in 2003, 2004, 2006 and 2010 as a result of disease outbreaks such as the Severe Acute Respiratory Syndrome (SARS) in 2003, the Bird Flu (H5N1) epidemic from 2004 to 2007 Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 126 6. INDUSTRY OVERVIEW (Cant’d) and the Swine Flu (H1 N1) pandemic outbreak in late 2009, resulting in larger than usual demand for rubber gloves in the healthcare sector. Going forward, the industry is expected to grow at a CAGR of 7% to reach 50.4 billion pairs in 2015 from 41.1 billion pairs in 2012 due to the fact that rubber gloves will remain as a necessity for selected industries, particularly the healthcare industry. Increasing healthcare spending remains a key driver for the rubber gloves industry as the usage of medical gloves increases. Based on latest available data, total global expenditure on healthcare increased from USD566 per capita in 2004 to USD899 per capita in 2008 driven by the rapid aging of the world population, particularly in developed countries, and the emergence and adoption of new medical technologies. 5.4 KEY SUPPLY CONDITIONS AND DEPENDENCIES 5.4.1 Natural Rubber Plantation Area and Growth Trends Indonesia consistently emerged as the country with the largest tapped rubber area between 2003 and 2010 owing to its large availability of land for plantation purposes and encouraging Government policies. Tapped rubber area in Indonesia increased from 2.3 million hectares in 2003 to 2.8 million hectares in 2010 at a CAGR of 2.4%. Thailand is also a key rubber plantation country with 1.9 million hectares of tapped rubber area in 2010. While Malaysia remains a key plantation nation, its tapped rubber area contracted at a CAGR of 4.9% from 932,000 hectares in 2003 to 655,000 hectares in 2010 asa result of crop switching to oil palm. During this same period of 2003 and 2010, oil palm planted area increased from 3.3 million hectares to 4.2 million hectares at a CAGR of 3.5%. Tapped Area of Selected Key Countries (Global), 2003-2010 li)  3,000  …. 9  ~ …  …….  Q)… ro- 2,500  ~..  (.) Q) .!: 0  2,000  – — — — — — — – 0 E  1,500  ro Q)… <t:  1,000  .­ – …..  ….  ….  – .A  “C Q) Q. c.  500  ~ …..  – ~  – – “‘”  -­ ro I­ 0  2003  2004  2005  2006  2007  2008  2009  2010
i -t-Indonesia —Thailand “”,”,,~~lV1alaysia -+O:-China ~India =<‘fil’~’ Vi etn amI ~ Note: Data from 1991-2002 is not publicly available
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan ~~~lftI..~~~~~.~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 127 6. INDUSTRY OVERVIEW (Cont’d) 5.5 COMPETrrlVE LANDSCAPE AND MARKET SHARE Rubber trees flourish in tropical climates along the equator and as such the global upstream rubber industry is largely centralised in Asia, particularly in Thailand, Indonesia and Malaysia. In 2010, Indonesia reported a total rubber area of 3.4 million hectares and natural rubber production of 2.7 million MT. Thailand reported a total rubber area of 1.9 million hectares and natural rubber production of 3.3 million MT. Meanwhile, Malaysia reported a total rubber area of 1.0 million hectares and natural rubber production of 939,000 MT in the same year. As such, key players within the global upstream and midstream rubber industry are largely based in Thailand, Indonesia and Malaysia, where rubber plantations and rubber processing facilities are present. It is noted that the nature of the rubber processing industry in these countries is considered competitive, due to the large number of local players vying for market share. Below is a non-exhaustive list of selected key industry players in Indonesia, Thailand, Malaysia and Singapore, arranged in alphabetical order: • FGVH
• GMG Global Limited (incorporated in Singapore with operations in Cameroon and Ivory Coast)
• Indofood Agri Resources Limited
• Kuala Lumpur Kepong Berhad
• PT Astra Agro Lestari Tbk
• PT Bakrie Sumatera Plantations Tbk
• PT JA Wattie Tbk
• Sime Darby Berhad
• Southland Holding Company Limited
• Sri Trang Agro Industry Public Listed Company
• Thai Hua Rubber Public Company Limited
• Von Bundit Company Limited

