First Resources Ltd (SGX: EB5) released its 2016 annual report in late April.
As a quick background, the oil palm producer organises its business into two major segments: Plantations and Palm Oil Mills; and Refinery and Processing. There is much more that we can learn from First Resource’s annual report. I pulled out three key developments that investors might want to know.
1. Economic headwinds
In the company’s message to shareholders, it opened by saying:
“2016 was indeed an interesting year that was not short of surprises. Brexit and Trump’s win in the United States presidential election must be the two most noteworthy ones, both of which had caused market to be nervous and kept uncertainties in global economies brewing.”
“The palm oil industry was not spared, as it was hit by headwinds from lacklustre demand from major importing countries, namely, China and India.”
First Resources operates out of Indonesia but was affected by economic uncertainties and lack of demand from countries such as India and China. But this was not the only problems that First Resources had to deal with.
2. A rare decline
The oil palm plantation was also affected by unfavourable weather:
“Throughout 2016, the detrimental effects of the past year’s El Nino, the strongest since 1997-98, continued to make its presence felt.”
“Its harshest impact was between January and September, during which many industry players saw their production decline by more than 15%, a rarity in an industry that is used to seeing year-on-year increases.”
First Resources was squeezed by both lack of demand and unfavourable weather during the year. In all, the company produced 634,941 tonnes of crude palm oil in 2016, a decline from the production level of 687,248 tonnes in 2015. First Resources also experienced a fall in palm kernel production which fell from 160,021 tonnes in 2015 to 148,270 tonnes in 2016.
3. The white knight
As mentioned earlier, there was lower demand from China and India. However, First Resources cited the arrival of a “white knight” in the form of favourable Indonesian government policies:
“Despite the disappointments from both major importing countries, the Indonesian government once again undoubtedly became the white knight for the industry in 2016. Its biodiesel mandate was the single biggest demand driver for palm oil which successfully injected an incremental demand of approximately 1.7 million tonnes for the year.”
Amid the upsides and the downsides, crude oil prices were volatile for the year, fluctuating from US$506 per tonne to US$745 per tonne. Palm kernel prices also recovered from US$335 per tonne at the beginning of 2016 to US$647 per tonne at the end of last year.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.