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Crude palm oil – A price storm is brewing
Summary Hedging and trade recommendations Building blocks Declining CPO yields CPO supply forecasts Higher industry costs Fungibility and demand CPO balance sheet CPO price outlook Conclusion Appendix 2 3 5-7 8-13 14 15-19 20-25 25-26 27-29 31 32-35
A severe structural slowdown in palm oil output is under way. The downtrend will worsen over coming seasons and is one the market can no longer afford to ignore. The deceleration in palm output is caused largely by the ageing profile of estates in South East Asia, which accounts for over 90% of the market, as well as suboptimal farming practices across much of the region. Our conservative estimate is that more than 20% of trees in Malaysia are over 25 years old. In reality, this could be more. US prospective plantings for 2012 suggest soybean output will remain tight for the rest of the year. The resulting decline in palm yield alongside a production shortfall in the soy complex will necessitate strict demand rationing in the edible oils sector. As before, we continue to see upside momentum building in 2012, but contrary to consensus, we expect Q4-2012 to be mostly bullish. Despite current enthusiasm, markets are likely to rally to even higher levels in 2013. Our long-term bullish view on crude palm oil (CPO), relatively accommodative global interest rates and a deteriorating age profile of trees in Malaysia should help to convince owners, particularly in Malaysia, that the replanting decision is best not delayed. We recommend shorting the September 2012 BMD crude palm oil futures at the current price of MYR 3,450/tonne (t), with a target of MYR 3,250/t. From Q3-2012, we recommend looking for any reversal in prices to the upside with a target of MYR 3,700/t.
Abah Ofon, +65 6596 8651
Koun-Ken Lee, +65 6596 8256
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Crude palm oil – A price storm is brewing
Why we are bullish on CPO
Productivity and supply, substitutability and import demand are important factors determining the CPO price. In this report, we focus largely on supply and leverage off historic fundamental data that shows supply has a material impact on price trends in the CPO industry. We highlight the crucial decoupling between weather events and CPO output; wet weather in SE Asia will not, as in the past, lead to higher CPO output We believe there is a price storm brewing in the industry due to a deceleration in yields, the severity of which will be bullish for the market. First, we highlight the crucial decoupling between weather events and CPO output, which suggests that La Niña (wet weather in South East Asia) will not, as in the past, lead to higher CPO output (see Chart 1). We believe this phenomenon has been exacerbated by the sub-optimal profile of some plantations in South East Asia. We estimate that more than 20% of oil palms in Malaysia are already over 25 years old (Chart 2), after which yields plummet and trees generally have to be replanted. We recommend that estate owners not delay replanting. We find evidence to suggest that a large proportion of estate owners in South East Asia have underinvested in their estates, largely to limit overhead costs. Yields have been adversely affected as a consequence. Further yield erosion can be halted by replanting schemes, using higher-yielding seedlings, through the application of more fertiliser, the use of a more efficient and motivated work force or a combination of all three. Whatever the strategy employed, these essential investments will raise the cost curve for palm and provide a higher price floor. On the other hand, CPO consumption has been trending higher in an almost linear manner relative to global edible oil consumption, driven in part by population growth. CPO consumption has been enhanced by its fungibility across a wide range of applications, as well as its price competitiveness versus other vegetable oils. We assume this ratio will continue through the forecast period. We believe the market is entering a period of demand rationing; initially this will be felt most acutely in Q42012 We believe the market is entering a period of stringent demand rationing. We model CPO prices based on our CPO balance sheet estimates and, factoring in external market risks, arrive at a price forecast of MYR 3,450/t for 2012, MYR 3,620/t for 2013, MYR 3,228/t for 2014 and MYR 3,456/t for 2015. Our annual average forecast for 2012 is unchanged, but now adequately reflects upside risks further along the curve (Table 1). Chart 2: Age profile of oil palms in Malaysia We estimate over 20% of trees are over 25 years old, mn ha
6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 Mature area < 25 yrs 10% 5% 0% Mature area > 25 yrs % >25 25% 20% 15%
Essential investment in the CPO industry will raise the cost curve for palm and provide a higher price floor
Chart 1: Correlation between the SOI and change in CPO output in Malaysia has broken down
70% 60% 50% 40% 30% 20% 10% 0% -10% Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Source: Standard Chartered Research
30 April 2012
3.5 3.0 t-stat 5% (RHS) Corr Corr t-stat 2.5 2.0 1.5 1.0 0.5 0.0 -0.5
Sources: MPOB, Standard Chartered Research
Crude palm oil – A price storm is brewing
Hedging and trade recommendations
Producers should take advantage of the current market near MYR 3,500/t to lock in some profits. Although we are bullish on CPO, we expect significant volatility at current prices. Risk-averse clients should consider buying put options, which will give them the right but not the obligation to sell at an agreed price, thereby protecting against price drops.
We have a bullish long-term outlook on CPO on account of tight global edible oil stocks and an anticipated deceleration in CPO yields. However, we believe the market is approaching a near-term top and will dip briefly in Q3-2012. Consumers should look to buy dips on the basis that any weakness is likely to prove short-lived.
We recommend shorting September 2012 BMD crude palm oil futures at the current price of MYR 3,450/t, with a target of MYR 3,250/t, below our average Q3-2012 price target of MYR 3,350/t (prices above Q3-2012 price target will need to fall below target to ensure our average is met). MYR 3,241/t represents the 61.8% Fibonnacci retracement level and also appears to be significant since it has served as a support and resistance level for the past year. We place our stop-loss at MYR 3,590/t. After the northern hemisphere summer months, yields are expected to decline, but to lower levels than usual, which is a reflection of the sub-optimal profile of plantations in South East Asia. From Q3-2012, we would recommend looking for any reversal prices to the upside, with a target of MYR 3,700/t (about a 10-15% gain).
Table 1: Standard Chartered CPO forecasts We see significant upside risks in Q4-2012
New forecast MYR/t Q2-2012 Q3-2012 Q4-2012 2012 annual average 2013 annual average 2014 annual average 2015 annual average 3,500 3,350 3,700 3,450 3,620 3,228 3,456 Previous forecast MYR/t 3,400
Chart 3: BMD CPO futures, MYR/t We recommend shorting September futures
4,100 3,900 3,700 Daily Qtr Fcst
3,600 3,500 3,600 3,450 3,800 3,900 3,950 3,300 3,100 2,900 2,700 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Sources: Bloomberg, Standard Chartered Research
Fwd Qtr avg
Source: Standard Chartered Research
30 April 2012
shampoo and detergents • Animal feed Reduction • Energy generation. stabilisers for rubber and PVC Fatty alcohols Fatty nitrogen Sources: MVO. biodiesel and lubricants • Cosmetics • Pharmaceuticals • Organic fertilisers and biomass Amidisation • Paints • Plasticisers. its value chain and applications UPSTREAM Plantation Fresh fruit bunches (FFB) Milling Crude palm oil/ Palm kernel oil MIDSTREAM Trading/transport DOWNSTREAM Refining Applications RBD palm oil Food (75%): • Cooking oils and frying fats Fractionation • Margarine and spreads • Shortenings Stearin (20%) • Confectionary and bakery fats (specialty fats) • Vanaspati (vegetable ghee) RBD Olein (80%) Double fractionation/ palm mid fractionation Hydrogenation/ Oleo chemical interesterification processing • Ice cream.Crude palm oil – A price storm is brewing Chart 4: A graphic introduction to CPO. coffee creamers and filled milk • Emulsifiers • Vitamin E supplements Splitting Non-food (25%): Glycerol/fatty acids • Soap . Standard Chartered Research 30 April 2012 4 .
particularly in low-lying areas near riverbanks. FFB yields in Malaysia peaked in September 2011 and have since trended lower Chart 5: 2011 CPO yields vs. An unprecedented increase in CPO yields in South East Asia Lower CPO output in Q4-2010 provided the market with a bullish platform.800/t on 7 October.2 2. the market traded lower. where fresh fruit bunch (FFB) yields rose significantly between March and December 2011.95t/ha and have since trended lower (Chart 5). To demonstrate this view we analyse the CPO market’s evolution in 2011 where these three factors contributed to generate significant price volatility. nearby CPO futures subsequently rallied 38% This was most evident in Malaysia.990/t on 10 February 2011.0 1. Standard Chartered Research 5 . the worst in over 35 years.0 1.6 1.0 Jan Mar May Jul Sep Nov 2011 Chart 6: High yields boosted inventories in Malaysia Month-end closing stocks.4 2.8 1.2 1. Yields peaked seasonally in September at 1. slumping nearly 30% to reach a floor around MYR 2. the five-year average Malaysian yields saw unprecedented growth in 2011. t/ha 2.2 1. It is important to put the improvement in Malaysian FFB yields into context. mt 2. Monsoon flooding caused by La Niña tends to limit harvesting. as well as set the platform for events in 2012. CPO prices started 2011 on a bullish note.0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Sources: MPOB.6 5 yr average yields 1.Crude palm oil – A price storm is brewing Three building blocks – productivity. FFB yields declined counter-seasonally in 2010.4 1. its fungibility with other vegetable oils and import demand are key elements that shape the price outlook. FFB yields in Malaysia improved significantly in Q2-2011. Oil palm productivity (yield). with average yields 14% higher than the five-year average for the same period. Standard Chartered Research 30 April 2012 Sources: MPOB. with the trend persisting until it reached a floor in February 2011. but boost yields in the longer term. Lower output in Q4-2010 provided a bullish platform for markets. Flooding can significantly distort the palm oil supply chain in the short term.8 1. We believe these three factors will continue to shape CPO prices over the long term and we develop this argument further in our report to arrive at our CPO price forecasts. Overall. when yields were around 14% lower than the average yield in the same period in 2006-09. rallying 9% in mid-January to close at a peak of MYR 3. The sharp improvement in yields in South East Asia after La Niña subsided had an inverse effect on market prices. Three key events helped to shape the outlook for CPO prices in 2011. with nearby CPO futures rising 38%. Thereafter. The drop in yields in 2010 coincided with an intense La Niña.4 1. This tightening in output prospects was particularly prominent in Q42010. fungibility and demand An important starting point in our discussion on the outlook for CPO prices is to introduce building blocks we will use to formulate our CPO price forecast.
