Update on the global palm oil market and a review...

© 2018 LMC International. All rights reserved. www.lmc.co.uk

Update on the global palm oil market and a review of things closer to home

Presentation to Congreso de Palma Aceitera en Peru

by Owen Wagner, LMC International

Lima, Peru May 2018

© 2018 LMC International. All rights reserved. Update on Global Palm Oil Market, May

2018

Today’s presentation

• An overview of global production and price – why the

conversation must begin in Southeast Asia

• The pricing mechanisms of veg. oil generally and palm oil,

specifically

• How are recent supply/demand fundamentals and policy

provisions influencing prices today and going forward

• Palm oil production in Latin America

• Conclusions

2


2018

• SE Asia accounts for 90% of global production.

• Though Latin America has registered the strongest growth rates over the past five years, the

additional production added by SE Asia during this period is still more than the total of the rest of the

world’s production.

CPO production by region Growth rates by region (2013-2017)

Why the conversation begins with SE Asia

3

0

10

20

30

40

50

60

70

80

2013/14 2014/15 2015/16 2016/17 2017/18

Millio

n M

T

SE Asia Latin America Africa India

0%

1%

2%

3%

4%

5%

6%

7%

0

10

20

30

40

50

60

70

SE Asia Latin America Africa India

CA

GR

2

01

3-2

01

7 -

Pro

du

ctio

n

Millio

n M

T

2013/14 2017/18 CAGR

Long-term pricing mechanisms


2018

A price band links CPO and Brent

Since 2007, every time that CPO prices in Rotterdam move towards

Brent crude, the Brent price acts as a floor for CPO.

This is no coincidence. When EU CPO prices approach Brent levels,

FOB CPO prices in S.E. Asia are below Brent prices (due to the freight

costs to the EU). In addition, Indonesian export taxes, when in effect,

make its CPO prices even lower. Therefore, at the EU price floor, CPO

is a very competitive source of fuel in South East Asia, without any

need for subsidies.

In the price band, the CPO premium over Brent is greatly influenced by

stocks. The size of the premium moves in the opposite direction to

Malaysian stocks, which the market uses as the indicator of the world

supply-demand balance.

Although biodiesel is the minority of veg. oil use, unlike food, it can be

very responsive to changes in price – making it the tail that wags the

dog.

5


2018

• The extent of the palm premium over this floor is determined by stocks.

• If you are wondering why palm prices haven’t reached the 2010-13 highs, blame crude oil.

Petroleum is the biggest influencer to veg. oil price

• Around 2007, when biodiesel approached 15% of veg oil use, veg. oil prices became inextricably

linked to petroleum prices.

• At the low end, petroleum provides a floor via the biodiesel link.

Veg. oil price band

6

0

300

600

900

1,200

1,500

1,800

2,100

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

EU

prt

ice

s (U

S$ p

er

ton

ne

)

Soy Oil Palm oil Rapeseed Oil Sun Oil Brent


2018

• As the world’s

largest producer,

and as a producer

with very good data,

we look to Malaysia

as an indicator for

palm stocks.

• If Malaysian stocks

are high, downward

pressure on prices

cuts the EU CPO

premium over Brent.

If stocks are low, the

premium rises to

ration demand.

The CPO premium over Brent is driven by stock levels

Relationship between Malaysian Palm Stocks and the CPO premium over crude

7

1,000

1,300

1,600

1,900

2,200

2,500

2,800

3,100

-100

0

100

200

300

400

500

600

Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16 Jan-18

MP

OB

Pa

lm O

il Sto

cks,

'000 to

nn

esE

U p

rem

ium

ove

r B

ren

t, U

S$ p

er

ton

ne

EU CPO Premium over Brent Average CPO Premium MPOB Stocks


2018

The logical floor to the price of

vegetable oils is where no

subsidy would be needed to use

biodiesel as an alternative to

fossil diesel fuel. We are now

getting close to that floor, where

crude oil prices are crucial in

supporting the level of CPO

prices.

