the Vegetable Oil Market Today

Transcription

1 the Vegetable Oil Market Today by Dr James Fry, LMC International o PALMEX Thailand, September, 211

2 Outline of my presentation today ill start by describing one of the most surprising anges in the behaviour of the world vegetable oil rket, which has occurred within the past five years is is the way in which vegetable oils have become rt of the petroleum complex, as regards pricing. I w plain why and how this has happened. is has far-reaching consequences for the future haviour of vegetable oil prices. In particular, while pply-demand balances do matter, they are less portant than they used to be in setting oils prices. lm oil stocks are still the main driver of price ferentials within the oils complex, and so I will

3 he revolution in vegetable oil pric behaviour

4 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 oleum and vegetable oil prices. CPO was n cheaper than crude oil per tonne. Palm oil was actually less expensive than crude oil

5 table oil prices to crude oil prices, within a band with vegetable oils at a premium.,6,4,2, Jan-7 Jan-8 Jan-9 Jan-1 Jan-11

6 price band, but their premium over crude oleum has shrunk sharply in recent weeks.,4,,6,2 8 4 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11

7 hat, after a sharp correction after January, PO premium has settled near its average. Jan-7 Jan-8 Jan-9 Jan-1 Jan-11

8 major revolution in vegetable oil pricing e can now see very clearly that there is a price ban place, which became established in 27. hen vegetable oil prices get too far above crude oi orrection occurs, and typically quite fast. We saw ch a correction in 28 and again this year. ce the floor of the band is set by crude oil prices, ems likely that biofuels are the key to the link. is view is reinforced by the evidence that lauric oil ich are distinct from the other oils and are not use biofuels, are less closely tied to the new price ban wever, I suppose the link could be caused by bas mmodity speculation, and so I now turn to examin

9 iodiesel demandd has changed the ance within the oil and meal secto

10 ahead of those for protein meal. This boosts reliance upon high oil-content crops Oil (Million Tonnes)

11 emand for oils and meals were similar e look back 4 years, we see that, by coincidenc bal demand for oils and meals grew in step with e another. e feedback from income growth to oil demand (for d) and meal demand (for meat) meant that the bal consumption of oils and meals rose in paralle ce 2, world vegetable oil demand has grown ter than meal demand, with the divergence tween the two curves widening steadily. e best reason for the change has to be biofuels. ey generate a demand for oils, but without any

12 rages five times that of rapeseed, six times t of sunflower and seven times soybean s

13 tent of leading oilseeds. Hence, oil palm is oil crop best placed for the new biofuel era. % % % % % % % % % %

14 id output growth. It has overtaken soybean to become the world s most important oil. Average Annual Growth : Palm Oil = 8.3% Palm Kernel Oil = 7.7% Rapeseed Oil = 6.2% Soybean Oil = 4.8% Sunflower Oil = 2.8% Palm Oil Palm Kernel Oil Rapeseed Oil

15 growth plays to oil palm s strengths ow that we are in a world that craves more and ore vegetable oil, and is doing so at a faster rate an its demand for meal, it wants more of the worl ilseed output to come from a crop that gives us a f oil and relatively little meal. he crop that best meets alm! this need is called oil s a result, it is not simply because oil palm is a ighly productive and cost-competitive crop that it as captured a greater share of world supply. reality, the world needs more palm oil, rather tha ther oils, if it is to avoid the problems of large

16 diesel demand is very sensitive t he biodiesel premium over diesel

17 kly to swings in the biodiesel premium over el. This links biodiesel to diesel prices Premium, US$ per tonne Jan-7 Jan-8 Jan-9 Jan-1 Jan-11-1

18 re biofuel users can pay the government ey not to use biofuels if they get too costly Biodiesel Premium over Diesel (US$/tonne) -5 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11

19 high price differentials earlier this year. ound the world, biodiesel users cut back demand en biodiesel became very expensive vs. diesel. me of the cutbacks weree temporary, as blenders ited until biodiesel became cheaper. Some were used by users buying out their mandates a few cases, governments responded to high food ces by reducing their legal mandate targets. Thailand, your government reacted to low palm oi tput by cutting the mandate for a while. e effect of all these changes was to pull biodiesel ces (and hence vegetable oil prices) closer to the

20 nderstanding vegetable oil prices

21 rice levels today now include biofuels inally, vegetable oils compete. I will illustrate this hope that I have persuaded you that you have to ke account of biofuels today. In English, we talk bout a tail wagging the dog. In oils today, the ta f biofuels, with only one eighth of world oil demand waging the dog of the global vegetable oil arket (with the other seven eighths of demand). ecause of the price band, petroleum prices are ndoubtedly a major factor behind oils pricing today egetable oil stocks also influence prices. The cent period of low palm oil output has passed, an will next study how the upturn is affecting stocks.