particularly between Q2 and Q3-2011.66mt in 2009 (Chart 6). CPO traded on par with soyoil in September and December 2010 and at a premium to it in January and February 2011.000 2. India produces soybeans (but not CPO). kt (RHS) Key importers are price-sensitive to changes in CPO prices 1.and Q3-2011 as major support for prices was undermined The impact of the improvement in yields – and as a consequence. Standard Chartered Research 6 . To attract demand from India.400 1. now the largest CPO importer. Between April and September 2011.02mt in 2011. Standard Chartered Research 30 April 2012 Sources: SEA.61mt in 2010 and 1. USD/t (LHS) India China 500 400 300 200 100 0 -100 -200 Sources: Reuters.500 1. Chart 7: CPO usually trades at a discount to SBO A narrowing in the spread is followed by a drop in CPO prices 4. Markets quickly unravelled as tight production. Additionally. soyoil prices appear to provide a ceiling to CPO prices.000 500 0 Jan-06 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 CPO prices. cottonseed and mustard oil. According to data from the Malaysian Palm Oil Board (MPOB). on average. We do not see CPO trading at a premium to soyoil.000 800 600 400 200 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 SBO/CPO spread. Reuters.500 3. which provided major support. This is caused by a drop in demand for palm oil from pricesensitive importers. had a strong impact on the CPO market in 2011. soyoil prices move rapidly higher and at a faster rate than CPO price gains. as an increase in the price of CPO would quickly trigger substitution demand for soyoil. month-end closing stocks averaged 2. particularly in Asia. output – had a noticeable effect on Malaysian stocks.200 1. This important relationship between soyoil and CPO was a core element influencing CPO price volatility in 2011.500 2. which meant that CPO also had to trade at a discount to stay competitive. and particularly India. As seen from the CPO point of view.000 3. Also. Using market data spanning five years. A narrowing of the price premium of soyoil over CPO from July 2011 increased the competitiveness of soyoil (SBO) as a substitute edible oil. with the latter creating a natural springboard for soyoil prices. CPO industry fundamentals aside. stocks in Malaysia were. A narrowing in the price differential between soyoil and CPO is followed by a drop in CPO prices CPO has to trade at a discount to soyoil to stay competitive in key markets such as India The trend in CPO imports in Asia.000 1. it is important for CPO to offer a price incentive. MYR/t (LHS) SBO/CPO spread monthly avg USD/t 400 350 300 250 200 150 100 50 0 Chart 8: Monthly CPO imports slumped in Q4-2010. so consumers there have traditionally consumed soyoil and other locally sourced edible oils including peanut. The improvement in yields was facilitated by the waning of La Niña conditions. was undermined. India‟s import policy favoured soyoil until 2008.Crude palm oil – A price storm is brewing Markets quickly unravelled in Q2. compared with 1. We have two observations. we believe soyoil prices will continue to be key in determining the outlook for CPO prices in 2012 and beyond. it is therefore imperative to have a view on soyoil in order to have a more rounded view on CPO prices. 25% higher than the previous year and 40% higher than in 2009.500 4. it appears that as this floor is reached. our analyses show that a narrowing of the price differential between soyoil and CPO is followed by a drop in CPO prices (Chart 7).
but we also see a similar pattern in China. The sharp improvement in CPO demand in Q2-2011 coincided with a larger soyoil premium over CPO. This relationship is more established in India. and now looks to have reached a floor. will continue to drive the outlook for CPO prices in 2012 and beyond. we find some correlation between the average monthly SBO/CPO spread and the volume of imports. the trend in the SBO/CPO spread and CPO import dynamics in Asia) set the stage for CPO prices in 2011. the recent decline in CPO demand coincided with a tightening of the soyoil premium over CPO. which mainly imports crude CPO. The sharp improvement in CPO demand in Q2-2011 coincided with a larger soyoil premium over CPO Using data from January 2004 in China and from January 2007 in India. The soyoil premium hit its lowest level in nine months in January 2012. the impact of these three key events (the trend in CPO yields. 31 October 2011. along with significant fiscal changes in Indonesia‟s CPO market and energy prices.Crude palm oil – A price storm is brewing The past four years had three significant periods in which a narrowing of the SBO/CPO spread was followed by a sharp slowdown in CPO imports and. which has so far provided significant upside impetus for CPO prices in 2012. ‘Soybeans – The case for a bull market in 2012’). as a consequence. a sharp drop in the price of CPO. 30 April 2012 7 . Over all. which mainly imports refined CPO (Chart 8). Conversely. These events. The improvement in the SBO/CPO spread reflects bullish momentum in the soybean complex (see Special Report.
we believe this low cycle will last even longer than estimated due to what we perceive to be a crucial decoupling between weather events and CPO output. This captures our expectation for tighter global inventories.Crude palm oil – A price storm is brewing Productivity – A protracted decline in CPO yields is in sight We expect CPO output to grow in 2012/13. mt 160 140 120 100 80 60 40 20 0 1990/91 1993/94 1996/97 1999/00 2002/03 2005/06 2008/09 2011/12 Sources: USDA.76mt in the 2010/11 season to only 240.5% in the medium term. and with good reason. However. but at a slower pace Oil palms in South East Asia are showing signs of stress after bumper harvests in 2011 The relationship between CPO output and the weather has weakened Market consensus suggests output will fall in South East Asia as the industry is in a low cycle that will last until November 2012.5% y/y) and which will trigger a considerable squeeze on edible oil markets. accounting for around 60% of major edible oil consumption in the 2011/12 season (Chart 9). lead to higher CPO output. as in the past. as the market comes around to the view that weather-induced supply disruptions will limit output in the current season. our core view is for global CPO output to grow by around 5. CPO and soyoil are the two largest consumed edible oils. The decline in global soybean supply in the current season will lead to a loss of around 5mt of soyoil Crude palm oil (CPO) and soyoil prices have been buoyant since the start of the year.42mt in the 2011/12 season. This translates into a 5mt decline in soyoil output in 2011/12 (down 9. it is our view that the market has not fully grasped the risk of a supply Chart 9: CPO and soyoil account for most edible oil consumption Making up around 60% of major edible oil use. We believe the market‟s focus has been on the soybean complex. Standard Chartered Research 30 April 2012 Chart 10: Soybean output has dropped in both the US and Latam Global soybean output 2011/12. the global edible oil/oilseeds market is faced with a decline in soybean output in both the US and Latam where output is forecast to drop by 7mt and 19mt. For the first time ever. While we acknowledge tightness in the soy complex and its impact on the edible oil market. a phenomenon that has been exacerbated by the sub-optimal profile of some plantations in South East Asia. Standard Chartered Research 8 Other major edible oils CPO Soyoil Latam US Rest of World . This suggests to us that La Niña weather conditions will not naturally. but also takes into account unpredictable upside risks. mt 300 250 200 150 100 50 0 1990/91 1993/94 1996/97 1999/00 2002/03 2005/06 2008/09 2011/12 Sources: USDA. respectively (Chart 10). global soybean output is likely to drop from 265. Forecasting supply. According to estimates from consultants Oil World.
which together account for around 90% of global output (Chart 11). where on average the three key industry speakers estimated 2012 output in Indonesia and Malaysia at 26. to a planting campaign in 2008-09. Data and comments from industry consultants highlight the fact that the industry is in the middle of a down-cycle. Consultant.73t/ha in 2011. we believe this low cycle will last even longer than currently estimated due to what we perceive to be a crucial decoupling between weather events and CPO output. down from 3.72t/ha. up from 22. should it be realised. up from 50. There is. In Malaysia.36t/ha compared with 4. in part.1mn ha. In both Malaysia and Indonesia. The general market consensus is that output will fall in South East Asia but we believe the decline will last longer Globally. Central to output projections is the age profile of trees in producing countries.94t/ha in 2012.Crude palm oil – A price storm is brewing shortfall in the CPO market. respectively. particularly in the state of Sarawak on Borneo Island (Chart 12). palm trees are likely to show signs of stress after strong production in 2011. with global yields dropping marginally to an average 3.7mt. However. a phenomenon which has been exacerbated by the sub-optimal profile of some plantations in South East Asia.44mn ha in 2011. However. yield is likely to drop despite a larger mature area due. The occurrence of this low cycle. up from 13. This will partly compensate for the slowdown in yield from older trees. flat compared with 2011. This is not to say there is not healthy interest in the supply outlook. Government estimates in Indonesia put 2012 CPO output at 25. will be of particular significance because CPO yields usually start trending higher in March before peaking in October (we briefly discuss seasonality below).5mt and 19mt. In Malaysia. which we noted at a recent industry conference in Malaysia. yield is forecast to drop to 4.3mt in 2012. we advocate greater market focus on supply as this will be a key game changer in the industry in the near to medium term. Oil World.5mt in 2011 while in Malaysia official figures indicate that output will rise by around 2. particularly for the key producing regions of Indonesia and Malaysia. Oil World forecasts output at 52. Chart 11: Malaysia and Indonesia are top CPO producers The countries together account for about 90% of global output 60 50 40 30 20 10 0 1990/91 1993/94 1996/97 1999/00 2002/03 2005/06 2008/09 2011/12 Sources: USDA.2mt in 2011.3% y/y to 19. Oil World. forecasts CPO yield in Indonesia of 3. Standard Chartered Research 30 April 2012 Chart 12: Output growth is slowing This is particularly true in Malaysia. Global mature acreage is forecast to rise to 14. % y/y 30% 25% 20% 15% 10% 5% 0% -5% -10% 1990/91 1993/94 1996/97 1999/00 2002/03 2005/06 2008/09 2011/12 Sources: USDA.3mt as more trees enter maturity.42t/ha in 2012. Standard Chartered Research 9 Indonesia Malaysia ROW Indonesia Malaysia . Comments from major industry player Godrej International supports the view that the industry is in a low cycle which will last from March 2012 until around November 2012. Indonesia is expected to benefit from young trees (4-6 years old) entering their prime (7-12 years old).
