Professional Documents
Culture Documents
POTS 2012 Kuala Lumpur
POTS 2012 Kuala Lumpur
Economy on Global
VegOil Prices
Paper by Dorab E Mistry
Director, GODREJ INTERNATIONAL LIMITED
POTS KUALA LUMPUR 2012
At Shangri‐La Hotel, KL
On 16 October 2012
Ladies and Gentlemen
I am delighted to be back in Malaysia participating in this Palm Oil Tradefair &
Seminar in the beautiful capital city of Kuala Lumpur. I have many friends in the
palm oil industry in Malaysia and I have reason to be indebted to this very
successful industry in your great country. I have worked in this industry for 35
years. Our company GODREJ is very much a palm oil pioneer, being the first
Indian company to introduce RBD Palm Olein in consumer packs to the Indian
housewife in 1977. The first invitation I received to speak on Palm Oil Price
Outlook came not from the industry in India but from the industry in Malaysia – in
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fact from the old but very famous KLCE or the then Kuala Lumpur Commodity
Exchange which used to run the palm oil futures market and its then General
Manager Mr Raghbir Singh Bhart.
Let me also pay rich tribute to my dear friend Mr M R Chandran who used to
run the MPOA for many years. And of course the man I have known since 1981
Tan Sri Dr Yusof Basiron who can rightly be called Mr Palm Oil. I am also most
grateful to MPOC for inviting me to participate in this POTS Kuala Lumpur. As a
promotional body, MPOC has no equal in the world.
Today I am going to restrict myself to speaking on the world palm oil scenario
since my friend Dr Bharat Mehta has covered the detailed Indian scenario in his
usual brilliant manner. No one knows India better than Dr Mehta. May I say it was
a great pleasure for us at SEA to join hands with PORAM last year in a landmark
Seminar cum Workshop on Dispute Resolution.
Background Macros
The economic scenario for 2012 was dominated by various kinds of monetary
easing or Note Printing. The last one was in September when Chairman Ben
Bernanke announced QE 3 or as some say QE Infinity. All eyes are now fixed on
the outcome of the US Presidential elections on 4 November.
The situation in Europe causes worries to all. Even the mighty German
economy has struck a soft patch it would appear.
In a nutshell, I can sum up the macro economic situation as flat to negative in
the developed world and medium growth in the developing world. As I have been
saying in the last few weeks, the country that impresses me most is India – in view
of the re‐instatement of Reforms.
I remain optimistic on both China and India because both countries generally
do well when commodity prices are falling. Inflation is a problem for both and
lower commodity prices bring inflation under control. Both are engaged in pulling
large chunks of their population from poverty to progress and this process gives
plenty of scope for fast growth. Malaysia is also well placed to grow at around 5%
I believe and your government is also working hard on reforms. This is after all
Asia’s Century.
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Developments in the palm oil world
The recent release of September figures by the MPOB has vindicated what I
have been saying these last few months. September production came in at 2
million tonnes and stocks almost reached 2.5 million tonnes. I would like to pay
tribute to the MPOB because they have been faithful to their mission – to report
true and correct statistical information, regardless of market impact. If they
continue in this vein, they will soon develop a reputation like the USDA for probity
and propriety. Every Malaysian should be proud of the MPOB performance.
I have been asked often in the last 4 days as to what I think about the new
Export Tax regime announced by Malaysia.
For the long term it is exactly the right response to the situation that was
created by the new Indonesian export tax regime. You have an extremely astute
and knowledgeable minister who is cautious, careful and clever. As I have said
before, this was a difficult situation for Malaysia. Indonesia had taken First Mover
Advantage. The Malaysian Government has been extremely cautious and I may
add prudent in its response. Such situations do not call for a knee jerk reaction.
The palm oil industry in Indonesia is much younger, more adventurous and
more hungry for success. The industry in Malaysia is more mature and often
prefers the serenity of the golf course. In a situation like the present one,
Malaysia had no alternative but to emulate Indonesia and create a similar Export
Tax structure.
What about burdensome Palm oil Stocks
It now appears fairly certain that Malaysian palm oil stocks will reach or
exceed 3 million tonnes on 1st January 2013. If prices are held artificially high, it
will be counter‐productive and stocks on 1st January could be much higher and
could remain at 3 million tonnes until 1st March 2013. The recent difficulty in
boosting exports must serve as a warning. Malaysia and Indonesia began a major
Export Push from August onwards. The result is high stocks and full pipelines in all
destination markets. Even India, which was the best performing market until last
month, is now suffering acutely from high priced heavy inventory and a lack of
storage. Ships these days have to wait until there is room to discharge into shore
tanks. Ask any export shipper in Malaysia and he will confirm that the turnaround
time for vessels has swelled and this is one of the reasons for pedestrian exports.
