CIMB Investment CHALLENGES AND OPPORTUNITIES IVY NG, CFA Regional Head of Agribusiness Head of Malaysia Research ivy.ng@cimb.com +603-22619073 October 2018 Together
Content Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Section 9 Key determinants of plantation companies earnings Palm oil s market positioning in the global edible oils and fats Analysis of global oils and fats supply and exports trend Challenges facing the industry from supply perspectives CPO prices performances YTD, below expectations Potential trade disruptions in China and India markets Indonesia /Malaysia biodiesel policy and its potential impact Fundamental and technical view on CPO price Peek into refining industry stats 2
Key determinants of palm oil companies earnings Key determinants of palm oil companies earnings prospects: Average selling prices of palm products (CPO and PK) FFB yields of the estates and OER rate from mills (age profile, management, soil conditions, weather and others) Labour costs (minimum wage, availability of skilled workers) Fertiliser prices (potash prices and others) Fuel prices (government policy and international crude oil prices) Headquarter / Infrastructure costs (procurement of raw materials/supplies) New planting costs (impact depreciation costs of estates) Borrowing costs (dependent on capex and land costs/ acquisition costs of estates) Government taxes (export tax, sales tax, cess, windfall and corporate taxes) Downstream earnings prospects (refinery and oleo margins) 3
Palm oil is the most widely used edible oils Breakdown of production of edible oils 2017 Breakdown of export of edible oils 2017 Other Vege oils 12% Tallow 4% Other Animal fats 8% Palm oil 31% Rapeseed oil 5% Other Vege oils 10% Other Animal fats Tallow 2% 2% Rapeseed oil 12% Sunflower oil 11% Palm oil 55% Sunflower oil 9% Soybean oil 24% Soybean oil 15% SOURCE: OIL WORLD, CIMB RESEARCH SOURCE: OIL WORLD, CIMB RESEARCH 4
Palm oil s rising share in the edible oils supply Palm oil and soybean oil share of global oils and fats supply Palm Oil Soybean Oil 32% 30% 30% 30% 30% 31% 28% 27% 28% 27% 28% 29% 29% 26% 25% 25% 24% 22% 24% 23% 22% 23% 23% 22% 22% 22% 24% 24% 20% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 SOURCE: OIL WORLD, CIMB RESEARCH 5
Analysis of global production of 17 oils and fats (1996-2006) Oils and Fats, ( 000 tonnes) 1996 Mkt share 2006 Mkt share Chges for past 10 yrs Avg Annual chges Share 9 yrs CAGR Palm oil 16,282 16.8% 37,259 24.8% 20,977 2,098 39% 9.6% Palm kernel oil 2,048 2.1% 4,365 2.9% 2,317 232 4% 8.8% Soybean oil 20,327 21.0% 35,196 23.5% 14,869 1,487 28% 6.3% Cottonseed oil 4,119 4.3% 4,933 3.3% 814 81 2% 2.0% Ground nut oil 546 4.7% 4,416 2.9% (130) (13) 0% -0.3% Sunflower oil 9,034 9.3% 11,217 7.5% 2,183 218 4% 2.4% Rapeseed oil 11,481 11.9% 18,446 12.3% 6,965 697 13% 5.4% Corn oil 1,834 1.9% 2,270 1.5% 436 44 1% 2.4% Coconut oil 2,867 3.0% 3,140 2.1% 273 27 1% 1.0% Olive oil 2,042 2.1% 2,779 1.9% 737 74 1% 3.5% Castor oil 479 0.5% 522 0.3% 43 4 0% 1.0% Sesame oil 668 0.7% 861 