350 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Jul-13 Nov-13 Feb-14 Avg yield (inverted.600 3. The reason prices exhibit this seasonality is linked to yields that start to trend higher in March and peak around October.6 0.0 0. This is roughly what we expected from the forward curve (Chart 14). As an exercise and to quantify our expectations.2 3. Looking at the forward curve. The seasonality for palm oil. as seen in our price seasonality. RHS) Sources: Bloomberg.0 3. MYR/t 9 April 2012 0. any price trends. peaking around April.2 0.0 Price seasonality NE monsoon weather Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Bloomberg. The irregular term I is the random noise component. Simplistically. with peaks occurring in the run-up to the summer (Chart 13).650 3.4 3. MPOB. and CPO is no different. and ultimately removes. while the trend term T captures.8 0. There is then an upturn at the end of the year.Crude palm oil – A price storm is brewing Palm oil seasonality Seasonality in agricultural commodities is well known. with zero representing the seasonal low and one representing the seasonal high. While the relationship is clear. This assumes that prices can be broken down into three components: trend. based on the last 10 years of data. Higher yields at this time would drive prices lower. we analyse front-month futures prices for seasonality. using our multiplicative model (see Commodity Focus Quarterly. normalised) 1. The North East monsoon weather runs from November through March.0 0.8 1. 21 June 2011. We calculate the normalised seasonal month average yield and overlay this with our price seasonality to demonstrate the relationship and show it inverted in Chart 13. we see signs of seasonality.4 0. is shown in Chart 13 and has been normalised to be between zero and one. Yield seasonality is closely linked to the disruptive impact of monsoon weather in SE Asia Chart 13: Estimated relative seasonality CPO and average seasonal yield (inverted.450 3.400 3. Standard Chartered Research 30 April 2012 Chart 14: BMD CPO forward curve. it takes the following form: CPO prices are seasonally high around March to August and trough around September/October We use S to refer to the average seasonal component for that time of the year.6 0.500 0. it is worth highlighting that seasonality in yields is largely a function of the weather. Seasonal troughs look as though they occur around September. disrupting harvesting and production due to heavy rainfall. Prices remain seasonally high around summer time and then descend to a trough in September-October.550 0. What we find is that seasonal upward bias is seen in the run-up to the summer. Estimations of trend and removal of the irregular component allow us to isolate the seasonal component. Standard Chartered Research 10 . irregular and seasonal. ‘A season for everything’).
and El Niño with drier-than-normal conditions. Climate models by the Australian Bureau of Meteorology show a continuing weakening of La Niña Between June 2009 and May 2010. which is why it is important to examine weather events over the last 24 months. Browning. weather events were dominated by El Niño developments that led to moisture stress and occurrences of bunch failure.to late spring. Climate models surveyed by the Australian Bureau of Meteorology (ABM) show a continuing weakening of the event. low moisture is the most common reason for tree stress. the weather over the last 24 months has been volatile. with neutral conditions expected over the coming months. dominated by La Niña weather conditions stretching from July 2010 to April 2011. lasting until January 2012. According to the UN‟s Food and Agricultural Organization. In contrast. after May there is a wide range in the model forecasts. floral abortion and sex differentiation. a marriage gone sour Oil palms thrive best in countries with high rainfall (minimum of 1. remain neutral or cool again in the autumn. Standard Chartered Research 30 April 2012 11 . It is uncertain how sea temperatures will evolve after May 2012 There is some uncertainty over the outlook for the rest of 2012. we will adopt the opinion of the ABM that sea surface temperature anomalies will likely return to a neutral state from March to May 2012 (temperate spring).Crude palm oil – A price storm is brewing Weather and CPO. When we plot the Southern Oscillation Index (SOI) against annual output in Chart 15: Oil palms thrive in tropical climates within 10° of the equator Sources: FAO.600mm p. Browning has a similar view – while the Pacific is expected to be neutral by mid.a.) in tropical climates within 10° of the equator. a feeling echoed by the World Meteorological Organization (WMO) and consultants. La Niña weather is associated with wetter-than-normal conditions in South East Asia. CPO yields rise following La Niña events For the purposes of this report. In February. La Niña weather conditions again gained momentum in July 2011. the WMO wrote that although historical precedence and the latest output from forecast models suggest that the current La Niña reached its peak in late 2011 and early 2012. opinion is divided on whether the ocean will warm. We also assume conditions will remain neutral into December 2012.
4 0. RHS) 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: USDA.0 1. we see that palm output y/y tends to rise during La Niña events and fall during El Niño episodes.0 0.5 3. Standard Chartered Research 15 10 5 0 -5 Chg CPO output (% y/y.5 Corr 1. We calculate the rolling correlation between CPO output and SOI for both countries (Charts 18 and 19).5 0. we look for more concrete evidence.0 1.5 2. we look for yields to fall below trend in Q4-2012. change in CPO output in Indonesia More recently. we expect yields will return to trend between May and October but.5 2. this relationship has decoupled 0. however. Assessing the current shape of the SOI curve.5 t-stat 5% 2.0 t-stat 5% Corr Corr t-stat 2.1 0. ABM.5 1.4 SOI index 0.0 -0. What reinforces our conviction that CPO yields will be tighter than expected beyond Q4-2012 is the noticeable decoupling in the relationship between CPO output and the SOI in both Malaysia and Indonesia (Charts 16 and 17). and taking into account forecasts for a drop in the SOI to neutral conditions.5 0.1 0. ABM. Chart 16: SOI vs. change in CPO output in Malaysia Palm yields tend to rise during La Niña events 0. The recent de-coupling is noticeable.2 0.1 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: USDA.3 0.0 -0.5 . Standard Chartered Research SOI index 15 10 5 0 -5 -10 -15 Chart 17: SOI vs.0 0. For each correlation we evaluate the accompanying t-statistic that tells us if the correlation is significantly different from zero for a particular confidence level (5%).3 0.2 0. contrary to market expectations. Sustained positive values of the SOI are indicative of La Niña conditions.0 -0. A result above the t-statistic 5% level would mean the correlation was significantly different from zero. RHS) -10 -15 Chart 18: Rolling correlation between SOI and change in CPO output in Malaysia 70% 60% 50% 40% 30% 20% 10% 0% -10% Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Source: Standard Chartered Research 30 April 2012 Chart 19: Rolling correlation between SOI and change in CPO output in Indonesia 25% 20% 15% 10% 5% 0% -5% -10% t-stat Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Source: Standard Chartered Research 12 3.1 Chg CPO output (% y/y.Crude palm oil – A price storm is brewing both Malaysia and Indonesia (Charts 16 and 17).0 -0.
labour. as in the past. However. and hence La Niña/El Niño. The impact of the weather will remain important. we see a correlation ranging from 40-60%. in the process. when we do this for Indonesia. Interestingly. has not had a significant effect on Indonesian CPO output in the past compared with Malaysia‟s output. We attribute this to the younger profile of trees in Indonesia compared with Malaysia and the use of relatively improved seedlings in many parts of Indonesia‟s CPO industry. 30 April 2012 13 . which statistically is close to zero for the whole period we studied (19842011). which backs up our initial expectations. Beyond 2002. These will have important cost implications for estate owners who may be inclined to stagger costly innovations and initiatives and. we see a much smaller and varied correlation. and particularly after 2008. we see a strong correlation decoupling. which remained significantly different from zero until 2002. it would appear there has been a lack of influence from the SOI. output will depend even more on plantation management and practices. keep CPO yields depressed for longer. including the age profile of trees. and planting procedures. Other factors have lessened the impact of the weather on yield outcomes in the CPO sector What this means to us is that La Niña weather conditions will not naturally. In the near to medium term. fertiliser and manure use. It would appear that the SOI. since 2008.Crude palm oil – A price storm is brewing For Malaysia. as well as prior and subsequent weather conditions. but the scale of its effect on output will depend on the severity of the weather event. lead to higher output.
4 27.4 64. dropping 2% in 2009/10.1 6.51 5.5 % growth y/y 4. particularly given the low output base. mt (BASE CASE) World production % growth y/y Of which Indonesia Of which Malaysia Of which rest of the world 2010/11 2011/12E 2012/13F 2013/14F 2014/15F 47.2 31.7 18.30 8.2 19.51 5.5 6. We believe growth of 6% can be maintained over the forecast period. we believe our forecast captures unpredictable upside risks.7 33.53 5. in Indonesia and Malaysia through the forecast period.9 50.2 18. Standard Chartered Research 30 April 2012 14 .7 20.15 4.50 8.3 59.9 30.8 59.1 6.2 18.1 Sources: USDA.7 6.4 4.9 7.5 7. Table 2: CPO supply forecasts. stagnating in 2010/11 and forecast to grow 6% in the current season.7 20.5 18.7 19.6 25.6 54.2 8. mt (HIGH CASE) World production 2010/11 2011/12E 2012/13F 2013/14F 2014/15F 47.9 Of which rest of the world 6.8 7.5 29.7 CPO supply forecasts.4 27.0 8.5 6.8 18.6 25. We believe supply prospects outside Indonesia and Malaysia are good given increasing investment in oil palms in Latam and Africa.36 4.7 Of which Malaysia 18. Our supply projections are shown in Table 2.59 Of which Indonesia 23. but with downside risks.3 7.6 25.2 18.3 29.7 55.55 Of which Indonesia 23.9 19.Crude palm oil – A price storm is brewing Our CPO supply forecasts We assume global yields will stay on par with a three-year average.50 5.1 6.3 56.51 5.0 57.9 CPO supply forecasts.39 8.3 6. We calculate that output will grow 7% and 3%. Our supply forecast is more aggressive than market conditions suggest.8 21. While our core view is for tighter global output in the medium term.50 4.6 53. mt (LOW CASE) World production 2010/11 2011/12E 2012/13F 2013/14F 2014/15F 47.9 50.4 Of which Malaysia 18.7 19.3 31.6 52. respectively.9 50.0 Of which rest of the world 6.5 23.49 5.4 27. Production in the rest of the world has been more chequered over the last three years.5 % growth y/y 4.
