The Palm Oil Market and Price Outlook

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1 The Palm Oil Market and Price Outlook Presentation to the 218 FEMEXPALMA Conference by Dr. James Fry, Chair, LMC International, Oxford, UK Villahermosa, Tabasco, 8 th February LMC International. All rights reserved.

2 The outline of this presentation In order to understand the recent surge in palm oil output, one must begin with the impact of biofuels on oils demand. Therefore, I describe why the growth in the production of palm oil was absolutely essential after 2. Then I explain how the growth of biofuel demand for oils has transformed the behaviour of vegetable oil prices. I consider how the quantity of Malaysian palm oil stocks influences the behaviour of CPO prices worldwide. I will conclude with a discussion of the outlook for CPO prices, taking account of the influence of petroleum prices and of the demand for biofuel. 2

3 Meal (million tonnes, soymeal equivalent) Growth of world GDP vs. oil and meal demand After 2, biofuels pulled demand growth for oils above that in GDP, and in meal. The world needed extra oil more than it needed extra meal Oil (million tonnes) and GDP (as index) Meals Oils Real World GDP, as Index

4 Average world yields, tonnes per hectare Palm is the best crop to meet the extra need for oil Oil palm yields eight times as much oil per hectare as soybeans, but only 2% as much meal per hectare. Rapeseed and sunflower lie in between Soybean Rapeseed Sunflower Oil palm Oil yield Meal yield

5 World output, million tonnes Palm + palm kernel oil output overtook soy oil in 2 Oil palm meets the major share of world oil demand growth. Soybean oil supply grows as a result of increased crushing of soybeans for meal Average Annual Growth Palm Oil = 8.% Palm Kernel Oil = 7.9% Rapeseed Oil = 6.% Soybean Oil = 4.5% Sunflower Oil = 3.2% Coconut Oil =.8% Palm Oil Palm Kernel Oil Rapeseed Oil Soybean Oil Sunflower Oil Coconut Oil

6 Harvested area, million hectares Demand growth boosted global areas of all oil crops Although oil palm is now easily the world s leading source of vegetable oils, it still has the smallest harvested area of all the four main oil crops Palm Soybean Rapeseed Sunflower

7 Palm oil met the market s needs after 27 The consumption of the products from oil crops, i.e., oils and meals, was transformed after the advent of biofuels. Unlike the previous growth in oil and meal demand, driven by population and income growth, the biofuel era created a demand for oils, without any matching demand for meals. Oil palm was the best crop to meet this new world balance, yielding lots of extra oil without very much extra meal. In addition, it is striking to see how much more efficient oil palm is than annual oil crops in its production of oil per hectare. This has limited the growth in the pressure on the area of land needed to meet the extra demand for oils. 7

8 The new era of CPO prices after 27 The influence of biofuels and petroleum prices on the prices of vegetable oils 8

9 EU prtices (US$ per tonne) After 27, EU vegetable and crude oil prices became linked Whenever, since 27, EU CPO prices touched Brent crude prices, they bounced back. Brent is now the floor to CPO prices and CPO the floor to other oils prices. 2,1 1,8 1,5 1, Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Soy Oil Palm oil Rapeseed Oil Sun Oil Brent

10 The CPO premium over Brent is driven by stock levels EU premium over Brent, US$ per tonne If Malaysian stocks are high, downward pressure on prices cuts the EU CPO premium over Brent. If stocks are low, the premium rises to ration demand. 6 3,5 5 2,8 4 2,55 3 2,3 2 2,5 1 1,8 1,55-1 1,3 Jan-8 Jan-1 Jan-12 Jan-14 Jan-16 Jan-18 EU CPO Premium over Brent Average CPO Premium MPOB Stocks MPOB Palm Oil Stocks, ' tonnes

11 A price band has emerged linking CPO and Brent Since 27, every time that CPO prices in Rotterdam move towards Brent crude, the Brent price acts as a floor for CPO. This is no coincidence. When EU CPO prices approach Brent levels, FOB CPO prices in S.E. Asia are below Brent prices (due to the freight costs to the EU). In addition, Indonesian export taxes make its CPO prices even lower. Therefore, at the EU price floor, CPO becomes a competitive source of diesel fuel in S.E. Asia, without any need for subsidies. In the price band, the CPO premium over Brent is greatly influenced by stocks. The size of the premium moves in the opposite direction to Malaysian stocks, which the market uses as the indicator of the world supply-demand balance. 11

