dr james fry, lmc international - globoil presentation - sept 17 - key factors in today's...

© 2017 LMC International. All rights reserved. www.lmc.co.uk

Key factors in today’s market

Presentation to Globoil 2017

by Dr, James Fry, LMC International, Oxford, UK

September 2017

© 2017 LMC International. All rights reserved. Globoil 2017

Key influences on the markets today

Weather is very topical right now, with floods from here to the Americas. So I start by reviewing where we are in the El Niño/La Niña cycle and its impact on palm oil. I then take this forward, outlining our latest forecasts of palm oil output into 2018.

The other highly topical issue today is biofuel policy in three vital markets: the EU, US and Indonesia, and therefore, I explain what I see as the key issues today.

Before getting into details, I must make an important point. In supply-demand terms, US and EU on/off biodiesel anti-dumping barriers are a zero-sum game.

One extra tonne of EU imports from Argentina means displacing a tonne of local supply. Instead of importing oils to make biodiesel locally, it is imported directly. EU palm oil imports for biodiesel manufacture will be among the more obvious losers.

With zero-sum games there are winners and losers. US anti-dumping duties lift CBoT soy oil but are negative for FOB prices elsewhere, as foreign biodiesel suppliers divert their exports elsewhere, probably as oil, rather than biodiesel.


We have entered a frothy period in the market

I stress the zero sum nature of the present excitement about biodiesel trade barriers, because the market is reacting to the news as if it is good for everyone.

I find equally irrational the recent bullishness about reports of a sharp fall in CPO output in Malaysia in early September. Have people forgotten that the country had three consecutive weekdays of national holidays, including one extra one added at the last minute? Presumably, as with the slowdown associated with the Ramadan and Eid period, the lost output will be made up later.

Likewise, when the market does not like a bearish tone to USDA crop forecasts, it decides to discount them. It is dangerous when markets react only to the bullish aspects of news. I will try to present a more balanced view today.

A last point: since 2007 biofuels have kept vegetable oils trading in a price band above crude oil. In my first diagram, you will see that this remains true. Thus, Brent prices are the starting point for vegetable oil price forecasts. I assume that, once the US gets over Hurricane Irma, Brent will trade at $50-$55/bbl, which satisfies US shale oil producers, with their impressive new disruptive technology.


Brent crude remains at the floor to the EU oils price band

Brent at $50, rather than $100/bbl., explain why vegetable oils haven’t regained since 2014 the levels of well above $1,000 per tonne, despite low stocks of oils.

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Soy Palm Rapeseed Sun Brent Crude


The recovery after El Niño:

the evidence from palm oil

Weather and the oil palm production cycle

5


The 2015/16 El Niño was in line with the last major El Niño

.. but La Niña never really followed after it, nor did a possible second El Niño.

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ONI 1997-99 ONI 2015-17

El Niño

La Niña


Year-on-year growth in Malaysian CPO output has faltered

2017 year-on-year monthly growth in Malaysian output lags behind 1999.

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ONI 1997-99 ONI 2015-17 Growth 1997-99 Growth 2015-17


Strong growth in CPO output will continue until end-2018

This year world CPO output will only just get back to 2015 levels, but the rolling 12 month year-on-year changes in output show good growth continuing in 2018.

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Indonesia Malaysia Others


The story so far: the outlook for oils production

As the world’s major oil, palm leads the way on the world market. The conclusion from the slides I have just shown you is that CPO output is recovering from the devastating impact of the El Niño drought.

The upturn is not as fast as predicted (indeed, 2017 Malaysian output will be down around half a million tonnes on 2015), but the ONI climate index points to future decent rains and so CPO output growth is assured as we go into 2018.

Among seed oils, Asian output, notably of rapeseed, is dismal; but the world now looks to South America, the Black Sea and Canada for exports.

As of now, North American and European crops seem fine, with good news in some areas offset by bad news elsewhere. In many respects, the key question is what is happening to the demand for soymeal, with oil as the by-product.

China’s appetite for pork and chicken seems insatiable, and its indirect imports of soy oil in beans are still accounting for a growing share of the country’s oil needs.

So, the supply of oils is set fair. The next question is what is happening to demand.


Biodiesel mandates and trade:

developments in Indonesia, the EU and US

Biodiesel demand and policy shifts

10


Indonesia's automatic stabiliser in its biodiesel mandate

This plots trade-offs of the mandate vs. FOB CPO at $55 Brent, with $750 million to spend.