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I have been asked the question – Will the new export tax structure in
Malaysia clear away these burdensome stocks? Absolutely NOT. The current
situation has been brought about by Strong Production, Flat Edible Demand,
Collapsing Bio diesel Demand and Rising Stocks. To reduce stocks Malaysia must
pay heed to 2 short English proverbs – First, A bit of short term pain can lead to
long term gain; and second The cure for low prices is Low Prices.
How low do prices need to go to clear stocks
It is common knowledge that a Fantom has been operating on and off in the
BMD futures market. I say on and off because he tried unsuccessfully to hold the
level at 2800 Ringgits only to lose and retreat. In the last few days he has been
seen again, trying to hold the market and to take it higher towards 2500. Let me
tell you this attempt too will fail. Drop the Fantom and instead please listen to
the free advice offered by a life‐ long friend of the Malaysian industry.
Given the current fundamentals, BMD futures on the 3rd position should be
at 2200 Ringgits. CPO CIF Rotterdam should be US$ 749. Malaysia should
immediately remove all export taxes and export quotas. Malaysian refiners will be
very competitive and will be able to work at full capacity. With zero export duty,
palm exports will expand. At this level, the Indonesian export tax also becomes
NIL. Indonesian growers and millers will actually be better off than at present.
Malaysia and Indonesia will enjoy a level playing field. With better infrastructure
and more efficient ports, there is no doubt Malaysia will win a greater share of
the export business. It is a win‐ win situation for all.
At that price level, USD 749 CIF Rotterdam or BMD at 2200 Ringgits on the 3rd
position, palm will be so competitive that Energy demand will come back
strongly. Palm oil will be competitive for blending into fuel for electricity
generation. Palm bio diesel will also be super competitive and will go for
discretionary blending without requiring a mandate or any subsidy. This is the
way stocks can be reduced within three months.
I know I am speaking to an audience of producers. It is difficult for producers
to accept the logic of lower prices. However, a level of 2200 Ringgits for a couple
of months is not an oppressive level. Each and every CPO producer will make a
decent profit at this level. And as stocks decline, it will pave the way for higher
prices in the near future.
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CPO Production: My expectation is that Malaysia will produce 18 to 18.2
million tonnes of CPO in 2012. The recent news that El Nino is faltering and may
not happen is indeed heartening. Recent rainfall data also suggests that.
Accordingly we have to re‐work our preliminary estimates for production in 2013.
I hope to announce my estimates at the Bali conference in November.
I confirm Indonesian CPO production looks like exceeding 27.5 million tonnes
this year. While Malaysian production will peak in October, it is generally
expected that Indonesia will enjoy an extended Double Peak ie. October and
November.
The current Anti‐Dumping Inquiry launched by the EU in case of bio diesel
exporters from Indonesia and from Argentina will take about a year to complete.
At the end, if the EU finds a case for levying an Anti‐ Dumping Duty, it can be
levied with retrospective effect. Therefore, it will remain a cloud overhanging the
use of palm products in bio diesel for export.
Some frank comments
With great respect to my hosts, I shall also take the liberty of speaking freely
and frankly on a few other points. Let me say emphatically that any talk of
cooperation between Malaysia and Indonesia on long term curtailment of
plantations is meaningless. It will not happen and it is not moral to restrict
production of a food item when current prices are still very profitable. Besides,
Malaysia and Indonesia are fierce competitors for markets. So there is no merit in
that plan.
Discount of Palm to Soya
I have been asked about the big discount between the price of palm oil and
soya oil and why this has not resulted in a bigger switch of market share to palm.
Firstly we must realise that palm already enjoys a much bigger market share than
soya oil in key swing markets like India.
Most other markets have their own compulsions like taste, historical or
cultural preference or climate. Palm also has a disadvantage during winter
months. Most markets do not switch from one oil to another simply on price. For
all these reasons, I have cautioned people who expected a major switch to palm
from soya oil in the months from September to February. We must also
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remember that soya oil is a by‐product of soybean crushing and therefore in soya
producing countries it will always be the preferred oil.
Finally, in the last 2 years we have seen a massive increase in the production of
sunflower oil. People of my generation have been staggered to see sun oil remain
at a Discount to soya oil. So soya oil has lost market share, but to sunflower oil.
What chance of import duty on CPO in India
I have also been asked about the chances of India imposing an import duty on
CPO and raising the import duty on refined palm oil and RBD Olein. I believe this
will happen but not immediately. Indian domestic prices for soybeans have fallen
and farmers are not happy. However, the Indian government will wait until local
inflation numbers turn lower. This will happen soon because the Rupee has got
stronger and commodity prices have fallen. Once inflation numbers are lower, the
government will be in strong position to give some small protection to oilseed
farmers.
