Price and Supply-Demand Outlook in the Vegetable Oil Market Today by Dr James Fry, LMC International to PALMEX Thailand, September, 2011 www.LMC.co.uk Outline of my presentation today • I will start by describing one of the most surprising changes in the behaviour of the world vegetable oil market, which has occurred within the past five years. • This is the way in which vegetable oils have become part of the petroleum complex, as regards pricing. I will explain why and how this has happened. • This has far-reaching consequences for the future behaviour of vegetable oil prices. In particular, while supply-demand balances do matter, they are less important than they used to be in setting oils prices. • Palm oil stocks are still the main driver of price differentials within the oils complex, and so I will examine the recent trends in global palm oil output. The revolution in vegetable oil price behaviour Before 2007 there was no link evident between petroleum and vegetable oil prices. CPO was often cheaper than crude oil per tonne. 900 EU Prices, US$ per tonne 800 700 600 500 400 300 Palm oil was actually less expensive than crude oil 200 100 0 Jan-03 Jan-04 Brent Crude Jan-05 Palm Oil Jan-06 Soy Oil Rapeseed Oil Jan-07 Since 2007, a price band has appeared, linking vegetable oil prices to crude oil prices, within a price band with vegetable oils at a premium. 1,600 EU Prices, US$ per tonne 1,400 1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Brent Crude Jan-09 Palm Oil Jan-10 Soy Oil Jan-11 Rapeseed Oil The two lauric oils are not so strongly tied to the new price band, but their premium over crude petroleum has shrunk sharply in recent weeks. 2,400 EU Prices, US$ per tonne 2,000 1,600 1,200 800 400 0 Jan-07 Jan-08 Brent Crude Jan-09 Palm Oil Jan-10 PKO Jan-11 CNO Examining differentials vs. diesel for oils, we can see that, after a sharp correction after January, the CPO premium has settled near its average. Premium over diesel, US$ per tonne 600 500 400 300 200 100 0 -100 -200 Jan-07 CPO Jan-08 SBO Jan-09 Jan-10 CPO Average Jan-11 SBO Average The emergence of a price band is the major revolution in vegetable oil pricing • We can now see very clearly that there is a price band in place, which became established in 2007. • When vegetable oil prices get too far above crude oil, a correction occurs, and typically quite fast. We saw such a correction in 2008 and again this year. • Since the floor of the band is set by crude oil prices, it seems likely that biofuels are the key to the link. • This view is reinforced by the evidence that lauric oils, which are distinct from the other oils and are not used in biofuels, are less closely tied to the new price band. • However, I suppose the link could be caused by basic commodity speculation, and so I now turn to examine whether there is a good reason for the band to exist. Biodiesel demand has changed the balance within the oil and meal sectors 300 150 250 125 200 100 150 75 100 50 50 25 0 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Meals, Soymeal Equivalent Oils Oil (Million Tonnes) Meal in Soymeal Equivalent (million tonnes) Biofuels have pulled demand growth rates for oil ahead of those for protein meal. This boosts the reliance upon high oil-content crops. Until ten years ago, the growth rates in the demand for oils and meals were similar • If we look back 40 years, we see that, by coincidence, global demand for oils and meals grew in step with one another. • The feedback from income growth to oil demand (for food) and meal demand (for meat) meant that the global consumption of oils and meals rose in parallel. • Since 2000, world vegetable oil demand has grown faster than meal demand, with the divergence between the two curves widening steadily. • The best reason for the change has to be biofuels. They generate a demand for oils, but without any corresponding demand for protein meal. Among oil-bearing crops, oil palm’s oil yield/ha. averages five times that of rapeseed, six times that of sunflower and seven times soybean’s. 4.0 Oil yield, tonnes per hectare 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oil Palm Rapeseed Sunflower Soybean In contrast, oil palm has by far the lowest meal content of leading oilseeds. Hence, oil palm is the oil crop best placed for the new biofuel era. 90% Meal content of crop output 80% 70% 60% 50% 40% 30% 20% 10% 0% Oil Palm Rapeseed Sunflower Soybean Palm oil has captured market share thanks to rapid output growth. It has overtaken soybean oil to become the world’s most important oil. 50 Million Tonnes 40 30 Average Annual Growth 1975-2011: Palm Oil = 8.3% Palm Kernel Oil = 7.7% Rapeseed Oil = 6.2% Soybean Oil = 4.8% Sunflower Oil = 2.8% 20 10 0 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Palm Oil Palm Kernel Oil Rapeseed Oil Soybean Oil Sunflower Oil The new global balance of consumption growth plays to oil palm’s strengths • Now that we are in a world that craves more and more vegetable oil, and is doing so at a faster rate than its demand for meal, it wants more of the world oilseed output to come from a crop that gives us a lot of oil and relatively little meal. • The crop that best meets this need is called “oil palm”! • As a result, it is not simply because oil palm is a highly productive and cost-competitive crop that it has captured a greater share of world supply. • In reality, the world needs more palm oil, rather than other oils, if it is to avoid the problems of large surpluses of unwanted oilseed meal to dispose of. Biodiesel demand is very sensitive to the biodiesel premium over diesel 500 300 460 250 420 200 380 150 340 100 300 50 260 0 220 -50 180 Jan-07 Jan-08 US + German Demand -100 Jan-09 Jan-10 Jan-11 Average US & German Biodiesel Premium Premium, US$ per tonne Monthly Biodiesel Demand, '000 tonnes Biodiesel use in Germany and the US, reacts quickly to swings in the biodiesel premium over diesel. This links biodiesel to diesel prices. 