©lmc international, 2015 1 26/10/2015 conference proceedings: partnered by – reshamwala...

©LMC International, 2015 120/04/23

Conference Proceedings:Partnered by – Reshamwala Shipbrokers

World vegetable oils markets today and tomorrow: “the biofuel tail wags the dog”

Presentation by : Dr James FryGloboil India 2015


World vegetable oils markets today and tomorrow: “the biofuel tail wags the dog”

Presentation to Globoil 2015,

by Dr James Fry,

Chairman, LMC International

www.LMC.co.uk


The key themes in today’s palm oil market

I will start by reviewing the current state of the price band linking vegetable oil and petroleum prices.

I review the special role of mandated and discretionary demand, for biodiesel in defending the price band.

I then turn to the new factors, notably the response by producers to expensive fertiliser and Indonesia’s new export levies, that are affecting the market today, on top of the usual cycle in palm oil output growth.

I will mention the weather, of course, and end with the implications of all these influences for the price outlook.


The price band is the best place to begin


The price band, with Brent at the floor to the range for EU oils prices since 2007, remains as valid as ever, with Brent leading oils prices down this year

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Malaysian stocks are the key to the EU CPO-Brent price differential per tonne


The EU CPO premium over Brent is negatively correlated with stocks. High stocks imply a low premium, as now, and low stocks a high premium.

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CPO Premium over Brent Average CPO Premium MPOB Stocks


CPO prices remain linked to crude oil, fluctuating within a price band whose floor is set by Brent.

It is evident that palm oil prices are still led within a price band by prices in the world petroleum market.

There is also compelling evidence that the most important single factor determining where EU CPO prices stand in relation to crude oil is MPOB stocks.

MPOB stocks play this role because they are the only reliable stock data available to the market and are published within two weeks of the end of the month.

A major question to examine now is whether the market is reacting to stocks today or is starting to look ahead.


The significance of discretionary price-sensitive biodiesel demand in Indonesia and Argentina


Indonesian biodiesel sales fluctuate. With EU anti-dumping duties, exports now rely on free market price-competitive sales which are not viable today.

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Discretionary biodiesel use emerges when it competes as a fuel. Indonesian exports to new price-sensitive markets, led by China, prove this.

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Premium Exports to price-sensitive markets


Argentine local demand has crept up to a million tonnes, while exports fluctuate with policy shifts in the US and EU and with price-sensitive buying.

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Argentina is similar to Indonesia in the price-sensitivity of its biodiesel exports. (Spikes come just before policy changes in the EU and US.)

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SME exports SME margin for export


Discretionary, price-sensitive, biofuel demand has been crucial in absorbing surplus oils stocks

Many countries do not fill their mandates because their governments do not take proper action to enforce them.

Among palm producers with mandates, Colombia and Thailand meet high targets. Malaysia has slowly lifted its mandate. Indonesia has not met its mandates so far. Argentina has done better with its soy biodiesel mandate.

In both Indonesia and Argentina, we have seen price-sensitive demand for biodiesel (for export and locally) emerge when it become price-competitive as diesel fuel.

In 2014, well over three million tonnes of biodiesel in all went to discretionary uses from Indonesia and Argentina.


What about price competition between palm oil and other leading vegetable oils?


EU spreads between palm oil and other vegetable oil prices rose over the past four months, helping CPO to lift its market share in countries like India.

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Soybean oil Rapeseed oil Sunflower oil


India, as the biggest importer of vegetable oils, is crucial to the market balance by adapting imports to the landed discount of CPO on soybean oil.

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CIF CPO/SBO Prices Palm Oil % of Indian Imports


Competition between palm oil and other oils

For a long period, which lasted almost two years and extended until July this year, the differentials for soybean and rapeseed oils over CPO were quite low by historical standards. They jumped a great deal in subsequent weeks, as CPO prices fell (until the last few days) while those of other oils remained steady.

If these wider differentials were maintained (which I don’t expect), palm oil should be able to regain sales, notably here in India, where it lost market share to soybean and sunflower oils in 2013/14 and 2014/15.

(Here I must thank our hosts the Solvent Extractors’ Association for the superb job it does issuing prompt reliable statistics, like the MPOB. Thank you.)


Looking ahead: factors to take into account


Discretionary biodiesel: Indonesian CPO came very close to Brent once in 2015, but then bounced back. Discretionary biodiesel is not now viable.

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CIF Rotterdam Indonesian CPO (deducting export levy)


Fertiliser is a crucial input. Here I plot not the price of fertilisers, but the fertiliser-CPO price ratio. It is now at its highest level since 2008, hitting its use.

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The impact of lower fertiliser use in response to high fertiliser prices may be seen in the year-on-year CPO output growth in 2010 in Malaysia.

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Output: Year-on-year quarterly growth in CPO output (i.e., Q2.2015 on Q2.2014) will slow on the back of lower fertiliser use and recent droughts.

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Malaysia Indonesia Total, including Thailand and Colombia


Export levy: This shows how much PME can be funded (at $50 Brent = $460 gasoil) as FOB CPO prices rise using 60% of Indonesia’s export levy.

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FOB CPO, US$ per tonne


Influences on palm oil prices going into 2016

The failure of fertiliser prices to fall with CPO over the past year has reduced application rates. This will hit production in the usual slowdown in South East Asian output after November.

So far, while there have been droughts in eastern South East Asian palm regions, it is impossible to blame them yet on a full El Niño, but these past droughts are already affecting production.

Discretionary biodiesel sales are not viable at current prices, but if Indonesia’s levy fund subsidises local biodiesel, as was originally intended, its impact could be large.


If there is an El Niño: With A.H. Ling we forecast CPO output in our S.E. Asia quarterly report under different weather conditions. This is for Malaysia.

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No El Niño El Niño Ideal weather


Wider factors behind vegetable oils prices

Year-on-year CPO output growth is declining, even without a full El Niño which makes growth negative.

For soybeans, crushing remains strong, with the US running well ahead of 2014 rates and China rebuilding its pig numbers. This will inevitably boost soy oil supply.

Rapeseed oil output is down while sun oil output is flat.

This implies a higher CPO premium over Brent in 2016 and a narrower spread between soy oil and CPO.

The rise in the premium depends on the effectiveness of Indonesia’s new fund managing export levy revenues.

Brent crude, the floor to oils prices, will not rise. In fact, I think it will fall a bit when Iran resumes crude exports.


Stocks: Projecting our diagram of stocks vs. the CPO premium over Brent, you can see why I expect the premium to turn upwards shortly.

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CPO Premium over Brent Average CPO Premium MPOB Stocks


Laurics: To many people’s surprise, there is a nice inverse relationship between the PKO premium over Brent and MPOB PKO stocks.

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EU PKO premium over Brent Stocks


The price outlook in 2016

The FOB CPO price, even without an El Niño, should go above $600 during Q1.2016. This assumes that the Indonesian fund implements its subsidies in full.

An El Niño would take prices well above $700 by mid-year, with world CPO output in 2016 below that in 2015.

If Indonesia’s fund still pays out its subsidies against this tight backdrop for CPO, it is likely that soy oil, whose supplies will be supported by a high level of crushing for meal, would move to a discount on palm oil by mid-year.

Among laurics, coconut oil will remain at a high spread over PKO, due to the high prices of short chain alcohols. PKO will see its premium over Brent rise as palm output slows, but the PKO-CPO spread should shrink by $50.


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, 2015All rights reserved

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Conference Proceedings:Partnered by – Reshamwala Shipbrokers

©lmc international, 2015 1 26/10/2015 conference proceedings: partnered by – reshamwala...

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