Growth in yield can be remedied. annual change. yield has been adversely affected. with a substantial increase in yield three to four years later. Indonesia. investing in fertiliser or both. the market should not get too comfortable High industry margins mask structural deficiencies The age profile of estates in Malaysia is sub-optimal. After years of buoyant output. annual change. 2. Malaysia’s headache is Indonesia’s. Once trees reach maturity. 2. Fertiliser is the largest cost item for an immature estate. As a result. 3. but at a cost – through planting higher-yielding seedlings. Yields are therefore central to profitability as they impact on the cost of CPO per hectare (or per tonne). Palm trees typically begin flowering and producing fresh fruit bunches (FFB) after three to four years. Standard Chartered Research 15 World CPO exports ex-Indonesia. Standard Chartered Research 30 April 2012 .Crude palm oil – A price storm is brewing Higher industry costs – An indication of yield erosion Low production costs in South East Asia are transient. 1 spot. FFB yield in t/ha 30 25 20 15 10 5 0 4 8 12 16 20 24 28 Chart 21: Annual change in CPO import demand Indonesia now supplies over half the annual change in use 5 4 3 2 1 0 -1 -2 1991/92 1994/95 1997/98 2000/01 2003/04 2006/07 2009/10 Sources: USDA. Oil palm plantations generally remain profitable for 25 years. particularly in Indonesia. In most cases. too Malaysia and Indonesia find themselves at a crossroads. The cost structure of oil palm plantations is made up largely of labour. As a consequence. fertiliser and diesel on a per hectare (ha) basis. labour takes the No. we understand. mt CPO exports. Oil palm plantations are extremely labour intensive and are costly to establish and manage. this is due to the relative cost of investing and long lead times between plantation establishment and profitability. However. Chart 20: Typical yield profile of oil palms Trees peak at around 7-12 years. before exploring the resulting cost implications from the drop in yield in both countries it is important to note the following: 1. Smallholders. replanting will increase output costs We see evidence to suggest that a large proportion of estate owners in South East Asia have underinvested. after which they need to be replanted. have limited their use of fertiliser on properties that generally have inferior stock. the price of fertiliser is a significant yield and profit driver. with fertiliser dropping to No. These essential investments will raise the cost curve for palm and provide a more elevated floor for prices. yields are showing greater signs of stress. mt Sources: Oil palm industry journal.
Newly established plantations might have 130-145 trees/ha. By 2010. IPOC. smallholders in Indonesia form a sizeable proportion of oil palm areas Tree stress from bumper production over the last decade in Indonesia is now coming to bear on estates Chart 22: Oil palm planted area by category Private estates dominate Malaysia’s oil palm acres 70% 60% 50% 40% 30% 20% 10% 0% Sources: MPOB. according to the USDA and the Indonesia Palm Oil Commission (IPOC). The annual growth rate at smallholders was over 17. Peak palm oil yields occur when trees are between 7 and 12 years of age. and around 820 private operators operating 1. The long lead time between plantation establishment and profitability are huge impediments to many plantation owners.900 ha. with a typical farm size of two ha. Additionally. Land lease terms were also liberalised and extended from a limit of 25 years to a new limit of 95 years to motivate investors.Crude palm oil – A price storm is brewing 4.500 ha. we calculate that Indonesia‟s CPO growth averaged 12% p.6% at private commercial estates. Using data from the US Department of Agriculture (USDA).020 plantations with an average size of 3. smallholders apply minimal fertiliser to their land and genetic stock on their properties is generally inferior to that grown by government and private estates. are Chart 23: Oil palm planted area by category Smallholders form a large part of Indonesia’s palm acres 60% 50% 40% 30% 20% 10% 0% Private Independent estates smallholders Felda State agencies Felcra Risda Private estates Independent smallholders State agencies Unlike Malaysia. The primary reason for this remarkable growth in Indonesia‟s CPO output was due to reforms in Indonesia‟s CPO industry. official data indicates that around a third of oil plantations. whereas an old plantation might be reduced to about 100 trees/ha. What is fascinating about the growth in palm planted acres in Indonesia during this period is that the rate of growth was greatest among smallholders. smallholders now account for more than 40% of the planted area in Indonesia.5 million. As a plantation ages. Indonesia has not only overtaken Malaysia as the top producer of CPO.a. As a result. Standard Chartered Research 16 . smallholders numbered over 1. This compares with around 14% in Malaysia (Charts 22 and 23). it also tends to experience declining tree populations as a result of pests and disease. and gradually decline thereafter (Chart 20). Evidence on the ground suggests that smallholders find labour to be a more manageable cost than other inputs required for an immature estate. Standard Chartered Research 30 April 2012 Sources: USDA. which included the allocation and issuance of around 10mn ha of new land licences between 2000 and 2009. between 2001 and 2010 compared with 6% p. in Malaysia. compared to 4. Consequently.a.4%. compared with over 10 government companies operating around 185 plantations with an average farm size of 3. Growing pains in Indonesia and Malaysia Indonesia’s remarkable CPO output owes largely to reforms in the industry between 2000 and 2009 Over the past decade. mainly smallholders. but now supplies over half of the annual increase needed to meet growing demand global demand (Chart 21).
low palm seed sales during the financial crisis suggest that many producers reconsidered their decision to expand plantings (Chart 25). 2008 Smallholders are at the bottom of the pile. Additionally. land-management ability. The recent slowdown in CPO yields in Malaysia is also a significant and serious concern for the industry Malaysian policy makers have a rigorous policy to keep 50% of the country forested. is largely low-lying coastal peat land or degraded inland forest. USDA 30 April 2012 Sources: MPOB. While some private producers have recorded 6. We believe that the stress of strong production over the past decade is now coming to bear on estates where farming practices have been inadequate. Considering the current pace of expansion (180k ha/year). Chart 24: Indonesia palm oil yield by owner.5-8. Yield growth in Malaysia before 2008 averaged 4% p. given the tremendous advantages that private estates have in capital. Acreage in Sarawak. this gives estates fewer than seven years before reaching the limit of Malaysia‟s land bank. the average for the group is only around 4. mn 95 90 85 80 75 70 65 60 55 50 2 0 Smallholder Govt Estate Private Estate 2005 2006 2007 2008 2009 2010 2011 Sources: Directorate General of Estates. This view is captured by a USDA study that shows the gap is much larger than it should be between yields on well-managed and highyielding private estates and the national average for their group. Like Indonesia..a. Indonesian output will be relatively depressed until better farming practices are employed The gap between yields on smallholder subsistence properties and private estates is inexplicably low. We believe that comparatively high yields have helped to contain CPO production costs in Malaysia. but has since declined by around 13%. Annual demand for CPO has grown by around 2. Most suitable areas for oil palms have already been developed and marginal land is scarce. One reason why owners have not been motivated to invest adequately is still-healthy margins.Crude palm oil – A price storm is brewing not planted with certified seed. the recent slowdown in yields in Malaysia should raise serious concerns for the industry. This means output in Malaysia and Indonesia will continue to be relatively depressed until better farming practices are employed or larger mature acreage comes onstream.3mt over the past decade. Underinvestment in fertility management is a theme that seems to run through many CPO plantations in Indonesia.0t/ha average yields on individual plantations. t/ha 8 Potential yield 6 Average yield 4 Chart 25: Sale of palm seedlings in Malaysia Yet to recover following the global financial crisis. In the interim. which reportedly has the most remaining development potential. fertilisers and better high-yielding varieties.1t/ha (Chart 24). Growth in yields can be remedied – at a cost – either through planting high-yielding seeds or investing in fertiliser. demand will have to be rationed via higher CPO prices. Standard Chartered Research 17 .
the investment required to integrate upstream and downstream operations will be significant. This poses a significant cost challenge for estates where labour contributed only around 20% of total costs in 2002. with the possibility for output to stagnate (Chart 27). yield growth in Malaysia seems to have reached a plateau. According to our own estimates.6 4.4 3. Standard Chartered Research 18 . around 25-30% of Malaysian oil palms are 20-30 years old. CPO investors are increasingly looking outside Malaysia and towards Africa and Latam for new acreage. To arrive at our estimate. Labour costs on plantations estates now account for around 30-40% of total costs (depending on the level of mechanisation and location) and are likely to trend higher at a rate of 10-15% annually. over 20% of palm oil trees in Malaysia are older than 25 years Like Indonesia. and publicly available information on major replanting schemes over the last five years. Farmers have not been persuaded to replant in earnest. despite attractive international prices.8 3. Industry officials indicate there is potential to boost yields with new higher-yielding varieties. This shortage of plantation workers. Plantation owners we spoke to on a recent trip to Malaysia have been compelled to raise worker wages over the last 12 months. t/ha 4. Labour constraints and high CPO prices are severely limiting replanting rates. but there is increasing interest in Africa and South America.6 3. the profile of oil palms in Malaysia is also damping output. USDA. The Malaysian government last year increased the minimum wage for workers by 10% y/y to MYR 850/month. There are also other factors exacerbating the pressure on yields in Malaysia.0 2000 2002 2004 2006 2008 2010 Sources: MPOB. most of whom are from Indonesia.2 4.Crude palm oil – A price storm is brewing According to our estimates. According to USDA estimates. We also use an industry assumption that 5% of stock in private estates is replanted annually. so it may take time before a big replanting scheme can be undertaken. Indonesia has been a popular alternative for the expansion of Malaysian plantations. In the short to medium term. has adversely affected harvests and is creating wage pressures in the industry. more than 20% of oil palms in Malaysia are over 25 years old (Chart 26).4 4.0 3. we used data from the MPOC. mn ha 6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 area <25yrs old 10% 5% 0% area >25yrs old % trees >25 years old 25% 20% 15% Chart 27: Malaysia CPO yields Yield growth seems to have plateaued. as Indonesia is also expanding its palm oil industry.2 3. the investment needed to integrate operations will be costly Acute competition with Indonesia for labour is fuelling wage inflation in the CPO sector Chart 26: Age profile of oil palms in Malaysia We estimate over 20% of trees are over 25years old. but there is a need to replace up to 50% of the Malaysia‟s current national crop. including acute competition with Indonesia for labour. although in Malaysia we are more concerned about the age profile of trees. While land lease costs are more competitive in these regions. Standard Chartered Research 30 April 2012 Sources: MPOB.