The volume of biodiesel subsidised by the Indonesian CPO Fund moves in the opposite direction to the CPO-crude oil spread, thus acting as a price stabiliser..

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FOB CPO price, US$ per tonne

Price on Monday

Today, 2.5 mn mt can be subsidised

At $600, 4 mn mt can be subsidised


Indonesia's "mandate" is limited by the high CPO price

The CPO Fund faced pressure not to drive up cooking oil prices during the Ramadan/Eid period this year, and thus the stabiliser ceased to operate.

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Actual biodiesel sales Subsidy needed per tonne under the formula


EU biodiesel supplies show the impact of import barriers

Anti-dumping measures boosted local biodiesel output.

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Output Net imports


Total EU demand has actually fallen since its peak in 2012

You can see the growing importance of waste oils and fats

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Rapeseed Soy Palm Other oils UCO, animal fats


The "double counting" of biofuel from wastes is the reason

Reported mandate totals actually rose, due to this double counting

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Rapeseed Soy Palm Other oils UCO, animal fats Double counting


The reason is the double counting of biofuel from wastes

Reported mandate totals actually rose, due to this double counting

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Rapeseed Soy Palm Other oils UCO, animal fats Double counting


Imports are now a major source of biodiesel for the US

Uncertainties about the renewal of tax credits lead to Q4 spikes in supply

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FAME Output Imports FAME Neste HVO


US imports of biodiesel reveal Argentina's significance

The US is an Argentine market for over 200,000 tonnes per month at the peak

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Argentina Canada Indonesia


The story so far: the outlook for biodiesel

Indonesia’s CPO Fund uses export levies from producers to finance subsidies on local biodiesel sales, bridging the gap between the costs of local biodiesel and imported gasoil. As this gap grows (when CPO moves further above Brent), the amount that can be subsidised shrinks, reducing upward pressures on CPO prices and acting as a price stabiliser (and thereby reinforcing the price band). However, we saw earlier this year that pressure not to add to demand during times of peak local cooking oil consumption led to a temporary cutback in the mandated amounts.

EU data reveal that the actual volumes of biodiesel sold in its market have been steady; yet mandated quantities rose. This paradox arises because biodiesel made from “waste products” has a double weight; 1 litre counts as 2 in filling the mandate.

Argentina has been sending the US over 200,000 tonnes of biodiesel in some months. If the US applies anti-dumping duties, this will boost US demand for soy oil for local biodiesel production, with knock-on effects throughout the world soy sector.

Argentina may be able to switch this biodiesel from the US to the EU, but we must not forget that, without an actual rise in final biodiesel demand, this is a zero sum game. Argentina’s switch will displace other oils now used in EU biodiesel output.


The outlook for palm oil stocks and prices

The relationship between palm oil stocks and prices

20


First, I remind you about the oils price band

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Soy Palm Rapeseed Sun Brent Crude


The relationship between stocks and the CPO-Brent spread

The premium falls when stocks rise; and vice versa. So what next?

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EU CPO Premium over Brent Average CPO Premium MPOB Stocks


Stocks will rise further, forcing down the CPO premium

The rise in stocks would be expected to reduce the premium by over $100

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EU CPO Premium over Brent Average Premium MPOB Stocks


Implications for prices

The logic of the link between stocks and prices means that the rise in Malaysian palm oil stocks by end-November should reduce EU CPO prices by almost $100 between last month (August, when it averaged $674) and November-December.

The fall in Malaysian futures prices will be slightly less in US$, due to the strength of the Ringgit, but the futures should fall below MYR2,400 at the low point.

CPO’s discount on other oils will widen until Nov-Dec as stocks peak and import demand weakens during the winter period.

Sunflower oil will remain the most price competitive alternative in the EU market over the next six months.

In the background, the arrival of Argentine soy biodiesel in the EU will displace some palm oil and rapeseed oil from use in EU biodiesel production, pushing the palm oil back to Asia and shifting some sunflower oil out of EU food markets.

With this mention of sunflower oil, I thought you might like to see this last slide, which demonstrates how it has risen in importance in this region.


Sunoil‘s share of Chinese and Indian overall oils imports

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Sun Oil:CPO Price Ratio Sun Oil % Direct Oil Imports

When sun oil gets expensive vs. CPO, its share falls, but the trend is clearly up.

© 2017 LMC International. All rights reserved. MPOC

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, 2017All rights reserved

www.Lmc.co.uk

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dr james fry, lmc international - globoil presentation - sept 17 - key factors in today's...

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