Price Outlook for

World
Vegoils 2015-16
Paper by Dorab E Mistry,
Director, Godrej International Limited
At 10th CHINA INTERNATIONAL OILS & OILSEEDS CONFERENCE 2015
Hosted by Dalian Commodity Exchange and Bursa Malaysia Derivatives
In GUANGZHOU at Shangri-La Hotel
On 12 November 2015

Ladies and Gentlemen

I am delighted to be speaking at the 10th Annual CHINA INTERNATIONAL

OILS & OILSEEDS CONFERENCE hosted by the Dalian Commodity
Exchange and Bursa Malaysia Derivatives. I am proud of the fact that I have
spoken at each of the 10 Annual Conferences. I take this opportunity to warmly
congratulate the DCE on its huge success in making the 2 veg oil contracts – for
soya oil and for palm oil – the biggest and most active veg oil contracts in the
world.

We meet at a very interesting point in the world economy. Equity markets are in
recovery mode and the real economy is doing quite well. The US FED is expected
to begin raising interest rates from next month. South East Asia is in the midst of a
strong EL Nino.

Background

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The Five factors influencing the price of vegetable oils in the last few months are:

The current El Nino and dry weather

The higher than expected import of soybeans by China

The higher than expected import of veg oils by India

The declining price of crude oil

The Indonesian palm bio diesel mandate

There are other subsidiary factors such as currency weakness in Malaysia,

Indonesia, Brazil and Argentina and the upcoming Presidential election in
Argentina

What has been happening?

Crude oil prices declined dramatically after June and for various reasons the
Ringgit weakened to almost 4.35. The Ringgit price of CPO reached just below
1900 and RBD Olein in US Dollars declined to just below US$ 490 FOB.

Similarly the aggressive import of soybeans from Brazil by China has lent a
helping hand to soybean prices which would otherwise have declined to US$ 8 per
bushel. Had it not been for the insatiable appetite of India, prices of veg oils would
have declined even lower. Indian consumption has been on a sharply rising curve
spurred on by lower prices.

The months ahead

Before I discuss Price Outlook scenario for the months ahead, let me discuss each
major oil in detail

PALM

In my last paper in Mumbai on 30 September, I estimated 2015 Malaysian

production at 20.1 million tonnes and Indonesian production at 32 million tonnes.
Overall I said I expected world palm oil production to be higher by 2.5 mln mt as
compared to the previous calendar year. At present I see no reason to adjust this
forecast.
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The big question in front of every trader is - What effect will the current El Nino
have on palm oil production in 2016?
Earlier I had estimated that palm oil production in 2016 would also record an
increase of about 2.5 million tonnes over 2015. In view of the severe spell of dry
weather and the Haze, I am now revising my estimate downward from 2.5
million tonnes to 1.5 million tonnes. Some analysts have said they expect a net
decline in word palm oil production in 2016. I do not believe that will be the case.
Expansion of mature area will compensate for the decline in yields and at this stage
I expect a net increase of 1.5 million tonnes.

The current EL Nino is still unfinished business. If dry weather returns to

Indonesia and parts of Malaysia once again – say around January 2016, then it will
be a serious development and that can further reduce output in 2016. In that event,
we shall be looking at a net decline in 2016 palm oil production. However, if the
drought is now over, we shall see a net increase.

We are to some extent in uncharted territory. There has been a great improvement
in planting material in recent years. The most drought affected areas were in
Kalimantan, Sabah and in South Sumatra. Many of these areas have been planted in the last 10
years. These young palms are hardy and can recover much faster. It will be
interesting to see how much or how little they have been affected by the recent dry
weather

Indonesian Palm Bio diesel Mandate

In the last few days we have heard more positive news about the Indonesian Bio
Diesel mandate and programme. PERTAMINA is said to have finalised allocation
of palm bio diesel contracts to 11 local producers. If they all produce and delivery
the tonnages allocated and Pertamina takes delivery and blends and pays for those
tonnages as agreed, the Indonesian Bio Diesel programme can be said to have
finally started in earnest.

However, neither Pertamina nor the Indonesian bio diesel producers have a good
record of performing as announced. These announcements of policy and of
contracts usually run way ahead of actual performance. So we must reserve
judgment and await further developments.

Secondly there is a Catch 22 situation here. The main determinant of the success or
otherwise of the Bio Diesel mandate will be the price of Gas Oil or Mineral Diesel
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in South East Asia. If the price of Gas Oil remains low around US$ 450 per metric
tonne and the local domestic price of CPO in Indonesia ( without Export Tax )
rises to US$ 500, then it will require a Subsidy of US$ 160 per tonne to make bio
diesel workable. If the price of CPO rises to US$ 550, the Subsidy required would
be a massive US$ 210 per tonne. That will reduce the tonnage of bio diesel that can
be subsidised and therefore consumed. So it can be said that the Bio Diesel
programme has an in-built bias towards the price of mineral diesel and also has a
self-correcting mechanism.