400 1. Standard Chartered Research 30 April 2012 Source: Standard Chartered Research 19 . we found that plantation margins are healthy. The prospect of slowing output in an industry that is vital to edible oil consumers in Asia. accounting for differences in the treatment of plantation costs and the fragmented nature of the industry. but struggles to contain higher upstream costs that are caused partly by labour shortages. Plantation margins are healthy given current CPO prices Chart 28: Unit costs per tonne of CPO. This is partly because wages in some areas of Indonesia are now comparable to those offered in Malaysia.Crude palm oil – A price storm is brewing Production costs in Indonesia have typically been lower compared to Malaysia. USD At select companies operating either in Indonesia. reflecting lower labour costs and different farming practices. Further validation of costs on an industry. This is in line with the view that Malaysia has a more efficient downstream sector compared with Indonesia.200 1. with some plantation costs in Indonesia higher compared with their Malaysian counterparts (Chart 28). We believe that current healthy profit margins in the palm sector are compounding structural deficiencies in the industry that will significantly limit downside risks. Africa and the Middle East who have few viable and affordable substitutes is a significantly bullish event in the industry. Costs per tonne of CPO produced in Indonesia have typically been lower compared with Malaysia. At current prices. was that the cash cost of production in Indonesia is typically lower ex-mill compared with Malaysia. Malaysia or both countries Indonesia and Malaysia Chart 29: Oil palm profit margins Profit margins are high on well-managed estates 1. however. This differential was not immediately obvious in our review of plantation costs. Oil World. What we found. ranging from around USD 451-642/t (Chart 29).000 Monthly average CPO price USD/t Malaysia 800 600 400 Indonesia 200 0 0 100 200 300 400 500 600 Jan-03 Jan-05 Estimated CPO costs on a well-managed estate (USD/t) Jan-07 Jan-09 Jan-11 Sources: USDA. Reuters.and country-wide basis is needed given the comparatively small sample size. but the differential is no longer obvious On our trip to plantations in the region. we noted that plantation costs in Indonesia and Malaysia are starting to converge.
palm oil consumption has grown faster relative to other vegetable oils because of its price advantage. Nigeria W. global consumption of palm oil stood at 5. with per capita consumption of just 1. To model demand. This is boosting out of home eating and the consumption of packaged food. up from 5. Nigeria lies just outside the top six consumers and is Sub-Saharan Africa‟s largest importer and consumer of palm oil (Chart 30).5mt. Nigeria is Africa’s largest importer and consumer of palm oil The top six CPO importers are India. Egypt M. mt USA Banglade… Nigeria Pakistan Malaysia EU-27 China Indonesia India Chart 31: % of population between the ages of 15 and 34 Selected countries. we also incorporate our view on sustainable CPO and biodiesel demand given that CPO is a feedstock for the latter. Growth in palm oil consumption has been driven by rapid urbanisation. Nigeria W. Pakistan.2kg. Demographics in Indonesia. We also expect demand for sustainable CPO to grow. 2011 Asia is the dominant user of palm oil. men (M) vs. tend to consume more packaged foods. or around 49. women (W) 39 38 37 36 35 34 33 32 31 30 W. for which CPO is a core ingredient. China. the EU.2kg. while the top six consumers are India. China. Global consumption of palm oil has grown in leaps and bounds over the last 30 years. although this is mainly in Europe. Indonesia M. which use significant quantities of palm oil. Africa and the Middle East. These trends are most evident in Asia. We expect CPO demand to outstrip supply by 2013. Chart 30: Top 10 consumers of palm oil.Crude palm oil – A price storm is brewing Fungibility and demand Global CPO consumption stands at around 49.3mt in 1982 Markets face the prospect of a much tighter soyoil market in 2012 Growing biodiesel mandates should provide a bullish signal to edible oil markets The consumption of palm oil as a percentage of the consumption of edible oils has been trending higher in an almost linear manner over the last 30 years. Standard Chartered Research 20 . a young and growing population and rising per capita incomes. Demand for palm oil is closely associated with its fungibility with other edible oils. particularly in urban areas. Global per capita consumption of palm oil now stands at around 7. as more consumers demand environmental accountability from food manufacturers.5mt. In 1982. Younger people.3mt. Standard Chartered Research 30 April 2012 Sources: World Bank data. However. We expect the relationship between CPO and other edible oils to continue over the forecast period. Indonesia. but increasing in Latin America. Egypt M. Egypt and Nigeria show a steady rise in the percentage of the population between the ages of 15 and 34 (Chart 31). Biodiesel demand is also a key driver of CPO use. Indonesia 0 2 4 6 8 1980 1985 1990 1995 2000 2005 2010 Sources: ERS. the EU.CONAB. Malaysia and Pakistan. Malaysia and Egypt.
soap for 16% and the oleo chemical industry for 6% (Chart 33). augurs well for the development of a large and buoyant fast-food/out-of-home food market that will support CPO demand in the longer term. China‟s brisk pace of urbanisation. the US (50kg) and the EU-27 (61kg). although our in-house research takes the view that increasing disposable income and changing lifestyles are encouraging consumers to move from the mid. cooking for 22%. In that regard. The place that instant noodles occupies on the menu in China is intimately linked to the need for convenience and competitively priced food. although consumers are moving from the low-end to the high-end market We believe that instant-noodle consumption in China will remain robust.5kg in 2011 from under 20 grammes in 1982. and China‟s robust demand for soybeans for meals implies a relatively good supply of soyoil.Crude palm oil – A price storm is brewing Overview of CPO demand in China China’s edible oil consumption is on par with the global average but lags OECD countries China is the second-largest importer and consumer of palm oil and accounts for around 13% of global palm oil consumption. Chart 32: Per capita use of CPO in India India has stepped up its use of CPO (kg) 7 6 5 4 3 2 1 0 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Sources: USDA. Reports from both the MPOC and the USDA point to the strong use of CPO in the production of instant noodles. Instant-noodle consumption will remain robust. This trend is especially true in top-tier cities where many young professionals will switch to high-end noodles instead of dining out. combined with the growing intensity of urban consumption. This makes CPO attractive for use in both the food and non-food sectors. Edible oil consumption is higher in urban areas compared with rural areas. Instant noodles are popular with younger people – including students. Standard Chartered Research 30 April 2012 The popularity of CPO for use in China’s food and non-food sectors is due largely to its price competitiveness relative to substitute edible oils Chart 33: Allocation of CPO use in China. migrant workers and office workers – as they are easily prepared and eaten. accounting for around 22% of total edible oil consumption. Industry sources show a significant rise in instantnoodle production to over 8mt in 2011. 2011 The bulk of CPO goes into food processing 35% 30% 25% 20% 15% 10% 5% 0% Food processing/ Cooking catering Instant noodles Soaps Oleochemicals Sources: USDA. Standard Chartered Research 21 .or low-end market to the high-end market. Per capita demand in China rose to around 4. up over 22% y/y. The popularity of palm oil in China is due largely to its price competitiveness compared with other edible oils such as soybean and rapeseed. Soyoil is the most used edible oil in China. which is used to make soy meal. Soyoil is a derivative of soybeans. While per capita consumption of edible oils in China has improved significantly over the last five years – we currently estimate it at 25kg and on par with the global average – it is still significantly below per capita consumption in OECD countries such as Canada (41kg). food processing for 33%. Data from the MPOC shows that instant noodles account for around 20% of CPO use in China.
Standard Chartered Research 30 April 2012 22 .and middle-income households Palm oil is mostly consumed in the out-of-home sector (mainly food outlets) Out-of-home consumption will drive CPO demand over the long term Palm oil is mainly consumed in lower-income households CPO is consumed mostly in the summer months CPO consumption drops during winter months as CPO becomes semi-solid CPO imports tend to increase in Q4 due to lower domestic output and festival demand South India is the largest consumer of CPO relative to other oils Sources: POC.Crude palm oil – A price storm is brewing Profiling CPO demand in India India is the top importer and consumer of palm oil Per capita consumption of palm oil is 6. including mid-day meals Refined soyoil is preferred by upper.4kg compared with 4. Standard Chartered Research Chart 34: CPO trade flow from Indonesia and Malaysia EU US INDIA PAKISTAN AND SOUTH ASIA CHINA MENA NEA / SEA MALAYSIA INDONESIA mt 1 5 10 Imported from Malaysia Indonesia SUB-SAHARAN AFRICA 20 Sources: MPOB.5kg in China (Chart 32) India is a price-sensitive edible oil market Imposes zero import duties on crude edible oil/ nominal import duties on refined oils CPO demand has been boosted by government schemes. GAPKI.
membership has grown primarily in the EU. with this area forecast to increase by around 2.2mn ha of land in Indonesia. Standard Chartered Research 23 . Among consumer goods manufacturers and retailers. This will be fuelled by the country‟s ambitious output target of 40mt by 2040.4% annually over the next decade (or 200k ha p. 90% of CSPO annual production capacity is from Indonesia and Malaysia. According to industry reports. palm oil plantations account for around 8.2bn gallons. The EPA in January said CPO converted into biofuels in Indonesia and Malaysia fell short of cutting greenhouse gas emissions by the required 20% necessary to access the US market. However. demand for sustainable palm oil is growing and likely to continue to grow as consumers reach the middle-income bracket. particularly multinational food processors. the organisation cited a strong increase in membership and sales of certified palm oil. The reason we articulate trends in the RSPO is because consumers. This is particularly important for Indonesia. Producers are also able to charge a premium for certified sustainable palm oil (CSPO) (Chart 35). This could affect consumer perception about the sourcing of CPO by these two markets.and high-income countries. Sustainable palm oil is also key to accessing markets such as the US where demand for biofuels is growing. In that regard. and in its inaugural qualitative review. a large swathe of whom are in middle. Despite anticipated domestic certification schemes. Membership in the RSPO is open across the entire supply chain. and the trade-off between expanding plantation area to meet growing demand and the environmental and social pressures that it creates. The palm oil growers association for Indonesia (GAPKI) and Malaysian Palm Oil Council (MPOC) have both opted out of the RSPO. data from the RSPO shows that Indonesia and Malaysia together had 72 oil palm growers adhering to the scheme (Chart 36). 90% of sustainable palm oil is from both countries The US EPA has ruled that CPO converted into biofuels in Indonesia and Malaysia falls short of its benchmark Chart 35: Certified sustainable palm oil uptake (% y/y) There has been a pick-up in market interest 100% Sources: RSPO. It is against this backdrop that the Roundtable on Sustainable Palm Oil (RSPO) was formed in 2004. both Indonesia and Malaysia have indicated they will establish domestic certification schemes that should allay some of these concerns. The US Environmental Protection Agency (EPA) in 2012 raised its annual renewable fuel mandates by 9. This decision is partly because of uncertainty regarding the operation of the scheme and partly because of comparatively slow sales of CSPO.a.4% y/y to 15.Crude palm oil – A price storm is brewing Demand for sustainable palm oil and why it matters The trade-off between expanding plantations and the environmental pressures it creates is of concern to the industry Another perennial concern in the industry is the environmental impact of palm plantations. Standard Chartered Research 30 April 2012 Sources: RSPO. are increasingly interested in products that are sustainably sourced.). and as of December 2011. which subsidises biofuel output Chart 36: Top 10 RSPO member countries By number of members as of December 2011 Belgium Singapore 80% 60% 40% 20% 0% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Switzerland USA Netherlands France Germany Indonesia Malaysia UK 0 20 40 60 80 100 120 We expect consumers to become increasingly interested in products that are sustainably sourced Although Indonesia and Malaysia have both opted out of the RSPO.