12 Understanding the floor to the price band The crude oil market 12

13 OPEC slowed oil supply growth, but US shale is filling the gap World suppply-demand, million bbl per day The IEA says the world had a deficit in 217, but should be in balance in Demand Output

14 US shale oil provided 4 million bbl/day out of the total 7.5 million bbl world output increase between 212 and 217 Output from main oil fields, mn bbl./day WTI, $ per barrel 1 2 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Total shale oil output, bbl./day WTI, $/bbl (RH axis)

15 Implications for crude oil prices The balance in the crude market has finally switched towards a global deficit, after a long period of very high stocks. Credit for this goes to the Saudi government and its need to get the best possible price for Aramco at its IPO this year. I expect OPEC cuts to last till Aramco has had its IPO. After that, you can expect output cuts to end, primarily because traditional oil exporters can see the US shale oil industry taking advantage of higher prices to ramp up their output. As long as Brent prices are supported at $65-$7 by OPEC, the floor to the EU price band will be near $5, and so oils will trade in a range above that, with the CPO premium over Brent determined by stock levels. 15

16 Other factors influencing oils prices Biofuels will be the most important 16

17 Premium over London gasoil, US$/tonne Biodiesel use increases as its premium over diesel shrinks EU biodiesel premia over gasoil have shrunk rapidly in recent months Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 oc FAME -1oC FAME PME (B99-1)

18 Indonesian biodiesel use is funded from export levies. If the CPO-gasoil spread is low, large tonnages can be funded This shows how much can be financed from $75 mn/year of levies. The slump in CPO-Brent spreads means much more Indonesian biodiesel can be funded. Quantity able to be funded, ' mt/month Biodiesel premium over gasoil, $/tonne Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Potential quantity Average actual sales Biodiesel-gasoil spread

19 Premium over Brent, US$ per tonne Daily S.E. Asian CPO-Brent spreads are below lows The slump in spreads has been overlooked because of the rise in Brent prices. Note the very recent widening of the gap between Malaysia and Indonesia Jan-15 Jan-16 Jan-17 Jan-18 Inside Indonesia MPOB Local delivered

20 What does this mean for prices? With OPEC holding Brent near $7 till Q4, with a floor to the EU CPO price at $5 per tonne, the key factors are: 1. If the US revives $1/gallon ($3/tonne) US tax credits, this will support vegetable oil prices 2. If Indonesia s CPO Fund supports biodiesel production as intended, local use will expand greatly, lifting CPO prices. 3. The appearance of La Niña after a very severe El Niño will sustain the recovery in CPO output round the world. 4. CPO stocks will fall till May and then rise rapidly. This will raise the CPO-Brent spread for 4 months, before they fall. 5. Remember that EU anti-palm oil policies affect sentiment, they do not affect demand at all, this year. 2

21 Price forecasts FOB S.E. Asia CPO should rise towards $69 by May. Key triggers, in chronological order, will be (1) US tax credits (within weeks); (2) MPOB stocks falling; and (3) Indonesia increasing its mandate, with an announcement by April. From May, stocks will rise. The speed of the rise depends on the willingness of Indonesia s CPO Fund to raise the mandate. In Q3, FOB prices will drop to $63 and Rotterdam to $67. In Q4, prices will fall further, as the Aramco IPO removes the need for OPEC cuts, and because of growing OPEC worries about the competition from US shale oil. Each $1/bbl drop in Brent prices reduces CPO by $7/tonne. 21

22 Factors driving vegetable oil prices Thank you for your attention 22

23 Oxford New York Kuala Lumpur 4 th Floor, Clarendon House 52 Cornmarket Street Oxford OX1 3HJ UK T F Broadway New York, NY 123 USA T +1 (212) F +1 (212) SO-3-8 Menara 1 No3 Jalan Bangsar KL Eco City 592 Kuala Lumpur Malaysia T info@lmc.co.uk info@lmc-ny.com info@lmc-kl.com LMC International, 218 All rights reserved This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International. While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client s own risk. LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.

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