Premia of SE Asian CPO over Brent crude

Daily price spreads are getting exceptionally low

8

0

50

100

150

200

250

300

350

400

450

Jan-15 Jan-16 Jan-17 Jan-18

Inside Indonesia MPOB Local delivered


2018

• Since mid-2015, the Indonesian

government has imposed a levy of

$50 per MT on CPO exports.

• It is estimated that the government

will take in $1 billion this year and

much of this will go to subsidizing

CPO use in biodiesel.

• When the biodiesel premium is low,

more gallons can be subsidized.

• There is a limit to how far this can go,

however. It is thought that domestic

use could not easily exceed 300,000

MT per mo.

• Fund balance often goes to support

small holder activities

• The CPO export tax has been

suspended for most of the past year

with the likely effect of moving more

product to the world market.

Indonesian CPO fund acts as backstop to palm oil price

Quantity of biodiesel that could be funded on

$750 million per year

9

0

100

200

300

400

500

0

150

300

450

600

750

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Bio

die

se

l pre

miu

m o

ve

r ga

so

il, $/to

nn

e

Qu

an

tity

ab

le t

o b

e f

un

de

d,

'00

0 m

t/m

on

th

Potential quantity Average actual sales Biodiesel-gasoil spread


2018

Understanding the floor to the price band

In 2017, the balance in the crude market had finally switched

towards a global deficit, after a long period of very high stocks.

Credit for this goes to the Saudi government and its need to get the

best possible price for Aramco at its IPO this year.

I expect OPEC cuts to last till Aramco has had its IPO. After that, you

can expect output cuts to end, primarily because traditional oil

exporters can see the US shale oil industry taking advantage of

higher prices to ramp up their output.

As long as Brent prices are supported at $65-$70 by OPEC, the floor

to the EU price band will be near $500 per MT, and so oils will trade

in a range above that, with the CPO premium over Brent determined

by stock levels.

10


2018

Saudi price drop temporarily reduced US shale output but the industry has emerged even

more competitive

The result? After a small deficit in 2017, 2018 will mark a return to balance in global

petroleum supply and demand

US shale has begun to recover production

following price war

IEA says world moving back into balance in

2018

US Shale has emerged from price war more competitive

The output figures here are from the top seven producing regions for “tight oil”, as shale oil from fracking is known in the US.

11

90

91

92

93

94

95

96

97

98

99

100

2012 2013 2014 2015 2016 2017 2018

Wo

rld

su

pp

ply

-dem

an

d,

millio

n b

bl p

er

day

Demand Output

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

WT

I, $ p

er b

arre

l

Ou

tpu

t fr

om

ma

in o

il f

ield

s,

mn

bb

l./d

ay

Total shale oil output, bbl./day WTI, $/bbl (RH axis)


2018

Shale driving deflationary cycle in petroleum price

12

Near-term fundamentals


2018

Measured by ONI it was comparable to 2009-11. Measured by impact on

yields, however, there were more similarities with 1997-99

The initial recovery from this El Nino was underwhelming

14

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan May Sep Jan May Sep Jan May Sep Jan

y-o

-y c

ha

ng

e

ON

I

1997-99 ONI 2009-11 ONI2015-17 ONI 1997-99 yoy output change2009-11 yoy output change 2015-17 yoy output change


2018

With a final sprint, annual Malaysian CPO output ended 2017 only 0.2% below the 2015 peak and

MPOB stocks were 1.07 million tonnes higher than in Dec. 2016. The recovery from El Niño is clearly

fully under way.

Overall, the rise in world CPO output in 2017 has exceeded 7 million tonnes.