0.6% 193 19 0% 2.9% Linseed oil 667 0.7% 702 0.5% 35 4 0% 0.6% Total Veg oils 76,394 79.0% 126,106 84.1% 49,712 4,971 93% 5.7% Butter 5,648 5.8% 6,747 4.5% 1,099 110 2% 2.0% Tallow 7,417 7.7% 8,474 5.6% 1,057 106 2% 1.5% Fish oil 1,339 1.4% 983 0.7% (356) (36) -1% -3.4% Lard 5,911 6.1% 7,688 5.1% 1,777 178 3% 3.0% Total Animal fats 20,315 21.0% 23,892 15.9% 3,577 358 7% 1.8% Grand total 96,709 100.0% 149,998 100.0% 53,289 5,329 100% 5.0% SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 6
Analysis of global production of 17 oils and fats (2006-2017) Oils and Fats, ( 000 tonnes) SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 2006 Mkt share 2017 Mkt share Chges for past 11 yrs Avg Annual chges Share 10 yrs CAGR Palm oil 37,259 24.8% 67,396 28.6% 30,137 2,740 43% 6.1% Palm kernel oil 4,365 2.9% 7,157 3.1% 2,792 254 4% 5.1% Soybean oil 35,196 23.5% 53,831 25.3% 18,635 1,694 27% 4.3% Cottonseed oil 4,933 3.3% 4,240 2.0% (693) (63) -1% (1.5%) Ground nut oil 4,416 2.9% 4,140 1.8% (276) (25) 0% (0.6%) Sunflower oil 11,217 7.5% 19,083 8.0% 7,866 715 11% 5.5% Rapeseed oil 18,446 12.3% 25,291 12.2% 6,845 622 10% 3.2% Corn oil 2,270 1.5% 4,170 1.7% 1,900 173 3% 6.3% Coconut oil 3,140 2.1% 2,438 1.3% (702) (64) -1% (2.5%) Olive oil 2,779 1.9% 2,810 1.6% 31 3 0% 0.1% Castor oil 522 0.3% 680 0.3% 158 14 0% 2.7% Sesame oil 861 0.6% 830 0.4% (31) (3) 0% (0.4%) Linseed oil 702 0.5% 760 0.4% 58 5 0% 0.8% Total Veg oils 126,106 84.1% 192,826 86.8% 66,720 6,065 95.0% 4.3% Butter 6,747 4.5% 8,230 4.1% 1,483 135 2% 2.0% Tallow 8,474 5.6% 9,550 4.6% 1,076 98 2% 1.2% Fish oil 983 0.7% 880 0.3% (103) (9) 0% (1.1%) Lard 7,688 5.1% 8,780 4.2% 1,092 99 2% 1.3% Total Animal fats 23,892 15.9% 27,440 13.2% 3,548 323 5% 1.4% Grand total 149,998 100.0% 220,266 100.0% 70,268 6,388 100% 3.9% 7
Analysis of global exports of 17 oils and fats (1996-2006) Oils and Fats ( 000 tonnes) 1996 Mkt share 2006 Mkt share Chges for past 10 yrs Avg Annual chges Share 9 yrs CAGR Palm oil 10,763 39% 30,000 52.1% 19,237 1,924 65% 12% Palm kernel oil 944 3% 2,390 4.2% 1,446 145 5% 11% Soybean oil 4,883 18% 10,435 18.1% 5,552 555 19% 9% Cottonseed oil 228 1% 158 0.3% (70) (7) 0% -4% Ground nut oil 252 1% 211 0.4% (41) (4) 0% -2% Sunflower oil 2,648 10% 4,470 7.8% 1,822 182 6% 6% Rapeseed oil 1,781 6% 2,103 3.7% 322 32 1% 2% Corn oil 600 2% 888 1.5% 288 29 1% 4% Coconut oil 1,391 5% 1,987 3.5% 596 60 2% 4% Olive oil 306 1% 733 1.3% 427 43 1% 10% Castor oil 262 1% 314 0.5% 52 5 0% 2% Sesame oil 23 0% 34 0.1% 11 1 0% 4% Linseed oil 138 0% 111 0.2% (27) (3) 0% -2% Total Veg oils 24,219 87% 53,834 93.6% 29,615 2,962 100% 9% Butter 554 2% 755 1.3% 201 20 1% 3% Tallow 2,150 8% 2,153 3.7% 3 0 0% 0% Fish oil 770 3% 693 1.2% (77) (8) 0% -1% Lard 139 0% 105 0.2% (34) (3) 0% -3% Total Animal fats 3,613 13% 3,706 6.4% 93 9 0% 0% Grand total 27,832 100% 57,540 100.0% 29,708 2,971 100% 8% SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 8
