Where are palm oil prices heading?

Where are palm oil prices heading? Grepalma Congress August 2016 2016 LMC International. All rights reserved. www.lmc.co.uk

Palm oil is still tied to petroleum today. El Niño and the Chinese Strategic Reserve have been major influences on oils prices this year. What happens next?

The impact of biodiesel on palm prices

% of output used for biofuels for major crops In 2000, biofuels took less than 1% of all oils. By 2015, the share was 17% (27% for rapeseed;17% for soy and palm), and 15% of maize supply went to biofuels. 35% % of world output used in biofuels 30% 25% 20% 15% 10% 5% 0% 2000 2002 2004 2006 2008 2010 2012 2014 Cane Maize Total oils Rapeseed oil Soy oil Palm oil 5

% of output used for biofuels for major crops In 2000, biofuels took less than 1% of all oils. By 2015, the share was 17% (27% for rapeseed;17% for soy and palm), and 15% of maize supply went to biofuels. 35% % of world output used in biofuels 30% 25% 20% 15% 10% 5% 0% 2000 2002 2004 2006 2008 2010 2012 2014 Cane Maize Total oils Rapeseed oil Soy oil Palm oil 6

EU prices for Brent crude oil and crude palm oil There is a price band for oils. The floor to the band is where EU CPO equals Brent crude prices, and thus CPO is cheaper than crude oil in S.E. Asia.. 1,400 EU prtices (US$ per tonne) 1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 CPO Brent 7

EU prices for Brent crude oil and crude palm oil There is a price band for oils. The floor to the band is where EU CPO equals Brent crude prices, and thus CPO is cheaper than crude oil in S.E. Asia.. 1,400 EU prtices (US$ per tonne) 1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 CPO Brent 8

Indonesian PME exports and the CPO-Brent differential The floor exists because discretionary biodiesel use emerges when CPO competes as a fuel. Indonesian PME exports to price-sensitive markets prove this. 160 400 PME exports from Indonesia ('000 tonnes) 120 80 40 0-40 300 200 100 0-100 Indonesian CPO premium vs Brent, $/tonne -80-200 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Local CPO premium vs Brent, $/tonne PME exports not to US or EU 9

Indonesian PME exports and the CPO-Brent differential The floor exists because discretionary biodiesel use emerges when CPO competes as a fuel. Indonesian PME exports to price-sensitive markets prove this. 160 400 PME exports from Indonesia ('000 tonnes) 120 80 40 0-40 300 200 100 0-100 Indonesian CPO premium vs Brent, $/tonne -80-200 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Local CPO premium vs Brent, $/tonne PME exports not to US or EU 10

The impact of the 2015-16 El Niño

The Oceanic Niño Index (ONI) in various years The ONI tracks ocean warming. The 2015-16 El Niño is as strong as in 1997-98, the last major one, but the ONI is now falling back, following the path of 1997-98. 2.5 2.0 1.5 1.0 ONI 0.5 0.0-0.5-1.0-1.5-2.0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 1997-98 2009-10 2015-16 12

The Oceanic Niño Index (ONI) in various years The ONI tracks ocean warming. The 2015-16 El Niño is as strong as in 1997-98, the last major one, but the ONI is now falling back, following the path of 1997-98. 2.5 2.0 1.5 1.0 ONI 0.5 0.0-0.5-1.0-1.5-2.0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 1997-98 2009-10 2015-16 13

CPO prices vs. the ONI in 1997/98 El Niño The CPO price broadly followed the ONI in 1997-98. As the El Niño ended, CPO prices returned to normal. 2.5 800 2.0 700 ONI 1.5 1.0 0.5 0.0-0.5-1.0 600 500 400 300 200 100 EU CPO price, US$ per tonne -1.5 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov ONI 1997-98 CPO 1997-98 0 14

CPO prices vs. the ONI in 2015/16 El Niño However, it is evident that CPO prices did not follow the ONI in 2015-16. If anything, it was the opposite. 2.5 800 700 ONI 2.0 1.5 1.0 0.5 600 500 400 300 200 EU CPO price, US$ per tonne 100 0.0 Jan Mar May Jul Sep Nov Jan Mar May ONI 20015-16 CPO 2015-16 0 15

CPO premium over Brent vs. the ONI in 2015/16 However, today s price band means that we should focus on CPO s premium over Brent, not the flat CPO price. The El Niño s impact becomes very clear. 2.5 400 ONI 350 2.0 300 250 1.5 200 1.0 150 100 0.5 50 0.0 0 Jan Mar May Jul Sep Nov Jan Mar May CPO premium over Brent, US$ per tonne ONI 20015-16 Premium over Brent 3 months later 16