If the local price of CPO is US$ 550, the export price including export tax will be
US$ 600 and that would translate to a price of RBD Olein FOB at about US$ 630.
So there is not much room for any further appreciation in palm oil prices
from current levels, even if Indonesia consumes palm bio diesel at the
projected monthly rate of almost 300,000 tonnes for the next 3 months. The
situation would become more bullish only if mineral diesel prices were to rise.

The spread between RBD Olein FOB Malaysia and Crude degummed soya oil
FOB Argentina for the new crop position of May-June-July 2016 has declined to
just around US$ 20. This does not augur well for palm oil demand from price
sensitive markets like India.

SOYA oil: El Nino years bring plentiful rain to the soybean belt in South
America. So it is quite possible we are on our way to a third bumper season of soya
in South America in 2016. The big question before us is the election of a new
President in Argentina later this month. Whoever is elected, some changes to the
Export Tax regime and to the Exchange Rate of the Peso are inevitable. Both are
likely to be bearish for export prices. The soybean market is already discounting
some of these changes. The situation will get clearer as the new government takes
office from 10 December.

On the Demand side, soya oil is gaining demand from sun oil consumers who are
price conscious. Rape oil is also at a premium to soya oil. And finally, as I shall
demonstrate a bit later, soya oil has been gaining market share from palm in the
crucially important Indian market.

It is for all these reasons of demand, supply and price that I hailed soya oil in
my paper in Mumbai on 30 September, as the MUST OWN oil for 2016.

Rapeseed / Canola: In 2015 we faced a lower crop of Rape/Canola by almost 5

million tonnes. Apart from a smaller crop in India, we had smaller crops in the EU
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as well as in Canada. The out-turn in Canada has finally turned out to be better
than previous lower estimates. On the other hand, sky high domestic prices of
mustard oil in India will encourage Indian farmers to expand the area under
rape/mustard seed. So far plantings are running behind schedule but there is still
time for planting. The latest forecasts say good winter rains and temperatures are to
be expected and in that case, India’s production can be 1 million tonnes higher in
2016.

Sunflower oil: We must keep our fingers crossed that Ukraine and Russia will
again produce big sun seed crops in 2016. Currently it appears that the 2015 crops
just harvested have been better than previous lower expectations. Sun oil is losing
market share in almost all countries except China. I expect China to import around
500,000 tonnes of sun oil in the Oil Year 2015-16 but most of that will be at prices
that were only marginally more expensive than soya oil. I expect imports to fall in
the May-July months where sun oil is at a premium of almost US$ 200.

Lauric oils: There has been a recovery in rainfall in Philippines and Coconut oil
production is also recovering. Palm kernel oil production is also higher this year as
compared with the previous year. I have been bearish on PKO prices since the bulk
of demand is industrial. Coconut oil prices are still too high and will eventually
lose demand.

INDIA: I invite you to take a look at Indian oil imports in the last 5 years. You
will be amazed by how much market share palm oil has lost. Palm oil bulls should
remember this table and think ten times before bidding up or ramping up CPO
futures on the BMD.

000 2015-16 2014-15 2013-14 2011-12

Soya oil 4,000 2,955 1,951 1,080
Palm oil 9,600 9,700 7,960 7,670
Sun oil 1,200 1,534 1,510 1,140
Laurics 300 250 220 200
Others 250 355 200 100
Total 15,350 14,797 11,818 10,200

What is at once noticeable from this table is that India’s imports have soared by
almost 50% in the last 5 years. Palm tonnages have increased by only 25% in these
5 years while soya oil has recorded an increase of over 370%. Soya oil imports will
take market share from every other oil because soya is so attractively priced. As I
have said previously, Soya Oil is the Must Own oil of 2016
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CHINA: China continues to amaze the world with rising imports of soybeans. My
estimate is that in the Oil Year 2015-16, China will import a record 84 million
tonnes of beans. China’s consumption of veg oils has plateaued. The current War
on Waste and trimming of extravagance has led to lower usage of veg oils. It looks
as if palm is losing market share in China also to soya and to sun oil.

In view of the greater crush of soybeans in China, we must look at further

reduction in soya oil imports.

There are also indications that China is finally releasing small tonnages of its
massive 6 million tonne Reserve Stock of rape oil. I repeat my suggestion that
China should aggressively release this old Rape oil and should reduce and curtail
the import of rapeseed and oil as well as import of canola seed and oil. This year
with lower Rape and Canola seed production all over the world, it is a great
opportunity for China to reduce her stocks of old Rape oil.