Analysis of global exports of 17 oils and fats (2006-2017) Oils and Fats ( 000 tonnes) 2006 Mkt share 2017 Mkt share Chges for past 11 yrs Avg Annual chges Share 10 yrs CAGR Palm oil 30,000 52% 49,161 56% 19,161 1,742 64% 5% Palm kernel oil 2,390 4% 3,237 4% 847 77 3% 3% Soybean oil 10,435 18% 11,553 13% 1,118 102 4% 1% Cottonseed oil 158 0% 120 0% (38) (3) 0% (3%) Ground nut oil 211 0% 270 0% 59 5 0% 2% Sunflower oil 4,470 8% 10,657 12% 6,187 562 21% 9% Rapeseed oil 2,103 4% 4,605 5% 2,502 227 8% 8% Corn oil 888 2% 1,030 1% 142 13 0% 1% Coconut oil 1,987 3% 1,610 2% (377) (34) -1% (2%) Olive oil 733 1% 940 1% 207 19 1% 3% Castor oil 314 1% 590 1% 276 25 1% 7% Sesame oil 34 0% 50 0% 16 1 0% 4% Linseed oil 111 0% 110 0% (1) (0) 0% (0%) Total Veg oils 53,834 94% 83,933 96% 30,099 2,736 101% 5% Butter 755 1% 800 1% 45 4 0% 1% Tallow 2,153 4% 1,650 2% (503) (46) -2% (3%) Fish oil 693 1% 800 1% 107 10 0% 1% Lard 105 0% 120 0% 15 1 0% 1% Total Animal fats 3,706 6% 3,370 4% (336) (31) (1%) (1%) Grand total 57,540 100% 87,303 100% 29,763 2,706 100% 4% SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 9
Major producers and exporters of palm oil World major producers of palm oil in 2017 Nigeria 1% Colombia 2% Others 9% World major exporters of palm oil 2017 Honduras 1% Guatemala 1% PNG 1% Others 7% Thailand 4% Malaysia 30% Indonesia 54% Malaysia 34% Indonesia 56% SOURCE: MPOB, CIMB RESEARCH SOURCE: MPOB, CIMB RESEARCH 10
Analysis of major producers of palm oil (1996-2017) World major producers of palm oil ( 000 tonnes) Country 1996 Share 2006 Share 2017 Share 10 yr cagr 20 yr cagr Indonesia 4,540 27.9% 16,070 43.1% 36,500 54.2% 8.5% 11.0% Malaysia 8,386 51.5% 15,881 42.6% 19,919 29.6% 2.3% 4.4% Thailand 375 2.3% 860 2.3% 2,450 3.6% 11.0% 9.8% Colombia 410 2.5% 714 1.9% 1,620 2.4% 8.5% 7.1% Nigeria 670 4.1% 815 2.2% 1,000 1.5% 2.1% 2.0% Ecuador 188 1.2% 352 0.9% 710 1.1% 7.3% 6.9% PNG 272 1.7% 365 1.0% 652 1.0% 6.0% 4.5% Honduras 76 0.5% 258 0.7% 610 0.9% 9.0% 11.0% Guatemala 36 0.2% 125 0.3% 560 0.8% 16.2% 14.7% Cote d Ivoire 280 1.7% 281 0.8% 485 0.7% 5.6% 2.8% Brazil 80 0.5% 170 0.5% 410 0.6% 9.2% 8.5% Others 969 6.0% 1,368 3.7% 2,480 3.7% 6.1% 4.8% Total 16,282 100.0% 37,259 100.0% 67,396 100.0% 6.1% 7.4% SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 11
Analysis of major exporters of palm oil (1996-2017) World major exporters of palm oil ( 000 tonnes) Country 1996 Share 2006 Share 2017 Share 10 yr cagr 20 yr cagr Indonesia 1,851 17.2% 12,540 42% 27,330 55.6% 8.1% 14.4% Malaysia 7,212 67.0% 14,423 48% 16,560 33.7% 1.4% 4.2% Colombia 29 0.3% 214 1% 710 1.4% 12.7% 17.3% Guatemala na na 109 0% 654 1.3% 19.6% na PNG 267 2.5% 362 1% 530 1.1% 3.9% 3.5% Honduras na na 131 0% 505 1.0% 14.4% na Cote D' Ivoire 99 0.9% 109 0% 205 0.4% 6.5% 3.7% Others 1,305 12.1% 2,011 7% 2,667 5.4% 2.9% 3.6% Total 10,763 100.0% 29,899 100% 49,161 100.0% 5.1% 7.9% SOURCE: OIL WORLD, MPOB, CIMB RESEARCH 12
Challenges 1 : 2017 FFB yield below historical averages Malaysia FFB Yield, tonnes/ha Tonnes/ha 21 FFB yield 20 year average 20 19 Average : 18.61 18 17 16 15 14 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCE: MPOB, CIMB RESEARCH 13