CPO premium over Brent vs. the ONI in 2015/16 However, today s price band means that we should focus on CPO s premium over Brent, not the flat CPO price. The El Niño s impact becomes very clear. 2.5 400 ONI 350 2.0 300 250 1.5 200 1.0 150 100 0.5 50 0.0 0 Jan Mar May Jul Sep Nov Jan Mar May ONI 20015-16 Premium over Brent 3 months later CPO premium over Brent, US$ per tonne 17

Palm oil prices in 2015/16

Rapeseed oil sales from Chinese State Reserve In view of the big loss of CPO output, the key question is: why didn t CPO prices rise more? The main answer: steady rapeseed oil sales from China s State Reserve. 2.5 6.5 Cumulative auction tonnage, million tonnes 2.0 6.0 1.5 5.5 1.0 5.0 0.5 4.5 0.0 4.0 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Cumulative auctions since Dec. 2015 Remaining State Reserve Rapeseed oil State Reserve, million tonnes 19

Chinese vegetable oil prices The auctions, with a 5,300 RMB floor price, acted as a cap to other oils prices, locally and globally. 6,500 Chinese Oil Prices (RMB per tonne) 6,000 5,500 5,000 4,500 4,000 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Palm olein Jiangsu Rapeseed oil market Jiangsu Average rapeseed oil auction Grade 4 soy oil, Shandong 20

Chinese vegetable oil prices The auctions, with a 5,300 RMB floor price, acted as a cap to other oils prices, locally and globally. 6,500 Chinese Oil Prices (RMB per tonne) 6,000 5,500 5,000 4,500 4,000 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Palm olein Jiangsu Average rapeseed oil auction Rapeseed oil market Jiangsu Grade 4 soy oil, Shandong 21

The road ahead for CPO prices

Year-on-year growth in SE Asian CPO output By Q4 this year, combined Malaysian and Indonesian CPO output will again record positive quarterly year-on-year growth, which will lift palm oil stocks. 40% Year-on-year growth in CPO outputt 30% 20% 10% 0% -10% -20% Q1.08 Q1.09 Q1.10 Q1.11 Q1.12 Q1.13 Q1.14 Q1.15 Q1.16 Q1.17 23

SE Asian CPO output Looking ahead, maturing oil palm areas and normal yields would lift CPO output by 6 million tonnes in 2017 and by a further 3.5-4 million tonnes in 2018. 60 S.E. Asian CPO output, million tonnes 57 54 51 48 45 2012 2013 2014 2015 2016 2017 2018 24

SE Asian CPO output Looking ahead, maturing oil palm areas and normal yields would lift CPO output by 6 million tonnes in 2017 and by a further 3.5-4 million tonnes in 2018. 60 S.E. Asian CPO output, million tonnes 57 54 51 48 45 2012 2013 2014 2015 2016 2017 2018 25

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. 26

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. Surprisingly strong Chinese demand for soybeans for crushing, adding to oil supplies. 27

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. Surprisingly strong Chinese demand for soybeans for crushing, adding to oil supplies. Limit on subsidised Indonesian sales of biodiesel because of the wide CPO-gasoil spread. 28

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. Surprisingly strong Chinese demand for soybeans for crushing, adding to oil supplies. Limit on subsidised Indonesian sales of biodiesel because of the wide CPO-gasoil spread. Palm oil production recovery arriving in the second half of 2016 in the face of a gloomier macro-economic outlook. 29

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. Surprisingly strong Chinese demand for soybeans for crushing, adding to oil supplies. Limit on subsidised Indonesian sales of biodiesel because of the wide CPO-gasoil spread. Palm oil production recovery arriving in the second half of 2016 in the face of a gloomier macro-economic outlook. Spot CPO in the EU is currently $340 over Brent with OND prices $280 above. The average level of the spread is $225. 30

Important factors in price formation today Rapeseed oil from the Chinese State Reserves. Surprisingly strong Chinese demand for soybeans for crushing, adding to oil supplies. Limit on subsidised Indonesian sales of biodiesel because of the wide CPO-gasoil spread. Palm oil production recovery arriving in the second half of 2016 in the face of a gloomier macro-economic outlook. Spot CPO in the EU is currently $340 over Brent with OND prices $280 above. The average level of the spread is $225. With Brent crude price at $45/barrel ($330/tonne), the average premium points to CPO falling to $550, then falling below $500 FOB as MPOB stocks move above 2 million tonnes.. 31

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