Where next for vegetable oil prices?

Where next for vegetable oil prices? POTS Korea 2015 David Jackson, LMC International LMC International, 2015 1

The outline of this presentation We begin by looking at how oil demand in Korea is maturing. Next, we compare the period of collapsing prices in 2008-09 and 2014-15. Finally, we consider the direction of vegetable oil prices for the next few months. LMC International, 2015 2

The Korean oil market LMC International, 2015 3

Korea is moving towards the type of mature food oil market seen in other advanced economies. 35 Food oil consumption per capita kg/year 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2010 2015 Japan USA EU Australia Korea LMC International, 2015 4

This is associated with slowing but not yet zero growth rates of oil consumption per capita. 18% 15% Annual % change in oil demand 12% 9% 6% 3% 0% -3% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 China United States South Korea LMC International, 2015 5

When total oil consumption is satisfied, consumers become more discerning. Palm and canola have been the winners in Korea, as they are in most mature markets. 400 350 300 Million tonnes 250 200 150 100 50 0 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Palm oil Cottonseed oil Rapeseed/canola oil Soybean oil LMC International, 2015 6

Comparing falling prices in 2008 and 2015 LMC International, 2015 7

The difference between crude oil and vegetable oil prices is the key to the market. In 2008, palm oil settled above crude oil? 1,600 NW Europe prices, US$ per tonne 1,400 1,200 1,000 800 600 400 200 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Brent Crude Palm Oil Soy Oil Rapeseed Oil LMC International, 2015 8

There are parallels between the movements in Brent prices in 2008-09 and 2014-15. 140 120 Brent Crude, $ per barrel 100 80 60 40 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2008-09 2014-15 LMC International, 2015 9

. and in the CPO premium over Brent. 500 CPO Premium over Brent, US$ per tonne 400 300 200 100 0-100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2008-09 2014-15 LMC International, 2015 10

There were also parallels between stock movements in the same two periods until 2015 stocks started to build in March. 2,400 2,200 MPOB Stocks, '000 tonnes 2,000 1,800 1,600 1,400 1,200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2008-09 2014-15 LMC International, 2015 11

We can see that EU CPO premia over Brent are inversely correlated with stocks. High stocks imply low premia, and vice versa. 600 2,700 EU premium over Brent, US$ per tonne 500 400 300 200 100 0 2,500 2,300 2,100 1,900 1,700 1,500 MPOB Palm Oil Stocks, '000 tonnes -100 1,300 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 CPO Premium over Brent Average CPO Premium MPOB Stocks LMC International, 2015 12

See the inverse relationship between the CPO premium and stocks in 2008-09 CPO Premium over Brent, US$ per tonne 350 280 210 140 70 2,275 2,075 1,875 1,675 1,475 MPOB Stocks, '000 tonnes 0 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Premium, 2008-09 Stocks, 2008-09 1,275 LMC International, 2015 13

and again in 2014-15. But this time, stocks are turning upward in March and the premium is beginning to fall. CPO Premium over Brent, US$ per tonne 350 300 250 200 150 100 50 2,300 2,200 2,100 2,000 1,900 1,800 1,700 MPOB Stocks, '000 tonnes 0 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Premium, 2014-15 Stocks, 2014-15 1,600 LMC International, 2015 14

Comparing 2014-15 with 2008-09 There are clear similarities between the two periods in the inverse relationship between stock levels and the EU CPO premium over Brent North Sea crude. However, there is a big difference. In 2009, stocks stayed low and palm oil prices settled $200 above Brent in the EU. In 2015, CPO stocks are beginning to build. If this continues, the CPO premium over Brent will have to disappear. Stocks are the key LMC International, 2015 15

The key to the price outlook: Stocks LMC International, 2015 16

Output: The year-on-year growth cycle is turning. Growth will be positive in Q3-Q4. Year-on-year growth in CPO output, % 40% 30% 20% 10% 0% -10% -20% -30% Q1.09 Q1.10 Q1.11 Q1.12 Q1.13 Q1.14 Q1.15 Malaysia Indonesia Total, including Thailand and Colombia LMC International, 2015 17

Demand: Discretionary use of biodiesel emerges when it is a competitive fuel. See Indonesian sales to price-sensitive markets. PME price-sensitive market exports '000 mt 160 120 80 40 0-40 -80 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Exports to price-sensitive markets Premium 400 300 200 100 0-100 -200 Indonesia CPO premium vs Brent, $/mt LMC International, 2015 18

Price: Today the PME premium over gasoil is large both in the EU and FOB S.E. Asia. This rules out any discretionary PME use. 400 300 PME premium vs gasoil, $/tonne 200 100 0-100 -200 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 PME EU premium over gasoil Premium over gasoil FOB Belawan LMC International, 2015 19

Burn stocks, or prices will fall. (Specifically, the price premium over Brent will fall). March MPOB data revealed rising stocks. Output is rising on a seasonal basis and year-on-year output growth is about to turn upwards. Unsubsidised PME cannot compete with gasoil today (in March FOB PME cost $200 more than FOB gasoil). So, PME demand will not absorb the extra output or keep stocks in check unless CPO (and hence PME) becomes cheaper. LMC International, 2015 20

Export taxes help the market reduce stocks LMC International, 2015 21

This shows how a $50 export tax would affect Indonesian local prices. They help reduce stocks by widening biofuel margins. 600 CPO premium vs. Brent US$ per tonne 500 400 300 200 100 0-100 -200 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 EU FOB Indonesia Malaysia With $50 export tax LMC International, 2015 22

The price outlook LMC International, 2015 23

Price outlook: the need to burn stocks The combination of strong output growth and the loss of unsubsidised biodiesel demand will drive up stocks during the second half of the year. Unless there s a huge surge in biodiesel demand in Indonesia, the rise in stocks will force the CPO premium over Brent down to a point (just as happened in September 2012, 2013 and 2014) where unsubsidised sales of PME become profitable, burning the overhang of CPO stocks. LMC International, 2015 24

Thank You www.lmc.co.uk Acknowledgments: MPOB, USDA, US DOE LMC International, 2015 25

Oxford 4 th Floor, Clarendon House 52 Cornmarket Street Oxford OX1 3HJ UK T +44 1865 791737 F +44 1865 791739 info@lmc.co.uk New York 1841 Broadway New York, NY 10023 USA T +1 (212) 586-2427 F +1 (212) 397-4756 info@lmc-ny.com Kuala Lumpur B-03-19, Empire Soho Empire Subang Jalan SS16/1, SS16 47500 Subang Jaya Selangor Darul Ehsan Malaysia T +603 5611 9337 info@lmc-kl.com Singapore 16 Collyer Quay #21-00 Singapore 049318 Singapore Tel: +65 6818 9231 info@lmc-sg.com LMC International, 2015 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. LMC International, 2015 26