Challenges 2 : Expansion opportunities in Malaysia ( 000 ha) 300 Net change in planted area Average 250 200 150 Average : 138.02k ha 100 50 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCE: MPOB, CIMB RESEARCH 14
Opportunity : Age profile of Malaysian estates in 2016 Total Planted Oil Palm Area in 2016 = 5.74m hectares >25 Years 7% 0-2 Years 7% 21-25 Years 12% 3-5 Years 14% 16-20 Years 19% 6-10 Years 23% 11-15 Years 18% SOURCE: OIL WORLD, CIMB RESEARCH 15
Challenges 3 : CPO prices CPO and palm kernel prices since 2001 (RM/MT) 4,500 CPO Palm kernel Drought in South America 4,000 3,500 3,000 CPO 9M2018 avg price: RM2,338/MT 9M2018 price band: RM2,060 2,547/MT 2017 avg price: RM2,783/MT 2017 price band: RM2,338-3,344/MT GFC Bumper oilseeds production El Nino 2,500 2,000 1,500 1,000 500 - PK 9M2018 avg price: RM1936/MT 2017 avg price: RM2,536/MT Record stockpile in Malaysia SOURCE: BLOOMBERG, CIMB RESEARCH 16
Palm oil inventory in Malaysia at 8-month high Malaysian palm oil inventory Key importers of Malaysian palm oil ('000 tonne) (000 tonnes) Sep-18 Aug-18 mom chg 3000 2018 2015 2016 2017 China 110 112-2% India 228 139 64% 2800 EU 228 80 185% Pakistan 105 56 86% 2600 US 49 47 5% Others 898 665 35% 2400 Total 1,619 1,100 47% 2200 2000 1800 1600 1400 1200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000 tonnes) 9M18 9M17 yoy chg China 1,199 1,344-11% India 1,888 1,651 14% EU 1,501 1,428 5% Pakistan 867 712 22% US 399 395 1% Others 6,292 6,708-6% Total 12,147 12,238-1% SOURCE: MPOB, CIMB RESEARCH SOURCE: MPOB, CIMB RESEARCH 17
Production in 2Q/3Q18 missed expectation Malaysia : CPO production fell below expectation in 2Q and 3Q18 Malaysia : CPO exports weaker than expected ('000 tonnes) 2,200 2018 2015 2016 2017 ('000 tonnes) 2000 2018 2015 2016 2017 2,000 1800 1,800 1600 1,600 1400 1,400 1200 1,200 1000 1,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 800 Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec SOURCE: MPOB, CIMB RESEARCH SOURCE: MPOB, CIMB RESEARCH 18
El Nino and Malaysia CPO production Historical impact of El Nino on Malaysia s palm oil yield and production Type Period Intensity Chge in FFB yield Chge in CPO yield CPO output growth El Nino May 82-Jun 83 Strong -10.5% -10.4% -14.1% El Nino Aug 86-Feb 88 Moderate -22.8% -23.1% -0.2% El Nino May 91- Jun92 Moderate -0.1% -1.4% 3.8% El Nino Sep 94-May 95 Moderate 2.8% 2.0% 8.2% El Nino May 97 - Apr 98 Strong -16.3% -16.8% -8.3% El Nino May 02-Feb 03 Moderate 5.7% 4.5% 12.1% El Nino Jul 04-Jan 05 Weak 1.5% 1.9% 7.1% El Nino Sep 06-Jan 07 Weak -2.9% -2.5% -0.4% El Nino Jul 09-Apr 10 Moderate -6.1% -6.1% -3.3% El Nino Oct 14-Jun 16 Strong -13.9% -15.1% -13.1% SOURCE: MPOB, CIMB RESEARCH 19