5.5.1 Market Share and Ranking 5.5.1.1 Total Rubber Area Indonesia (3.4 million hectares), Thailand (2.8 million hectares) and Malaysia (1.0 million hectares) dominated the total rubber area globally, recording a market share of 34.2%, 27.6% and 10.1 % respectively in 2010 in terms of total rubber area. These three countries accounted for approximately 71.9% of total rubber area in 2010. China ranked fourth in terms of total rubber area, recording a market share of 9.9%, followed by Vietnam and India, both of which held a 7.1% market share. The global rubber industry is a highly fragmented industry as there are possibly hundreds of industry players involved in the cultivation of rubber trees. Based on latest publicly available data published by industry players and based on the estimated total global rubber area of 10.1 million hectares in 2010, the selected key industry players in the top three producing countries in 2010 were GMG Global
6. INDUSTRY OVERVIEW (Cont’d)
Limited (87,560 hectares, 0.9%), Kuala Lumpur Kepong Berhad (24,067 hectares, 0.2%), Indofood Agri Resources Limited (22,028 hectares, 0.2%), PT Bakrie Sumatra Plantations Tbk (19,370 hectares, 0.2%), PT PP London Sumatra Indonesia Tbk (17,619 hectares, 0.2%), PT Astra Agro Lestari Tbk (16,795 hectares, 0.2%) and FGVH (10,574 hectares, 0.1%). INDUSTRY OUTLOOK AND PROSPECTS Based on historical trends, global consumption of natural rubber exhibited stable upward growth, albeit dips in 2001 and 2009 due to the economic slowdown after the September 11 th attack in 2001 in the United States and the global economic slowdown circa 2008/2009 which caused disruptions in rubber supply. Frost & Sullivan forecasts the consumption of natural rubber to increase from an estimated 11.5 million I\I1T in 2012 to reach 12.9 million MT in 2015, with a CAGR of 3.9% over the period. Demand is expected to be driven by the global vehicle tyre and rubber glove industries as a result of higher income levels, easier financing options for purchase of vehicles, and higher healthcare spending due to the rapid aging of the world population in developed countries and the emergence and adoption of new medical technologies. Forecast of Rubber Consumption (Global), 2012(e)-2015(f) 16,000 ..,——————————­~ … 14,000 1=======:::;~~~~==~;~:::==;;;~=It: 12,000 2012(e) 2013(f) 2014(f) 2015(f)
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan [The rest of this page is intentionally left blank] ~~!l~~m_l’Ill!I” •. I.:I.!pl!~~~I!~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 56 © Frost & Sullivan 2012 129 6. INDUSTRY OVERVIEW (Cont’d) 6 FUTURE OUTLOOK FOR FGVH In the past, the oil palm industry has shown significant growth globally as well as domestically, and this industry is expected to continue to witness growth in the future. The global palm oil demand is forecast to grow at a CAGR of 4.8%, from an estimated 52.7 million MT of CPO consumption in 2012 to 60.7 million MT in 2015. In terms of supply, the global oil palm industry is projected to produce 74.5 million MT of CPO in 2015 from an estimated 62.7 million MT of CPO in 2012, at a CAGR of 5.9%. Accordingly, the annual average local delivered prices for CPO is forecast to decrease from RM3,323 per MT in 2012 to RM2,867 per MT in 2015. The projected growth of the oil palm industry is expected to be driven by a number of factors. Among them include the increasing demand for food as a result of the growing population and economic development of key consuming markets such as China, India, the United States and Europe. Emerging markets such as the East Asia and Pacific region as well as the Europe and Central Asian region, Latin America and Caribbean region and South Asian region have registered healthy population increases, along with growth in GDP. The growing population and flourishing economies of these markets are expected to spur the growth in demand for palm oil and palm oil related products, thereby driving production and consumption worldwide. Additionally, with its versatility and fat content, palm oil is considered a key sustainable global commodity. Hence, it is increasingly used in a wide range of food and non-food uses and applications, and this is expected to continue to drive the demand for palm oil products. In Malaysia, the oil palm sector has grown to become a key component of the country’s economy. According to PEMANDU, a unit under Malaysia’s Prime Minister’s Department, the oil palm industry is the fourth largest contributor to Malaysia’s economy, accounting for RM53 billion of the nation’s GNI. In terms of agricultural products, palm oil and palm oil-based products have the largest contribution to export trade value, with combined export value of RM59.8 billion in 2010. In 2011, Malaysia was the second largest producer and the largest exporter of CPO in the world, exporting to more than 150 countries worldwide. The Government of Malaysia has acknowledged the significance of this industry and its vast growth potential. The oil palm sector is recognised as one of the NKEAs in the ETP, aimed at reaching a GNI of RM178 billion in 2020 whilst creating an additional 41,000 jobs. There are eight Entry Point Projects (EPP) that