Malaysian monthly CPO output, 2014-17

Estimates of Indo. Quarterly growth

But now the recovery in production is fully underway

15

0.0

0.5

1.0

1.5

2.0

2.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CP

O O

utp

ut

(millio

ns

of

ton

ne

s)

2014 2015 2016 2017

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017

Ye

ar

on

ye

ar

gro

wth

GAPKI PKM Company LMC


2018

CPO premium under pressure but crude has been supportive

Brent, CPO Premium and CPO Price - $/MT

0

200

400

600

800

1,000

1,200

0

100

200

300

400

500

600

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

CP

O P

rice

-$/M

T

CP

O p

rem

ium

an

d B

ren

t -

$/M

T

Brent Crude CPO Premium CPO

16


2018

CPO could lose ground in the latest round of veg. oils musical chairs caused by shifting policies

EU biodiesel by feedstock

In Washington, the US government applied anti-

dumping duties on Argentine biodiesel imports.

Because most of it is not eligible for RINs, this

creates little by way of an opening for additional

palm use. Beginning July, partially hydrogenated

oils must be removed from nearly all food products

which presents some immediate opportunity

In Brussels, the EU lifted duties on Argentine and

Indonesian biodiesel. SME performs better than

PME in cold weather (though not as good as RME)

and conventional wisdom suggest palm may lose

some market share when all is said and done. The

EU parliament vote to ban palm oil in biofuel in

2021 also causes concern.

Delhi’s decision to increase import tariffs on CPO

and olein puts these products at a competitive

disadvantage inside India, the world’s leading

importer.

Fortunately the CPO fund established in Jakarta

provides some stabilizing influence. There is a

limit, however, to how much biodiesel Indonesia

can absorb.

Price sensitivity of Indian imports

10.0%

15.0%

20.0%

25.0%

0

5

10

15

2012 2013 2014 2015 2016 2017 est

Sh

are

of P

alm

Oil in

EU

FA

ME

Millio

n to

nn

es o

f F

AM

E

Palm oil Rapeseed oil Soybean oilSunflower oil Recycled veg. oils Animal fatsOther

100%

110%

120%

130%

140%

150%

160%

170%

180%

0

30

60

90

120

150

180

210

240

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Lan

de

d s

un

oil p

rice a

s %

of

CP

O p

rice

Su

nfl

ow

er

oil im

port

s ('0

00

ton

ne

s)

Sunflower oil imports Indian sunflower oil price/CPO price

17


2018

Limits to leg up provided by sustainability premiums for CPO

Uptake of RSCPO

• Premium for mass

balance RCPO is around

$20 per tonne. Supply

continues to outpace

demand which places a

cap on future premium

growth.

• Cosmetic companies are

better positioned than

food companies to pay

large premiums and

RPKO premiums are as

high as $150 per tonne for

segregated oil as a result.

This also reflects a more

complex supply chain

18

0%

20%

40%

60%

80%

100%

0

3

6

9

12

15

2011 2012 2013 2014 2015 2016

Up

take %

Million T

onnes

Sales Supply Uptake %


2018

Laurics & PKO

Production of CNO in the Philippines and ROW

Much of the world’s coconut production, particularly in the Philippines, comes from trees that were

planted after WWII. Ageing trees have put pressure on yields.

This should widen the premium offered for PKO in the medium term.

19

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2002 2005 2008 2011 2014 2017

Million tonnes

ROW Philippines

0

0.5

1

1.5

2

2.5

rati

o

PKO/CPO CNO/CPO

Price ratio of laurics to CPO


2018

Other oils?

Arg. SPI 6 month drought severity

• Arg. drought has reduced soybean yields by

about 25% compared to last year. Soy

premium over CPO has risen as a result.

• Rape’s increase has been fairly muted

thanks to the removal of anti-dumping duties

on Arg. and Indonesian biodiesel imports

Rising premiums of other oils over CPO

-50

0

50

100

150

200

250

300

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Apr-18

EU

pre

miu

m o

ver C

PO

, US

$

pe

r to

nn

e

Sunflower oil Rapeseed oil Soybean oil

20


2018

Chinese Duties on US soybeans?

Brazil/Arg., will be the big winner but

the world still needs US soybeans.

A week after threat of Chinese tariffs

on US soybeans, 458,000 MT of US

soybeans were sold to the EU, the

largest one-off sale to the bloc in

over 15 years/

If it comes to pass, look for some

realignment in planting and trade

flows – more corn and minor crops

in the US, more soy in South

America.