Standard Chartered Research 30 April 2012 24 . sunfloweroil.7mt of edible oil feedstock in 2012. The IEA expects biofuels‟ share of the total supply of road transport fuels globally to rise to 9. soyoil Non edible oil seeds in wasteland Palm oil. but well below the 10-year average growth rate of 38%.77 million barrels per day (mmbd). which should provide a bullish signal to markets Table 3: Biodiesel mandates Country Argentina Brazil Canada China EU India Indonesia Malaysia Thailand US Feedstock Soyoil Castor oil/ soyoil Animal fat. In absolute terms. jathropha Rapeoil. In arriving at this estimate. The attraction of investing in sustainable palm oil is also being promoted elsewhere in Europe.2 billion gallons of renewable fuel into the US fuel supply in 2012 Sources: Biofuels digest. particularly to southern Europe. 20% ethanol blended petrol and diesel by 2017 An on-off 2. Biodiesel currently accounts for around 18% of the biofuel market.3 million tonnes of oil equivalent (mmtoe). Current biodiesel mandates are shown on Table 3. we assume global biofuel output will increase by an average of 9% in 2011 and 2012. This equates to around 13% of total edible oil consumption and will contribute to a tighter edible oils market. Latin America and Asia. Oils and Fats has asked the government to lobby the EU to exempt sustainable palm oil used in food from an import tax in Europe.5mt of edible oil feedstock in 2010. However. vegetable oils Used and imported veg oil.Crude palm oil – A price storm is brewing Limited domestic market absorption of biofuels has created opportunities in Europe and therefore has been more competitive in the biofuel trade compared with Malaysia. We believe that Indonesia and Malaysia will press ahead with their own certification schemes. with the top three producing regions being Latam. The Dutch Board for Margarine. recycled fats and oils Current blending targets 7% biodiesel blend 5% biodiesel 2% biodiesel Aspirational 10% biofuels blend by 2020 10% biodiesel share of transportation by 2020 Min.000 barrels per day (kbd). we believe first-generation feedstock such as CPO will continue to be widely used in the near term Demand for liquid biofuels has grown sharply in recent years in response to high energy prices. we calculate that biodiesel output used around 17. used veg oil Soyoil. There will be limited short-term fallout from opting out of the RSPO.5% biodiesel mandate 5% biodiesel started in June and to be phased in over time 3% biodiesel blend The EPA proposes to mandate the blending of 15. in 2000 to 1. jathropha Palm oil Palm oil. Limited domestic market absorption has also created export opportunities.5% by 2030 from 1. Although international policy targets the use of second-generation feedstock to cover biofuel output. The US International Energy Agency (IEA) forecasts consumption will reach 280mmtoe in 2030 and 750mmtoe in 2050.7mt of edible oil feedstock in 2012. we forecast that biodiesel output will use around 20. driven in part by supportive government policies. Using IEA data. We calculate that biodiesel output will use around 20. this will change in the longer term due to the need to increase market share Biofuel demand Biofuel demand is forecast to grow strongly over the long term. or 15. This is flat from 2010. tallow. Given buoyant growth in biodiesel mandates. The growth is expected to come predominantly from Europe. Europe and Asia. we believe that conventional biofuels that use first-generation feedstock such as soyoil and CPO will continue to play a crucial role in the supply of biodiesel in the near to medium term. where technical problems associated with the use of palm methyl ester at low temperatures are less relevant than in northern European countries. The impact on demand of opting out of the RSPO will be limited given growing regional consumption.5% in 2009. consumption has risen from 300. the need to expand to other markets outside of Asia and the changing profile of CPO consumers will add urgency to national and global certification schemes in the longer term.
244 6.3 CPO supply balance.15 0. So. mt 50. As the cheapest edible oil. it is apparent that the use of CPO increases as a share of edible oils Second. while in the EU and US the biodiesel industry represents a significant source of demand. As GDP per capita increases.0 -1. First.329 0. it is also worth underlining the intrinsic price relationship that exists between energy markets and edible oils (particularly CPO). particularly in Asia. Chart 38: CPO and edible oil consumption historical and forecasted. Standard Chartered Research Table 4: Results of consumption and supply analysis World CPO consumption.30 0. Research from the UN Food and Agricultural Organisation (FAO) supports our view that demand will largely come from developing countries. CPO relative to crude oil provides a floor at a price ratio of 1:1.10 1980 1985 1990 1995 2000 2005 2010 2015 CPO to Edible oil ratio 160 140 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 World CPO Consumption 2005 2010 2015 Edible Oil Consumption (EOC) EOC forecast Research from the FAO sides with our view that CPO demand will largely come from developing countries. and one that we have previously highlighted. is that in China and India.349 GDP % y/y 4.3 56. it is apparent that the use of palm oil increases as a share of global edible oils.637 Sources: USDA. mt 180 Forecast ratio 0.8 159. Against that backdrop.54 GDP per capita. An important differentiation. mt 150.6 54. Based on Standard Chartered‟s Global Research long-term forecasts for global GDP. we look at consumption of palm oil relative to the consumption of all edible oils. Our CPO balance sheet We forecast palm oil consumption in two steps.40 CPO Forecast Sources: USDA.Crude palm oil – A price storm is brewing While we highlight outright demand for CPO as a feedstock for biodiesel. followed by the EU. CPO needs to be priced at a premium to crude oil to keep it in the food space. India and the US.5 CPO supply. Standard Chartered Research Sources: USDA. consumption is largely for food. on account of per capita income and population growth.40 4.25 0. We assume this ratio will continue (R2 = 97%).7 170.4 -3.421 6. Standard Chartered Research 30 April 2012 25 . mt 1.20 0.342 0. The consumption of palm oil as a percentage of the consumption of edible oils has been trending higher in an almost linear manner over the last 30 years (see Chart 37). in its simplest form. Using this result along with our forecast CPO to edible oil consumption ratio. USD 6. mt 2012E 2013F 2014F 49.7 59.6 CPO to edible oil ratio 0. This will be important in forming price expectations for CPO. The results are shown in Table 4. we can forecast global edible oil consumption. China will remain the leading consumer of vegetable oil in the longer term.35 0. As GDP per capita increases.51 4. we can forecast global CPO consumption for the next few years.6 53. particularly in Asia Chart 37: CPO to edible oil consumption ratio trending higher in an almost linear manner 0.2 Edible oil consumption. we do a regression between global edible oil consumption and global GDP per capita using historical data between 1980 and 2011.
Crude palm oil – A price storm is brewing Compared with the FAO‟s estimates (Table 5). Although the FAO forecasts an increase in CPO consumption as a share of edible oil demand as we do. By 2020.6 126.329 0. according to the FAO.2 Of which food 123. Strong demand for biodiesel will be an important driver of CPO demand in the medium to long term.8 20. This will be fuelled by higher mandatory use in both developed and developing countries.7 CPO to edible oil ratio 0.1 52.8 19.339 Edible oil output. we are comfortable with our projections given higher actual demand and supply numbers in 2011.1 Of which biofuels 18.3 51.334 0.0 128. biodiesel production should account for 15% of total consumption. which overshot the FAO forecast. mt 149. Table 5: FAO global edible oil consumption forecasts World CPO consumption. compared to 10% in 2008-10.3 150.4 153.9 Edible oil consumption.2 153.4 Source: UN FAO 2011/12 2012/13 2013/14 30 April 2012 26 . mt 146. our model on demand (and on supply) is more aggressive. Demand for non-food use of vegetable oil (in particular for biodiesel) should account for about one-third of global consumption growth. mt 49.0 156.
3mt in 2013 and 56. We forecast that the resulting supply balance in CPO in 2013 will be at its lowest in 20 years.500 2. our earlier model showed CPO consumption increasing 5.2%. The Durbin-Watson test for first-order serial correlation is 2. which is close to the theoretical absence of serial correlation.500 3. We use a 4-lag vector autoregressive (VAR) model on differenced CPO and soyoil prices (∆CPOt and ∆soyoilt) and conduct F-tests to determine the explanatory power of each variable. We use an autoregressive model using y/y soyoil price changes and y/y CPO global supply changes as variables.6mt in 2012. Trying to derive CPO prices in isolation from other edible oils will not lead to credible outcomes Trying to derive CPO prices in isolation from other edible oils will not lead to credible outcomes due to their fungible nature. CPO pushes soyoil prices higher. Our forecasts for supply are estimated to be 50. We use Granger causality to determine the dependency of soyoil and CPO on lagged (historical) values and other variables.2% and 8. annual changes in prices show a negative correlation (-48%) with changes in imports. We can build a CPO price model that incorporates soyoil prices without worrying about a feedback mechanism to equalise with soyoil (i. then soyoil pushes CPO prices higher.Crude palm oil – A price storm is brewing CPO price outlook Looking at fundamental supply data since 1992. RHS) 2000 2004 2008 2012 2016 Forecast Avg % price chg -8% -4% 0% 4% 8% 12% 16% Chart 40: CPO medium-term forecast price Historical and forecast.3mt in 2014. which is highly unexpected.000 1. and so on). We factor soyoil prices into our model without having to worry about the feedback effects of CPO prices on soyoil prices. With soyoil being the dominant and most liquid edible oil. However. Their fundamentals have a material impact on one another. etc) only affect ∆CPOt and not ∆soyoilt.9% in 2012. 2013 and 2014. lagged changes in CPO (∆CPOt-1. The results are in Table 6. MYR/t 4. etc). this suggests it would be the price leader rather than the price follower in the edible oils market. In fact.e. We have found that consumption as approximated by import figures is not a significant driver of CPO prices. it is clear that the y/y supply of palm oil has a material effect on the price of palm oil (see Chart 39).500 1. respectively. This asymmetry is partly a reflection of the size of the soyoil market compared to palm oil. Standard Chartered Research 30 April 2012 Source: Standard Chartered Research 27 .000 2. 10. The results are reported in Table 7. The mechanism appears to be unidirectional.09. The correlation between annual price changes and y/y supply changes is calculated to be -83%. The results show that ∆CPOt and ∆soyoilt are both dependent on lagged changes in soyoil price (∆soyoilt-1.000 3. 53. However.000 500 0 1999 2001 2003 2005 2007 2009 2011 2013 2015 Bull case Bear case Base case CPO price Sources: USDA. with soyoil and CPO prices having a 69% correlation. Chart 39: Change in annual average CPO price and supply Percentage changes 80% 60% 40% 20% 0% -20% -40% -60% 1988 1992 1996 Supply y/y (inverted..