INCREMENTAL S & Ds
My normal method is to discuss the Incremental S&Ds and then arrive at an
outlook for prices.
In late 2011 and early 2012, I was very bullish and was forecasting CPO prices
to peak around 4000 Ringgits by the end of June 2012. As you all know prices
peaked at 3628 on 10 April 2012 and then fell. My forecast has since been
abandoned. Many have asked me what went wrong.
For a start the macro economic situation in the world and particularly in
Europe was unsatisfactory. Even developing countries like China, India and Brazil
slowed down. So I was far too optimistic about world growth. However, the
biggest disappointment came in Bio Diesel demand. In my Incremental S&Ds, I
had budgeted for an increase in veg oil demand for bio diesel at 3 million tonnes.
That turned out to be a massive over‐estimate. I am convinced world
consumption of veg oil for bio diesel ACTUALLY FELL in the Oil Year which has
just ended in September 2012. I am still working on this data and in the very near
future, either at my next speech at the Golden Jubilee COOIT Convention in New
Delhi on 4 November or at the 7th CIOC in Guangzhou, I hope to be able to
prepare fresh World Incremental S&Ds for the Oil Year October 11 to September
12. I believe traders and analysts will be shocked at the figures I shall present.
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The main culprits have been Double Counting of Used Cooking Oil and non‐
edible oils like Tallow, Greases and Waste Products. On top of that some
countries like the UK have allowed inter‐changeability of bio fuels towards their
mandates. Hence cheaper Ethanol has replaced bio diesel. And finally, crude oil
prices have declined and come under pressure.
The future also does not bode well. In addition to the Anti‐ Dumping Duty
Inquiry, the EU has undergone a huge re‐think on its policy for use of alternative
renewable fuels. As a result, the use of bio diesel will not be encouraged or
mandated beyond certain limits. Growth prospects, under EU mandates have
been literally reduced to NIL. The EU has also embraced the concept of Indirect
Land Use Change which goes to the detriment of vegetable oils. Some EU
countries are also going to give preference to their own locally produced veg oils.
Soya: The recent USDA Report of 11 October has come and gone. We have a
big rationing job to do but traders were far too bullish about bean prices. Once
the US harvest is done and we get into a South American weather market, we are
likely to see a recovery in bean prices. The benefit of that recovery is likely to go
to meal rather than to bean oil.
Sunflower oil: Sunflower seed crops in Ukraine and Russia are lower than last
year but better than recent expectations. Sun oil will continue to give stiff
competition to soya oil in its traditional markets. We must watch for currency
depreciation in Ukraine which may affect sun oil prices.
Rapeseed oil: The Canola crop is somewhat lower than expected and will help
to keep domestic soy oil prices in USA at a high level.
Lauric oils: I repeat I do not see a good outlook for Coconut oil and Palm
Kernel oil prices
PRICE OUTLOOK
The macro factors do not look bullish. We have to watch how the US Dollar
performs and how Equity markets perform.
There is a growing feeling that the cyclical bull market in commodities is over.
Agricultural commodities like soybeans, wheat and corn had a bullish story of
their own. It remains to be seen if the funds will continue to drive these markets
or whether they will move on to some other story.
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Energy prices are also very important. With slower growth, we should look for
lower crude oil prices. There are good prospects of USA exporting gas as well as
crude oil in the near future. Most energy traders I speak to tell me they are
friendly to energy prices. Perhaps they are building in a significant premium for
political risk.
Bearing in mind all of the above, my short term forecast for CPO prices is a
level of 2200 Ringgits on the BMD 3rd position sometime in the next 4 to 6
weeks. Prices must enable energy demand to kick in and for vast tonnages to be
contracted and shipped out. In the New Year we could look at higher prices. In the
meantime, I shall be speaking on 3 occasions – in New Delhi, in Guangzhou and
finally in Bali. So there will be plenty of opportunity for me to provide further
longer term forecasts.
Whilst I have not had much to cheer the bulls, let me say the outlook for this
industry has never been brighter. We are in a unique sweet spot where we
provide food to humanity at a reasonable price and at the same time provide
employment and a decent life to millions of our people. At this stage I also send
my best wishes to the Round Table on Sustainable Palm Oil and its deliberations
at RT10 next month. We are very fortunate to be part of this great industry and to
participate in its prosperity. As I said, A bit of short term pain will give way to
handsome long term gain.
I wish you all Good Luck and God Bless
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