21

0.95

1.00

1.05

1.10

1.15

1.20

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

Ind

ex p

rice

ch

an

ge

US - CBOT Arg. - FOB Brazil - FOB

Impact of Chinese duty threat on US,

Arg. and Brazilian soybean prices

Latin America’s competitive position and conclusions


2018

Latin American competitiveness

• Growth in Latin America has been propelled by good yields while SE Asian yields have been trending

downward.

• Most countries in Latin America can compete against labor rates (+ benefits) of around $15 per day in

Malaysia. Indonesia is lower cost – around $10-11 per day.

• Room for further efficiency gains in Latin America through consolidation and outreach to small

holders. In Latin America and Indonesia there are 6-7 Has. Per full time worker. In Malaysia, its 9-10.

CPO Yields, 2015-2017 Avg. Expansion rates in Latin America

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ma

lays

iaP

NG

Ind

on

es

iaT

hail

an

dP

hil

ipp

ines

Gu

ate

mala

Co

sta

Ric

aD

om

. R

ep

.H

on

du

ras

Co

lom

bia

Pe

ruB

razil

Nic

ara

gu

aM

exic

oV

en

ezu

ela

Ec

ua

do

rIn

dia

Se

ne

ga

lL

ibe

ria

An

go

laC

am

ero

on

Ben

inC

ote

d'I

vo

ire

Gh

an

aS

ierr

a L

eo

ne

Co

ng

oT

og

oN

ige

ria

Gu

ine

a

CP

O -

MT

/HA

SE Asia Latin America India Africa

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

50

100

150

200

250

300

350

400

450

500

CA

GR

, 2

01

3-2

01

7 -

Ha

rve

ste

d A

rea

Ha

rve

ste

d A

rea

-h

ec

tare

s

2013/14 2017/18 CAGR

23


2018

Conclusions

• Crude oil provides a floor for all veg. oils. In the near term, that floor has

been rising thanks to OPEC cuts.

• As this floor has been rising, however, the recovery in production

following El Nino has gotten underway, reducing the CPO premium

(over petroleum), keeping prices flat.

• CPO prices have also fallen relative to competing oils thanks primarily

to the Argentinian drought.

Going forward:

• The Aramco IPO is likely delayed until 2019. After that point, expect

OPEC cuts to end as members balk at shale stealing market share. This

could push petroleum prices back toward $60-$65 per bbl. This sets

CPO floor FOB between $450-$550 per MT.

• Insatiable Chinese demand for meal, means more crushing and more

soybean oil. (Argentine drought but record Brazilian production).

24


2018

Conclusions

• Much more vegetable oil will be available globally

• Meanwhile, the opening of the European market to Argentine biodiesel

could displace some palm oil.

• So, while palm oil prices could edge up in the near term, there could be

pressure on prices in the next year. Below $600 in Q3 and below $575

in Q4.

• Future growth for renewable premiums on CPO limited by excess

supply. Outlook for RPKO much brighter.

• Fortunately, the Indonesian CPO fund acts as a backstop to the global

palm oil market, but that country can only absorb so much biodiesel.

Will need to step up its mandate

Silver lining:

• Latin America is improving its competitive position relative to Southeast

Asia.

• More room for demand growth in the Americas

25


2018

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, 2018

All rights reserved

www.lmc.co.uk

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http://www.lmc.co.uk/


2018

Biofuels: "the tail will wag the dog"

At first sight it is paradoxically that the biofuel sector, using 15% of

the world’s oils, should, after crude oil, be the next most important

influence on the short term price outlook.

This is because, unlike food, biofuel use can change sharply from

month to month, without far-reaching impacts upon human well-

being. There are three big biofuel issues now.

The US recently renewed their biodiesel export tax but only

retroactively, which offers much less support to oil prices.

EU policy has become very anti-oil palm, even though the palm used

in EU meets the EU’s own sustainability criteria.

Indonesia’s biodiesel mandate, discussed previously, is much more

reliably supportive.

27

Update on the global palm oil market and a review...

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