22 ks and oil supply-demand balanc

23 ting growth in output of the main vegetable to 6 million tonnes worldwide in 211/12. 26/7-27/8 27/8-28/9 28/9-29/1 29/1-21/11 21/11-211/12

24 th and cause it to lag behind output growth, two years when demand exceeded output. 26/7-27/8 27/8-28/9 28/9-29/1 29/1-21/11 21/11-211/12

25 ed stocks. Biofuel price sensitivity will be ial to balancing world oil supply vs. demand /7-27/8 27/8-28/9 28/9-29/1 29/1-21/11 21/11-211/12

26 ilseed stocks are big enough to ensure high growt world oil output, while high prices slow demand. ithin the world oil total, palm oil will make a bigger ntribution to global production growth in 211/12 an it did in 21/11, rising million tonnes. his increase will be crucial in keeping world supply panding in line with the rise in global oils demand he key looking further ahead will be the speed of e revival in palm oil outpu growth. Newly mature eas and good rains in the past year should keep orld year-on-year CPO production growth strong f

27 laysian CPO output growth in 21 was a porary aberration and that growth is back. % % % % % % % % % % % % %

28 i CPO output fluctuates than Malaysia s, we can also see the poor upturn in 21. % % % % % % %

29 le has been spread throughout the world of alm all the way from SE Asia to S America. % % % % % % % % Q1.29 Q3.29 Q1.21 Q3.21 Q1.211

30 el output in 21 and early 211, which lains the recent wild swings in PKO prices. % 5% % 5% % 5% % 5% % 5% % Q1.29 Q3.29 Q1.21 Q3.21 Q1.211

31 oil and palm kernel growth cycles. 1 was undoubtedly an unusual year, in that the ar-on-year increases in both CPO and PK output ere very modest by historical standards (which ma ve been a result of low fertiliser use in 28-9 in action to high costs), and it ended with sharp year -year declines in Q4 production of CPO and PK. alm kernel output was hit harder than CPO in the wnturn, but was displaying very strong growth ain by the second quarter of 211. oking at the growth patterns, we must be close to e peaks. Malaysia s and Indonesia s year-on-year owth rates peaked in May-June, while the Thai ra

32 hat is the role of palm oil stocks

33 s used to be fairly easily explained in terms anges in Malaysian stock levels Year-on-Year Stock Change, ' tonnes Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7-5

34 ve together. Prices are still growing year-on- espite the big increase in Malaysian stocks. 2, 1,6 1, ,2 1,6 1, Year-on-Year Stock Change, ' mt 2, Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11-1,

35 must look instead inside the price band is clear that palm oil stocks (we use Malaysian ocks as the reference) no longer drive CPO prices stead, our theories must adjust to reflect the band gic suggests that, with a price band, a floor exists CPO prices when high stocks have driven prices wn so far that it becomes profitable to make and e biodiesel without any government subsidy. owever, when stocks are low, food demand for oil ould pull CPO far enough above the price floor fo od use to compete oil away from biodiesel output. o, we expect the CPO premium over diesel to be versely related to the stock level, i.e., the premium

36 diesel. Early in 211, the premium was too, but it is now back down near its average EU premium over diesel, $/tonne Jan-7 Jan-8 Jan-9 Jan-1 Jan-11-2

37 emium over diesel should rise a little, but t back to the peaks of early this year EU Premium over diesel, $/tonne an-7 Jan-8 Jan-9 Jan-1 Jan-11-2

38 soy oil in vital markets such as India keeps oil prices from moving too far above CPO. 5% % 5% % 5% % 5% % 5% % 5% % Q4 23 Q4 24 Q4 25 Q4 26 Q4 27 Q4 28 Q4 29 Q4 21 9% 8% 7% 6% 5% 4% Palm Oil % of (Palm + Soy Oil) Imports

39 mal, the soy oil premium, which is already, is not expected to rise much further. Jan-7 Jan-8 Jan-9 Jan-1 Jan-11

40 ave to analyse the petroleum market as ell as supply-demand in vegetable oils. he picture I have described is quite different from at you may have expected. e are now in a new world in which vegetable oils ade in price band, created by biofuels, which links getable oils inextricably to the petroleum price. he old fashioned drivers of oils prices, i.e., supply- a factor in setting price mand and stocks, are still t the supply-demand balance only influences ices within limits that are set by petroleum. herefore, I will end with a few remarks about the

41 at is the petroleum market doing?

42 ouraging lots of drilling. This should boost ut, especially when Libyan supplies return.,5 125,,5, Brent Crude North Sea Oil, $/barrel 25 Q3.26 Q2.27 Q1.28 Q4.28 Q3.29 Q2.21 Q1.211 Number of Oil Rigs Brent Crude

43 by far the biggest consumer, has stabilised, high prices have pushed it below its peak Demand, million barrels/day

44 emand; yet, prices were much lower in the t, when stocks were also much lower US Stocks in Days of Demand

45 should remain at current high levels he cure for high prices is high prices. his is as true for petroleum as it is for other market igh crude oil prices are stimulating new discoverie d output, including from deep offshore fields and om unconventional sources such as tar sands. igh crude oil prices are also hitting demand, both a ers save energy and turn to cheaper alternatives, d by natural gas, but also by making a double dip cession much more likely. his is why I believe the petroleum prices must fall, d this will have a direct and negative impact on a

46 Thank You National SEA, Acknowledgements: EIA, IMF, Jacobsen, MPOB, Biodiesel Board, Oil World, OPEC, Public Ledger, TNS, UFOP, US Commerce Dept., USDA, World Bank

47 New York 1841 Broadway ew York, NY 123 USA Oxford (HQ) George Street Oxford OX1 2AF UK Kuala Lumpur 3-19, Subang Empire SOHO Jalan SS16/1, Subang Jaya 475 Selangor Darul Ehsan Malaysia +1 (212) (212) T F info@lmc.co.uk T F info@lmc-kl.com LMC International, 211 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.