On a more general note, I remain a bull on China and believe your economy
will emerge stronger, more vibrant and more diversified as a result of the
present re-structuring. Every re-structuring causes some pain and disruption and
China is no different. The government in China has taken all the right
measures to re-align the economy to a more domestic consumption oriented
and sustainable model which works to uplift living standards and to preserve
the environment.

Energy Demand: The US EPA is likely to announce its proposals by the end of
November. The other big factor will be Indonesia. Indonesia has not been able to
consume the massive tonnages of palm bio diesel in the past 2 years that it
promised. This year they appear to be better organised. I shall only believe the
Indonesian Hype when I see actual proof of consumption. Temporarily, based on
recent Indonesian developments, I am estimating that world energy demand will
expand in 15-16 by 1.5 million tonnes. I shall cover this point in more detail in
my next paper on 27 November at the GAPKI conference in Bali.

World Demand

Low prices have given us a robust increase in food demand by 4 million tonnes in
14-15. Growth in 15-16 is likely to temper to 3.5 million tonnes.

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Discretionary blending demand for bio diesel has collapsed and is unlikely to
surface for a long time.

World demand for bio diesel in 2014-15 SHRANK by about 1.5 million tonnes.
From that low base, we hope to see a modest recovery and therefore I am
expecting 15-16 bio fuel demand to expand by 1.5 million tonnes. So with that
here are my projections of Incremental World S&Ds for 2015-16

000 Oct 13-Sep 14 Oct 14-Sep 15 Oct 15 – Sep 16

Soya oil + 1,800 + 2,700 + 3,500
Rape oil + 400 - 300 - 1,500
Sun oil + 1,600 - 600 -
Gn & Ctn oil - - - 300
Palm oil + 3,400 + 1,600 + 1,500
Lauric oils + 300 + 200 + 400

Supply Increase + 7,500 + 3,600 + 3,600

Demand Increase + 5,200 + 2,500 + 5,100

You will see that in my estimates today I have reduced Incremental Production by
1 million tonnes and raised Incremental Demand by half a million tonnes.

Overall, after 2 years of comfortable surplus, the world faces a situation where
Incremental Demand exceeds Incremental Supply. Therefore I expect a gradual
price recovery to begin from December and to take world veg oil prices higher.

PRICE OUTLOOK – Assumptions

I am assuming Brent crude oil to trade in a range US$ 45 to 60 per barrel.

I am expecting the FED to increase interest rates very gradually from December
2015 and release dovish statements at the same time.
I expect the Malaysian Ringgit, the Indonesian Rupiah, the Brazilian Real and the
Argentinian Peso to remain under pressure and lose value against the US Dollar.

PRICE OUTLOOK

I believe Palm oil futures bottomed out around 1900 Ringgits and we are not likely
to see 2000 Ringgits again. As you know I had forecast a trading range of 2100 to

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2400 Ringgits for BMD futures. I believe CPO futures will trade at the upper end
of this range due to the weakness of the Ringgit. If the Ringgit falls further and
crosses 4.50, this trading range will have to be expanded to 2500. It is possible to
go to 2500 Ringgits just for a short time but I believe such a level is not sustainable
unless mineral oil prices rise significantly.

As I explained earlier, CPO prices FOB Malaysia at US$ 600 will be difficult to
sustain unless Brent crude oil rises above US$ 60 per barrel

Soya oil: Soya oil prices are in an inverse and should have been higher but for the
weakness of the Brazilian Real and the Argentinian Peso. These currencies are
likely to remain weak. If the US EPA comes in with an enhanced mandate for bio
diesel, we may see soya oil futures on the CBOT climb to 33 cents. I expect
soybean prices to remain below 900 cents per bushel.

I am reasonably bullish on old crop basis in South America and I forecast old crop
soya oil for shipment in Dec 2015 and Jan-Feb 2016 will be tight and can advance
by US$ 50 per tonne to US$ 700 FOB

Sun oil prices have run up and opened a significant premium to soya oil prices.
That premium will cut demand for sun oil and therefore on the new crop positions
of November and beyond, I expect stable to sideways prices.

Rape oil prices will remain at a premium to soya oil but at a small discount to sun
oil.

I expect Palm Kernel oil to trade in a range of $ 700 to 800 CIF Rotterdam. Lauric
oils are dependent on industrial demand and I am surprised at their price recovery.
Coconut oil is over-priced and will eventually have to decline to a premium of only
US$ 200 over CPKO.

Conclusion

The industry in most parts of the world is in good shape. Food demand is robust
and we can look forward to better times. Price outlook for 2016 will be influenced
by the outlook for mineral oil prices. We are not expanding palm acreage and that
means higher prices in 2017 and beyond. I congratulate the DCE and BMD once
again on their success. Good Luck and God Bless.