The goodness of fit for our model is R2=88%.00026 Source: Standard Chartered Research Table 7: Model coefficient statistics Variable CPOt-1 CPOt-1. Soyoil(y/y)t CPOt-1.76 -3.02170 0. We discuss this in the next section.000000000 0. Our model forecast prices are capped and floored by the historical relationship with other oils.87 -8.000000199 0.Crude palm oil – A price storm is brewing All variables are deemed to be significant at the 1% level. Our forecasts for soyoil based on our previous studies are USc 65/lb for 2012.42 T-stat 31. USc 54/lb for 2014 and USc 60/lb in 2015.6314 Significance 0.000000013 Source: Standard Chartered Research 30 April 2012 28 .51 Std error 0.9413 2.36 Significance (two-tail) 0. USc 66/lb for 2013.5599 2. CPO Supply(y/y)t Coefficient 1. Standard error of the model is 203.0064 5.03999 0.09522 0.11 0. Table 6: Granger causality between soyoil and CPO using a 4-lag VAR model F-Statistic ∆Soyoil granger causes ∆Soyoil ∆Soyoil granger causes ∆CPO ∆CPO granger causes ∆Soyoil ∆CPO granger causes ∆CPO 2.04 0.29 0.00 6.
but we now expect prices to rally in Q4-2012 rather than stay flat We have long been aggressive in our forecasts on CPO.1.9 0. crude oil (Brent) and soyoil (SBO) SBO/CPO CPO/Brent CPO MYR/t SBO USc/lb Brent USD/bbl 2000-2011 Average 2000-2011 range 1.620/t for 2013. and the cap and floors.9 1.700/t (MYR 3.5 2. Our annual average forecast remains unchanged from our previous forecast.40 0.228/t for 2014 and MYR 3.17 1.07 1. Standard Chartered Research 29 Sources: Reuters. a decline in inventories.1 1.7 0.600/t previously) in Q3-2012 and MYR 3. We do not believe our forecasts are mispriced relative to soyoil (Chart 41) and crude energy prices (Chart 42).0 120 2012F 1. We believe this will be a reflection of the supply premium in CPO and its growing importance in the global diet.37 3.272 55.8 1. to add a bullish tone to CPO prices.7 1.3 2. an increase in import demand and firmer energy prices in Q4-2012 through 2015. We also expect the soybean complex market.456 60.3 1.600/t previously) in Q4-2012.9 1.01 1. ratios between CPO and other oils provide natural boundaries to future CPO prices.400/t previously).500 56.74 – 2. MYR 3.0 121 2013F 1. but suggesting a near-term ceiling for CPO 1. Our forecast is also based on our expectation of a drop in CPO yields.450/t (MYR 3. MYR 3.5 111 Now 1.1 1.944 31. Our forecasts suggest a tighter spread between soyoil and CPO over the medium term.2 1.01 1.0 130 Sources: Reuters. Standard Chartered Research Chart 41: SBO/CPO spread within range.5 CPO /Brent ratio SBO/CPO ratio 3-year average SBO/CPO ratio 3-year average CPO/Brent ratio Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-00 Aug-01 Mar-03 Oct-04 May-06 Nov-07 Jun-09 Jan-11 Sources: Reuters. but now adequately reflects upside risks further along the curve.5 1.228 54.500/t in Q2-2012 (MYR 3. but we now expect most of the upside in Q4-2012 rather than in Q3-2012 as normal price seasonality in Q4 is reinforced by the weaker impact of La Niña weather. our CPO forecast model (R2=88%) arrives at prices of MYR 3. Based on our ratios from historical data.1 59 2011 1.Crude palm oil – A price storm is brewing Ratios to show price boundaries As discussed before in previous sections. for an annual average of MYR 3.31 3. We remain bullish CPO. which is seasonally stronger in Q4. MYR 3.450 65.23 3.1 0.32 3.32 1.01 .350/t (MYR 3. we can estimate these boundaries for various percentiles of historical ratios (summarised in Table 8).0 0.9 Jan-00 Jan-02 Chart 42: CPO/Brent crude ratio CPO appears adequately priced relative to energy prices 2. and our model vindicates our bullish view.5 1. Our forecasts suggest CPO will remain adequately priced relative to crude oil prices and near the middle of the 2008/11 price ratio.31 1. Table 8: Snapshot of relative ratios – palm oil (CPO).39 3.3 1.0 123 2014F 1.0 127 2015F 1.450/t previously). Standard Chartered Research 30 April 2012 .7 1.15 1. Factoring in CPO supply and soyoil forecasts.26 1.450/t for 2012.4 1.456/t for 2015 (Chart 40). We expect the market to average MYR 3.6 1.30 3.76 1. We continue to see upside momentum building in 2012.620 66.
The optimum replanting age is determined when the MNR in year n of the current batch of plantings is equal to the AVNR in year n of the subsequent batch of plantings (see Chart 43).000 0 -1.000 -5.000 -6. This is to maximise net revenue over time and is done by comparing marginal net revenue (MNR) from the current batch of plantings to the estimated amortised present value of net revenue (AVNR) from the subsequent batch of plantings. annual costs.000 -3. Future net revenues (NR) are discounted to their present value to make possible their Chart 43: Determining the optimal replacement age of oil palms 4. This approach is best used by individual estate owners with knowledge of gross revenue. This arises from the fact that a sum of money received or paid at the present time is worth much more in the future. relatively accommodative global interest rates and the deteriorating age profile of trees in Malaysia should help to persuade owners.Crude palm oil – A price storm is brewing Estate owners should no longer delay planting decisions Historically.000 1 3 5 7 9 11 13 15 17 19 Year 21 23 25 27 29 31 33 35 x y AVNR MNR Source: Oil palm industry economic journal 30 April 2012 30 . it is necessary to compare anticipated revenue at the same point in time. the MNR from the current batch is lower than the AVNR from the subsequent batch.000 2. after point y. that replanting decisions are best not delayed.000 -4. Estate owners should use the deterministic approach to establish the optimum replanting age for their trees We recommend estate owners employ the deterministic approach highlighted in academic literature to establish the optimum replanting age for their trees.000 -2. Our long-term bullish view on CPO. On the chart.000 3. field establishment costs and the age of their estates. However. these points are x and y. interest payments. meaning profits obtained would be higher on the subsequent batch. particularly in Malaysia. The relevant equation is sourced from the oil palm industry journal. farmers are pessimistic on the outlook for prices and tend to delay replanting due to uncertainties over prices and costs. MNRn = Yn – [(an–1 i) + bn + cn] where Yn = Gross revenue an-1 i = Interest on unpaid balances for establishment and land cost bn = annual costs cn = field establishment costs n = age in years In order to make a valid comparison of revenue.000 1.
To obtain the amortised PV. we believe the CPO market is gearing up for a step change in its cost structure. and we believe this trend will worsen in the coming seasons due to poor farming practices and the ageing profile of trees. Some market participants are aware of this. With productivity central to the sector. 30 April 2012 31 . generated by a shortfall in CPO (and soyoil output) in 2012. The market is entering a period of severe demand rationing. which will add to the price aspirations of producers in the palm oil sector in the near to long term. While supply continues to grow to meet that need. biofuels and industrial feedstock has enhanced its consumption over the last 30 years. We believe that demand for edible oils. Conclusion The market is entering a period of severe demand rationing as falling CPO yields struggle to cope with burgeoning demand A storm is brewing in the edible oils industry. we believe oil palm estates in South East Asia that supply the bulk of global demand need a facelift to reverse a severe slowdown in yields. is set to grow even more in the near to medium term as per capita consumption increases. including palm oil.Crude palm oil – A price storm is brewing comparison with the present value. CPO productivity in South East Asia has been trending lower over recent years. and most cannot afford to ignore it. the PV of the NR is accumulated and then multiplied with an amortising factor (AF) of: From the above equation. we deduce that the optimal replanting age of an estate will be shorter the higher the CPO prices as costs incurred at replanting are recovered over a shorter period. This will lead to rising costs for estates. Rationing CPO will be difficult as its versatility and its growing use in food. but even more so in 2013. which will push prices higher in 2012. The present value (PV) of future NR forthcoming at the end on n years in the future can be expressed as follows: Where i is the market rate of interest.