Malaysia palm oil supply to decline to 19.6m tonnes in 2018 We project Malaysia palm oil output to decline to 19.6m tonnes (-1.5% yoy) in 2018 due to weaker than expected FFB yields in selected states (2017 : +15% to 19.9m tonnes) Malaysia palm oil output (by states) Output yoy Market share States 9M17 9M18 change 9M17 9M18 JOHOR 2,158,637 2,218,548 3% 15% 16% KEDAH 230,312 187,747 (18%) 2% 1% KELANTAN 210,615 201,774 (4%) 1% 1% NEGERI SEMBILAN 467,802 490,668 5% 3% 4% PAHANG 1,965,390 1,954,317 (1%) 14% 14% PERAK 1,541,526 1,350,432 (12%) 11% 10% SELANGOR 393,742 384,740 (2%) 3% 3% TERENGGANU 329,066 334,932 2% 2% 2% OTHER STATES 154,054 157,482 2% 1% 1% P. MALAYSIA 7,451,144 7,280,640 (2%) 53% 52% SABAH 3,704,321 3,603,189 (3%) 26% 26% SARAWAK 2,978,016 3,013,452 1% 21% 22% SABAH/SARAWAK 6,682,337 6,616,641 (1%) 47% 48% MALAYSIA 14,133,481 13,897,281 (2%) 100% 100% SOURCE: MPOB, CIMB RESEARCH 20
Major consumers and importers of palm oil in 2017 World major consumers of palm oil in 2017 World major importers of palm oil 2017 India 14% India 19% Others 49% Indonesia 14% Others 46% Pakistan 4% China 8% EU 11% Nigeria 3% Pakistan 6% China 10% EU 16% SOURCE: MPOB, CIMB RESEARCH 21
Major consumers of palm oil World major consumers of palm oil ( 000 tonnes) Country 2002 Share 2006 Share 2017 Share 10 yr cagr 14 yr cagr India 3,549 14.0% 3,075 8.5% 9,324 15.2% 11.7% 7.1% Indonesia 3,027 11.9% 3,711 10.2% 9,147 15.0% 9.4% 8.2% EU 3,395 13.4% 4,419 12.2% 7,286 11.9% 5.1% 5.6% China 2,650 10.4% 5,450 15.0% 5,035 8.2% -0.8% 4.7% Pakistan 1,350 5.3% 1,599 4.4% 2,764 4.5% 5.6% 5.3% Nigeria 970 3.8% 1,220 3.4% 2,436 4.0% 7.2% 6.8% Thailand 503 2.0% 695 1.9% 2,097 3.4% 11.7% 10.7% US 192 0.8% 565 1.6% 1,323 2.2% 8.9% 14.8% Colombia 451 1.8% 481 1.3% 1,030 1.7% 7.9% 6.1% Russia 459 1.8% 551 1.5% 894 1.5% 5.0% 4.9% Others 8,876 34.9% 14,474 39.9% 19,813 32.4% 3.2% 5.9% Total 25,422 100.0% 36,240 100.0% 61,149 100.0% 5.4% 6.5% SOURCE: MPOB, CIMB RESEARCH 22
Major importers of palm oil World major importers of palm oil ( 000 tonnes) Country 1996 Share 2006 Share 2017 Share 10 yr cagr 20 yr cagr India 1,254 11.6% 3,198 11% 9,400 21.6% 11.4% 10.6% EU 1,867 17.3% 4,593 16% 7,500 17.2% 5.0% 7.2% China 1,370 12.7% 5,462 19% 5,050 11.6% -0.8% 6.7% Pakistan 1,104 10.3% 1,768 6% 2,920 6.7% 5.1% 5.0% Bangladesh 109 1.0% 887 3% 1,460 3.4% 5.1% 13.9% USA 125 1.2% 625 2% 1,400 3.2% 8.4% 12.8% Others 5,050 46.9% 13,577 46% 17,267 39.7% 2.4% 6.3% Total 10,770 72.0% 29,223 76% 43,537 64.5% 4.1% 7.2% SOURCE: MPOB, CIMB RESEARCH 23
India s consumption of edible oils and stocks India consumption of edible oils ( 000 tonnes) - 2017 India palm oil stock at domestic ports Edible oils Consumption Market share ('000 tonnes) 2800 Palm oil 9,216 40% Soybean oil 5,132 22% Butter 2,614 11% Rapeseed oil 2,270 10% Groundnut oil 1,683 7% Cotton oil 1,003 4% Others 1,301 6% 2600 2400 2200 2000 1800 1600 1400 1200 Total 23,219 100% 1000 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 SOURCE: OIL WORLD, CIMB RESEARCH SOURCE: SOLVENT EXTRACTORS ASSOCIATION OF INDIA, CIMB RESEARCH 24
Historical India duties Historical revisions of import duties on CPO and refined palm oil Date CPO RBD palm oil Duty gap 23-Mar-07 46.4% 54.1% 7.7% 20-Mar-08 20.6% 28.3% 7.7% 01-Apr-08 0.0% 7.7% 7.7% 23-Jan-13 2.6% 7.7% 5.1% 10-Jan-14 2.6% 10.3% 7.7% 25-Dec-14 7.5% 15.0% 7.5% 18-Sep-15 12.5% 20.0% 7.5% 23-Sep-16 7.5% 15.0% 7.5% 11-Aug-17 15.0% 25.0% 10.0% 17-Nov-17 30.0% 40.0% 10.0% 01-Mar-18 44.0% 54.0% 10.0% SOURCE: SOLVENT EXTRACTORS ASSOCIATION OF INDIA, CIMB RESEARCH 25