span across the value chain of the oil palm industry, targeted at developing oil palm cultivation productiVity and sustainability, and ensuring the expansion and sustainability of mills and refineries. The EPPs include clearing aged palms, increasing FFB yield, improving worker productivity, increasing the national average OERs, building biogas-capturing facilities at mills, shifting the focus of production to higher value oleo derivatives, emphasising early commercialisation of second generation biofuels and expediting growth in palm oil milling and refining activities. The Government has also included strategies in the 10MP that will benefit the oil palm industry, with the aim of increasing the industry’s GDP output contribution to RM21.9 billion, with exports values of RM69.3 billion during the Plan period (2011 to 2015). The Plan includes promoting Malaysia as a palm oil hub and destination for foreign direct investments, encouraging the adoption of good agricultural practices, and centralising procurement to reduce costs. The benefits of using palm oil as feedstock for biomass energy have also been recognised by the Government. As of April 2011, the House of Senate (Dewan Negara) passed both the Renewable Energy Bill 2010 and the Bill for Sustainable Energy Development Authority. Additionally, incentives for the renewable sources and energy efficiency activities industry such as Pioneer Status and Investment Tax Allowance will be extended until 31 December 2015. ~U~~imllr~l8i~~~~~~ Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries 57 ©Frost& Sullivan 2012 130 6. INDUSTRY OVERVIEW (Cont’d) These strategies present a positive outlook for the oil palm sector in Malaysia. Increased production targets may be achieved through increasing land for cultivation of oil palm crops as well as increasing the capacity of existing mills and refineries, or through the addition of new mills and refineries. These measures will lead to an increase in the supply of palm oil to be consumed and exported, which would lead to a growth in revenue for this industry. Additionally, replanting incentives initiated by the Government of Malaysia, namely the Oil Palm Replanting Incentive Scheme (SITS) and the Second Economic Stimulus Package (PRE2) to encourage replanting of oil palm planted area of more than 25 years of age, is expected to boost production volumes by 2015. With the current growth in replanted oil palm areas, FFB yield is expected to improve significantly in the next five years and thus, generating higher prospective income for the nation in the long run and boosting growth of the oil palm industry. With the support of the Government, coupled with other additional drivIng factors such as the wide range of uses for oil palm and its related products as well as lower CPO prices compared to crude oil and other edible oil prices, the oil palm industry in Malaysia is expected to continuously exhibit an upward trend in line with the growth in the global oil palm industry. FGVH, as one of the world’s leading integrated oil palm players and the world’s third largest in terms of mature planted area, shows potential to reap the benefits of the growing oil palm industry. In 2011, FGVH captured approximately 2.1 % of global mature planted area. In Malaysia, FGVH was the largest in terms of mature planted area with a market share of about 6.7%. Its associate company, FHB, was the leading CPO producer globally and it captured about 6.6% market share in global CPO production and 17.4% market share in CPO production in Malaysia. As this industry continues to grow over the forecast period, FGVH is expected to be able to capitalise on its reputation, expertise and experience to increase its market share over the longer term. Meanwhile, production of refined sugar in Malaysia is forecast to increase steadily from 1.7 million MT in 2011 to 1.9 million MT in 2015, registering a CAGR of 2.9% over the period. This estimated growth in domestic production of refined sugar is expected to be supported by increasing levels of domestic sugar consumption. Frost & Sullivan estimates that sugar consumption in Malaysia will increase from 1.5 million MT in 2011 to 1.8 million MT in 2015 at a CAGR of 4.3%. This positive growth is expected to be driven by growth in the food manufacturing and processing industry, population growth as well as limited product substitution. Sugar is regarded as a staple food item, and its wide array of uses in a variety of industries ensures its continued presence in the local market. The Government of Malaysia regulates the local sugar industry to ensure food stability and security of supply. Price controls are set in place and subsidies are dispersed in order to protect consumers from unpredictable fluctuations in the global sugar market. In addition, there are only four sugar refiners producing sugar for the consumption of the entire nation, as the importation of refined sugar into Malaysia is restricted by the Government. By keeping the sugar industry limited to a handful of players, the Government is allowed better control and ease of monitoring. Under the 10MP, the Government of Malaysia has announced its intention to gradually