000 1.5%) and capping it at 22.250 >1. USD/t. Standard Chartered Research 30 April 2012 Sources: Gapki.251 New regime Old regime Sources: Gapki. new regime 0% 0% 7. limit price volatility and meet its long-term objective of securing adequate supply for domestic (mainly cooking) purposes. The new tax regime replaced the previous system in which trade ministry and industry officials met monthly to decide the tax rate for the coming month. The export tax for palm olein was reduced to 13% from 25%.5% 3% 4. Bursa Malaysia and ICDX – from the 30 preceding days and calculated on or around the 20th of each month.100 1.101-1. in our view.5% (previously 1.050 1.5% 15% 17. social and macroeconomic implications associated with the use of palm oil. Changes to Indonesia’s CPO tax structure is part of a raft of measures to overtake Malaysia The need to promote the downstream sector is understandable.5% 15% 16. Importers pay more if the CPO price is between USD751/t and USD1200/t 350 300 250 200 150 100 50 0 <700 801-850 951-1. Standard Chartered Research 32 .5% Chart 44: Maximum tariff under different CPO price scales. because of the environmental.001-1. Now the reference price is derived from the weighted average of three markets – Rotterdam.151-1200 1.5% USD/t <700 701-750 751-800 801-850 851-900 901-950 951-1. Indonesia introduced a new fiscal regime for its palm oil industry with the aim of promoting downstream activity Table 9: Indonesia CPO export rates The CPO export tax rate is now capped at 22.5% 25% Tax rate. policy changes within the CPO industry have far-reaching consequences.5% 10% 12.150 1. the new laws are part of a raft of measures being introduced by policy makers in Indonesia as the country positions itself to become the dominant regional and global player in the palm oil trade. According to policy makers.5% 9% 10.5% (previously 25%). particularly after it overtook Malaysia to become the top producer of palm oil in the 2007/08 season. In August 2011.000 1. However.5% 18% 19. old regime 0% 1.101-1.251 Tax rate.Crude palm oil – A price storm is brewing Appendix – SEA policy developments and impact on trade A new CPO fiscal regime went into effect in Indonesia in October 2011 The aim of the new tax structure is to promote downstream activities The sector can no longer rely only on trade data from Malaysia to gauge industry-wide fundamentals Policy changes in the CPO industry have a huge bearing on the market Palm oil is the key agricultural export in both Indonesia and Malaysia and its importance in the economic fabric of both countries make the industry susceptible to frequent reform. However. using the average spot crude palm oil prices in Rotterdam from the preceding 30 days as a reference price.5% 21% 22. The key changes in the law included setting a minimum tax rate for crude palm oil at 7.201-1.5% 20% 22. The key policy change in 2011 was Indonesia‟s announcement of a change to its CPO export tax grid (see Table 9). Indonesia announced changes to the export tax structure in its palm oil sector that would come into effect in October 2011.150 >1. changes in the export tax structure will foster the growth of the refining (downstream) sector in the CPO industry.5% 12% 13.051-1.5% 6% 7.
in our view Chart 45: India’s monthly CPO imports Yet to recover after dropping sharply in Q4-2011 700 600 500 400 300 200 100 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Sources: SEA. The initial decision to slow CPO imports in anticipation of lower prices. which come mainly from Indonesia. although we believe that this window will be limited by a tight edible oil/oilseeds market. requested protectionist measures in favour of the local refining industry. ‘Crude palm oil – Finding a floor‟). India’s decision to slow its imports of CPO in the aftermath of the Indonesia tax change was wrong. both refiners and consumers will feel the pinch of firmer CPO and RBD palm prices. In the short term.4%.150/t (see Chart 44). will have to accept the new terms of trade. in our view (see Agricultural Insight.04% in the WPI India CPO imports. most of which it sources from Indonesia. Standard Chartered Research 30 April 2012 Chart 46: Trend of edible oil inflation in India Edible oil has a weight of 3. in our view. was wrong. which effectively increased the tariff for its CPO exports within a band of USD 751/t to USD 1. there is concern that a lot of refining capacity would be idle. both with idle refining capacity. We are concerned that attempts to increase the base price of refined CPO imports could backfire and instead stoke inflationary pressures (Chart 46). Both refiners and consumers in India will feel the pinch of higher edible oil prices The twin tasks of appeasing refiners and containing inflationary pressures will be challenging in the absence of a robust soybean harvest or cheaper alternative sources of CPO. Many in India‟s edible oil sector. this development has not been well received in India. Options will be limited for Indian refiners in the short term.5mt in 2011/12. we expect an inventory build-up in South East Asia as importers assess how best to react to the reform. India‟s demand is now likely to rise to 7. which it refines for use in its domestic market. boosting exports to India until they can also increase refining capacity. including the influential Solvent Extractors Association (SEA). up 15. Indonesia‟s CPO export tax changes.Crude palm oil – A price storm is brewing We believe the entire South East Asian CPO industry and its stakeholders will go through a difficult period of adjustment. kt 20 15 10 5 0 -5 -10 -15 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 Source: Standard Chartered Research 33 . The decline in demand is not a coincidence. which is the top importer of crude palm oil. India’s crude palm imports. While domestic oilseed output has increased moderately. Indonesia‟s key export markets of India and China. In the current environment. We see opportunity for exporters in Africa to increase output and productivity in the longer term. 8 November 2011. with a significant increase in its refined palm imports. where CPO imports declined sharply in Q4-2011 and have yet to recover. have slumped Still. According to industry reports. India traditionally imports around 6mt of CPO a year (Chart 45). as we expected the market to trend higher. triggered an immediate outcry in India. India will still rely significantly on imports to meet its edible oil requirements. With a refining capacity of around 15mt.
bleached and deodorised (RBD) palm olein futures contract. However. A CPO physical trade platform launched by the Jakarta Futures Exchange in June 2009 and the USD-denominated CME/Singapore Exchange that was launched in June 2007 have also seen limited success. However.12mt.Crude palm oil – A price storm is brewing Indonesia is looking to upscale its CPO industry In February 2012. Chart 47: Indonesian palm oil export flow Export to destination country Belawan Dumai Teluk Bayur Export to destination country Pontianak Balikpapan Tarakan Panjang Source: USDA 30 April 2012 34 . Semarang and Surabaya. as well as stocks in transit to seaports by trucks and small and medium-size boats. Indonesia plans to increase its annual refining capacity from the current estimate of 6mt to 24mt in 2014. Indonesia plans to raise its refining capacity from the current estimate of 6mt to 24mt by 2014 This follows the previous launch of a CPO contract on the ICDX to rival Bursa Malaysia's palm oil futures in May 2011. This is in addition to storage at palm oil mills and refineries. which is currently at around 18mt. Efforts to overcome these impediments will be constrained by the fragmented nature of inventories in Indonesia. Undeterred. This will rival Malaysia‟s refining capacity. but will also mean industry players can no longer rely only on data from Malaysia to adequately gauge demand and supply fundamentals in the industry. According to industry estimates. Understandably. One of the chief concerns expressed by industry players is the absence of trade data from Indonesia.000 islands is significant considering the size of the industry. Higher industry margins in Indonesia are already attracting refiners from Malaysia who are now looking to explore or expand refinery capacity in Indonesia. the effort required to survey production stocks and output on the archipelago of 17. stakeholders have also pointed to the need to strengthen the regulatory environment as a way to improve data collection. storage capacity at major seaports stands at around 1. volumes have been very light compared to those in Malaysia. This will not only challenge Malaysia's dominance in exporting refined palm oil. This contract will be settled physically with delivery points in Jakarta. key port cities on the island of Java where most of the refineries are based. Indonesia established a new refined. There has been some concern that Indonesia is not adequately addressing structural challenges ahead of key initiatives in the CPO sector This has led to growing concern in the industry that Indonesia has not yet addressed some of the structural challenges it faces ahead of key initiatives it is implementing.
Policy makers in Malaysia are said to be considering a number of options. one of which is to provide special funding incentives to refiners to move further downstream.5-25% 1.6mt. as they had hoped for a bigger quota to counter Indonesia‟s rising influence. For example. wharves at the major Sumatran ports of Dumai. Malaysia‟s reaction to increased competition from Indonesia has been relatively measured.Crude palm oil – A price storm is brewing The prospective increase in vessel traffic in Indonesia will strain current export capacity The market has also expressed concern that the development of infrastructure facilities. Though Kalimantan produces nearly one-quarter of Indonesia‟s output. We believe these regulatory. necessary to support larger CPO shipments. One of the region‟s most disadvantaged is Kalimantan. We believe the resulting impact will be more bullish than bearish for markets in the near to medium term. lags the overall growth of Indonesia‟s palm oil production. This is after a Preferential Trade Agreement (PTA) between Malaysia and Pakistan in 2007 accorded a zero tariff to Pakistan‟s imports of Malaysian CPO. Belawan. at least until the Maloy deep seaport in East Kalimantan is completed. Indonesia has strengthened trade ties with Pakistan. a fast-growing CPO export market. especially at ports. This also leaves inventory vulnerable to disruptions along this extended supply chain.5% Source: Ministry of Finance of Republic of Indonesia (summarised) 30 April 2012 35 .5-21/23% 2-10% New export tax regulations 29 products Less than or equal to USD 750/t 7.5-22. a fast-growing CPO importer Indonesia is also strengthening bilateral trade flows with Pakistan. This will overlap a critical period in Indonesia – as it attempts to boost its downstream sector – and tight and declining global edible oil stocks. in a bid to regain market share lost to Malaysia. Industry sources also say the Malaysian government will soon announce plans to help the palm oil industry cope with the export tax changes in Indonesia. which does not have a deepsea port that can serve vessels. Some players in the industry were disappointed. CPO producers there have to rely either on ports in Sumatra or in Malaysia and Singapore. the most visible of which was the announcement of a 3mt tax-free CPO quota in February 2012.5% 3-15% 2-10% 2-7.5-23/25% 1. we understand this limit can be raised if necessary. structural and infrastructural bottlenecks will take some time to resolve. Otherwise. which lowers Pakistan‟s duty on Indonesian CPO from 15% to zero. Some in the market are sceptical about the impact of any new incentives. some in the market remain sceptical Table 10: Comparative table of Indonesia’s old and new tax regimes Maximum taxes for refined products are much lower Comparative items Number of palm oil based products subject to tax Tax free palm oil price threshold Tax rate range (min to max) Crude products Pure refined products Mixed refined products Biodiesel (FAME) Old export tax regulations 15 products Less than or equal to USD 700/t 1. Indonesia has now followed suit with its own PTA. However. however. The prospective increase in vessel traffic on the back of a more competitive refined market will pressure current capacity with the risk of higher inventory in transit. we believe that Malaysia may have to adopt an export tax regime similar to that of Indonesia. which is significantly below last year‟s 3. Panjang and Teluk Bayur cannot serve more than two vessels with relatively long loading times of around four hours per vessel. Policy makers in Malaysia are said to be considering a number of incentives to benefit refiners.
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