India import duties on palm oil India raises import duties on CPO from 15% to 30% and refined palm oil from 25% to 40% on 17 Nov 2017. It also raised the import duties for soybean, soybean oils, sunflower oils and other edible oils On 1 Mar 2018, India raised import duties on CPO to 44% and refined palm oil to 54%, the highest since 23 Mar 2007 This represents the third increase in duties over the past seven months Negative for palm oil producers as it make CPO costlier in India and less competitive against other edible oils in Indian market. This could lead to weaker demand for palm oil Positive for India edible oil refiners (able to crush oilseeds and boost profit margin), government (higher tax revenue) and farmers (higher domestic oilseed prices) Talks of potential cut in import duties on palm oil in later part of the year will be positive for CPO 26
India s imports of major edible oils India imports of major edible oils ( 000 tonnes) 1000 800 600 400 200 0 Palm Oil Soy Oil Sunflower Oil SOURCE: SOLVENT EXTRACTORS ASSOCIATION OF INDIA, CIMB RESEARCH 27
CPO price competitiveness against soya oil CPO vs soybean oil prices (US$ per tonne) 1,400 (US$ per tonne) 500 1,200 450 400 1,000 CPO (LHS) Soybean Oil (LHS) 350 800 300 250 600 400 200 5-year average discount - US$123 Discount (RHS) 200 150 100 50 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 0 SOURCE: OIL WORLD, BLOOMBERG, CIMB RESEARCH 28
China s consumption of edible oils and stocks China consumption of edible oils Edible oils Total usage Market share China palm oil stock at domestic ports (Palm oil stocks at China domestic ports - '000 tonnes) 1,600 Soya oil 14,139 39% Rapeseed oil 6,499 18% Palm oil 5,126 14% Lard 3,613 10% Ground nut oil 1,906 5% Sunflower oil 1,173 3% Others 4,129 11% Total 36,588 100% 1,400 1,200 1,000 800 600 400 200 - Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 SOURCE: OIL WORLD, CIMB RESEARCH SOURCE: COFEED, CIMB RESEARCH 29
Potential impact of US-China trade war China has imposed a 25% import tariff on soybean imports from the US in July 2018 The US administration has announced that it will subsidize American farmers for up to $12bn due to the potential impact from higher tariff. Scenario 1 : Chinese crushers source soybean supplies from Brazil and Argentina but this could lead to higher soybean prices from these countries vs. US soybeans. Scenario 2 : Chinese crushers source other oilseeds which could lead to higher prices as well Scenario 3 : Chinese farmers could import meal and oil directly due to lower tariff of 5% and 9% vs. Proposed 25% on beans (currently 3%) Scenario 4 : China crushed less beans/oilseeds as the higher costs lead to weaker demand. This led to lower edible oils produced in China, leading to higher imports of other edible oils, including palm oil 30