rationalise the subsidies and price controls for sugar. By removing market distortions, sugar prices can then be allowed to float closer to market rates, thereby preventing wastage and overconsumption, and encouraging efficient allocation of resources. The Government has since embarked on its plan, where since 2010 the retail price of coarse and fine refined white sugar have been increased four times to reflect current global market prices. Nevertheless, the Government has recognised the fact that sugar is considered a staple food item, and is widely considered a necessity in the day-to-day diet of a typical Malaysian. As such, under the 10MP the Government intends to provide assistance to households considered to be at the bottom 40% © Frost & Sullivan 2012 I Company No.: 800165-P 6. INDUSTRY OVERVIEW (Cont’d) based on income level to ease the forthcoming burden of eventual price increases. NGOs, charities and corporations will be encouraged to participate in aid and corporate social responsibility programmes targeted at providing food and financial assistance to the less fortunate. The Department of Social Welfare will provide a database to identify the recipients and also to monitor the effectiveness of these programmes. Additionally, the global rubber industry exhibited stable growth rates for the past 21 years as seen from the upward trend in the global natural rubber consumption from 5.1 million I’v1T in 1991 to 10.9 million MT in 2011. Going forward, global rubber consumption is forecast to grow at a CAGR of 3.7%, from an estimated 11.5 million MT in 2012 to 12.9 million MT in 2015. The projected growth of the global rubber industry is expected to be driven by its end-user industries, more specifically the global vehicle tyre and rubber glove industries. Revenue for the global vehicle tyre industry grew from RM274.6 billion in 2001 to RM448.6 billion in 2010, registering a CAGR of 5.6% for the period and is expected to grow at a CAGR of 5.7% to reach RM576.1 billion in 2015 due to stable demand from the global automotive industry driven by higher disposable incomes and easier financing options. Meanwhile, the global production of rubber gloves grew from 17.1 billion pairs in 2001 to 36.8 billion pairs in 2010, registering a CAGR of 8.9% for that period. Going forward, the production of rubber gloves is expected to grow at a CAGR of 6.8% to reach 50.4 billion pairs in 2015 from 41.1 billion pairs in 2012 due to the fact that gloves will remain as a necessity for selected industries, in particular the healthcare industry. With the global vehicle tyre and rubber glove industries projected to remain robust, the global rubber industry is also expected to continue to grow positively. In Malaysia, the rubber industry remains an important contributor to the nation’s exports, contributing an export value of RM34 billion in 2010, largely driven by the increase in global rubber prices. For instance, the average annual price for SNiR 20 was on an upward trend for the last 12 years, increasing from RM2.43 per kg in 2000 to RM13.50 per kg in 2011. The Government of Malaysia aims to increase the contribution of the rubber industry to reach a GNI of RM49.7 billion in 2020 through the implementation of three projects under the ETP which include expanding rubber plantations in Sabah and Sarawak, increasing rubber yield through high yielding clones, increasing vehicle tyre production by 10% per annum and increasing Malaysia’s global market share of rubber gloves by 10% annually. Under the rubber NKEA, an estimated RM275 billion will be invested for the replanting and new planting of rubber trees nationwide in 2012. Replanting activities, which will take place in Peninsular Malaysia, will cover an estimated 38,000 hectares per year. Meanwhile, planting of new rubber trees will cover approximately 5,000 hectares each in Sabah and Sarawak respectively. During the tabling of Budget 2012, the Government announced an allocation of RM140 million for new rubber plantations and rubber replanting programmes. These programmes will be carried out by the Rubber Industry Smallholders Development Authority and is expected to benefit approximately 20,000 smallholders. The support from the Government to further develop the industry will be greatly beneficial to the rubber industry. These measures will lead to an increase in supply of rubber, which would lead to a growth in revenue for the rubber industry. FGVH is a global, diversified agribusiness oil palm plantation operator, which is also involved in the downstream processing and refining of palm oil and PKO into edible oils and fats, oleochemicals and biodiesel. With rising worldwide demand for food and non-food products driven by increasing population and economic growth, coupled with various supporting Government initiatives to facilitate the growth of these industries, FGVH is well-positioned to tap into the projected growth of the individual commodity markets to continually grow its presence globally. Executive Summary of the IMR on the Oil Palm, Sugar and Rubber Industries; and Selected End-User Industries © Frost & Sullivan 2012 132

 

 

 

 

 

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