Impact from the higher Chinese tariffs on US soy exports US Soybean Exports Volumes to China as a % of Total US Soybean Exports Global Soybean Stock Levels (% of Total US Soybean Exports) 90% 80% 70% 60% 50% 40% 30% m tonnes Sep Aug Sep Sep Sep Aug Aug 2018 2018 2017 mom chg yoy chg 2017 yoy chg China 22.5 23.5 19.7 (4%) 14% 19.2 22% US 10.7 11.7 9.4 (8%) 14% 10.1 16% Argentina 32.7 30.8 35.9 6% (9%) 35.6 (13%) Brazil 23.0 24.2 25.0 (5%) (8%) 26.5 (9%) Others 5.9 5.5 6.0 7% (2%) 5.6 (3%) Total 94.7 95.6 96.0 (1%) (1%) 97.0 (1%) 20% 10% 0% 2016 2017 2018 SOURCE: USDA, CIMB RESEARCH SOURCE: BLOOMBERG, CIMB RESEARCH 31
Usage of palm oil in 2017 (65m tonnes) Energy 18% Others 3% Chemicals 9% Food use 70% SOURCE: OIL WORLD, CIMB RESEARCH 32
Indonesia vs. Malaysia biodiesel mandate Malaysia biodiesel mandate It was reported that Malaysia is considering raising its biodiesel mandate to 10% from 7% in second half of 2019. We estimate Malaysia s biodiesel consumption at around 536,786 tonnes in 2017 based on B7 blend. As such, we estimate Malaysia could potential consume 766,837 tonnes of biodiesel if it adopts B10 This represents additional biodiesel usage of approx 230,000 tonnes, or 1.2% of projected CPO production for Malaysia of 19.6m tonnes in 2018E Indonesia biodiesel mandate Indonesia expanded its biodiesel mandate of 20% to include nonsubsidised diesel users starting 1 Sep and plans to stepped up enforcement. This is expected to translate to annual biodiesel usage of 6 to 6.2m kls in 2018 from projected 4m kls in 2018 by Indonesia govt (vs. 2.57m kls for 2017) or 17% of Indonesia s CPO output in 2017. We expect Indonesia to achieve around 3.2-3.5m tonnes of biodiesel usage in 2018, an improvement from 2.5m tonnes in 2017 in view of the government s efforts to raise biodiesel usage to reduce diesel imports. 33
Levy on palm oil exports from Indonesia Levy will be collected regardless of CPO price level to partly subsidise biodiesel usage in Indonesia Export tax on palm oil will only be collected when CPO price exceeds US$750 per tonne. Products Export levy RBD Palm Oil 20 RBD Palm Stearin 20 RBD Palm Kernel Oil 20 RBD Palm Kernel Olein 20 RBD Palm Kernel Stearin 20 RBD Palm Olein (In package of 25 kg or less) 20 Palm-based Biodiesel (with Methyl Ester > 96.5%) 20 Split Fatty Acid from CPO, CPKO (with free fatty acid of > 2%) 30 Split PFAD (with free fatty acid of >70%) 30 Split PKFAD (with free fatty acid of > 70%) 30 Products (US$/tonne) Export levy RBD Palm Olein 30 Palm Fatty Acid Distillate (PFAD) 40 Palm Kernel Fatty Acid Distillate (PKFAD) 40 Crude Palm Oil 50 Crude Palm Kernel Oil 50 Crude Palm Olein 50 Crude Palm Stearin 50 Crude Palm Kernel Olein 50 Crude Palm Kernel Stearin 50 SOURCE: BLOOMBERG, MINISTRY OF FINANCE WEBSITE 34
Discretionary biodiesel demand viability Estimated CPO biodiesel breakeven price against crude oil Brent crude w/o subsidy CPO breakeven with subsidy Ex-rate w/o subsidy CPO breakeven with subsidy (US$/barrel) (US$/tonne) (US$/tonne) US$/RM RM/tonne RM/tonne 40 270 420 4.15 1,122 1,745 50 344 494 4.15 1,429 2,052 60 418 568 4.15 1,737 2,360 70 492 642 4.15 2,044 2,667 80 566 716 4.15 2,352 2,975 81 573 723 4.15 2,382 3,006 90 640 790 4.15 2,659 3,282 100 714 864 4.15 2,966 3,590 * Assumes US extends its biodiesel subsidy of US$1 per gallon (US$300 per tonne) and biodiesel producers get 50% share of this 35
Price Outlook for rest of 2018 Current sentiment in palm oil market is bearish due to: high palm oil stocks in Malaysia and Indonesia; rising palm oil supplies as we are in the high production season; higher import duties on palm oil from India; good soybean harvest from the US concerns over US-China trade war impact on global economy. We project CPO price to trade in the range of RM2,100 to RM2,400 in Oct 18 and average RM2,320 per tonne in 2018 (9M18 : RM2,338 per tonne/ 2017 : RM2,783 per tonne). We project palm oil prices to recover in 2019 due to: Higher biodiesel consumption from Indonesia driven by mandates and enforcement Potential increase in discretionary biodiesel usage due to higher oil prices Potentially lower than expected CPO supply if El Nino occurs (70% probability) Replanting program and slower new plantings in Indonesia and Malaysia Potential reduction in import duties on palm oil by India 36
Technical chart view for CPO price CPO is in the final leg to complete this multi-year sideways pattern. It may be possible that CPO has found the low for the year at 2,137, where the triangle support trend line lie. If CPO breaks this said low in the weeks ahead, then look for further weakness towards the 2,050-2,090 or 1,925 support levels. Our LT bullish view would be incorrect if prices fell below 1,863. Closing above the 50-week EMA (currently at 2,375) would confirm that a medium-term bullish run is underway. Strong resistance seen at 2,590-2,850 SOURCE: BLOOMBERG, CIMB RESEARCH 37
Malaysian palm oil refining industry Malaysia : Number of refineries and capacities (tonnes) as at December 2017 State Number of refineries Processing Capacity (tonnes) Johor 14 7,153,200 Perak 3 841,500 Penang 3 567,000 Selangor 13 5,154,000 Other states 2 1,759,500 Pen Malaysia 35 15,475,200 Sabah 12 8,738,000 Sarawak 6 3,115,000 East Malaysia 18 11,853,000 Total 53 27,328,200 SOURCE: MPOB, CIMB RESEARCH 38
Malaysian palm oil refining industry Malaysian refining utilisation rate in 2017 and 2018 80.0% 2017 2018 75.0% 71.7% 71.4% 73.2% 71.5% 70.0% 66.4% 68.9% 72.7% 70.1% 68.2% 65.0% 60.0% 55.0% 66.2% 59.6% 55.4% 64.2% 60.6% 62.6% 64.9% 67.0% 62.9% 55.8% 67.2% 50.0% 49.6% 45.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SOURCE: MPOB, CIMB RESEARCH 39
Breakdown of CPO and processed palm oil exports CPO PPO 100% 90% 82% 80% 70% 60% 50% 40% 30% 20% 10% 0% 66% 49% 38% 26% 30% 27% 24% 19% 19% 12% 9% 11%10% 6%2% 3% 2% 3% 4% 11% 12%16% 14%15% 16%16% 22% 16% 21% 2%2% 1%1%1%0% 1% 1% 3% 4% 0% 0%0% 0% 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 9M18 SOURCE: MPOB, CIMB RESEARCH 40
Thank you 41
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