100 550 90 450 80 350 70 250 60 150 50 50 40 -50 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Demand Biodiesel Premium Biodiesel Premium over Diesel (US$/tonne) UK Demand ('000 tonnes) The same is true of biodiesel demand in the UK where biofuel users can pay the government money not to use biofuels if they get too costly. Biodiesel demand has been affected by high price differentials earlier this year. • Around the world, biodiesel users cut back demand when biodiesel became very expensive vs. diesel. • Some of the cutbacks were temporary, as blenders waited until biodiesel became cheaper. Some were caused by users “buying out” their mandates • In a few cases, governments responded to high food prices by reducing their legal mandate targets. • In Thailand, your government reacted to low palm oil output by cutting the mandate for a while. • The effect of all these changes was to pull biodiesel prices (and hence vegetable oil prices) closer to the price of diesel, narrowing the spread in the market. Understanding vegetable oil prices The main factors behind vegetable oil price levels today now include biofuels 1. I hope that I have persuaded you that you have to take account of biofuels today. In English, we talk about a “tail wagging the dog”. In oils today, the “tail” of biofuels, with only one eighth of world oil demand’ is waging the “dog” of the global vegetable oil market (with the other seven eighths of demand). 2. Because of the price band, petroleum prices are undoubtedly a major factor behind oils pricing today. 3. Vegetable oil stocks also influence prices. The recent period of low palm oil output has passed, and I will next study how the upturn is affecting stocks. 4. Finally, vegetable oils compete. I will illustrate this with evidence from price-sensitive Indian imports. Stocks and oil supply-demand balances Strong palm oil output this year will be crucial in lifting growth in output of the main vegetable oils to 6 million tonnes worldwide in 2011/12. Oil Output Growth, million tonnes 8 7 6 5 4 3 2 1 0 -1 -2 2006/07-2007/08 2007/08-2008/09 2008/09-2009/10 2009/10-2010/11 2010/11-2011/12 Soybeans Rapeseed Sunflower Palm Sum Oil Output and Demand Growth, million tonnes High prices will slow 2011/12 world demand growth and cause it to lag behind output growth, after two years when demand exceeded output. 9 8 7 6 5 4 3 2 1 0 2006/072007/08 2007/082008/09 2008/092009/10 Demand Output 2009/102010/11 2010/112011/12 Oil output will be sustained in 2011 by cutting oilseed stocks. Biofuel price sensitivity will be crucial to balancing world oil supply vs. demand. Oil Output Growth, million tonnes 12 10 8 6 4 2 0 2006/072007/08 2007/082008/09 Oil in Seed 2008/092009/10 Oil Output 2009/102010/11 2010/112011/12 Seed stocks provide a cushion for oil output • • • • Oilseed stocks are big enough to ensure high growth in world oil output, while high prices slow demand. Within the world oil total, palm oil will make a bigger contribution to global production growth in 2011/12 than it did in 2010/11, rising 3.0-3.5 million tonnes. This increase will be crucial in keeping world supply expanding in line with the rise in global oils demand. The key looking further ahead will be the speed of the revival in palm oil output growth. Newly mature areas and good rains in the past year should keep world year-on-year CPO production growth strong for a few more months, as I will now demonstrate. In palm oil, it is clear that the unusually slow Malaysian CPO output growth in 2010 was a temporary aberration and that growth is back. Moving ave. yr-on-yr Malaysia output change . 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 1997 1999 2001 2003 2005 2007 2009 2011 Here we can see both how much more wildly Thai CPO output fluctuates than Malaysia’s, and we can also see the poor upturn in 2010. Moving average year-on-year output change . 200% 150% 100% 50% 0% -50% -100% 1997 1999 2001 2003 2005 Malaysia 2007 Thailand 2009 2011 It is interesting to see that the recent production cycle has been spread throughout the world of oil palm all the way from SE Asia to S America. 30% Year-on-year growth, % 20% 10% 0% -10% -20% -30% -40% Q1.2009 Q3.2009 Malaysia Q1.2010 Indonesia Q3.2010 Thailand Q1.2011 Colombia Here we see the scale of the problems in palm kernel output in 2010 and early 2011, which explains the recent wild swings in PKO prices. 30% 25% Year-on-year growth, % 20% 15% 10% 5% 0% -5% -10% -15% -20% Q1.2009 Q3.2009 Q1.2010 Q3.2010 Q1.2011 Malaysia Indonesia Colombia We are near the peak of the current palm oil and palm kernel growth cycles. • • • 2010 was undoubtedly an unusual year, in that the year-on-year increases in both CPO and PK output were very modest by historical standards (which may have been a result of low fertiliser use in 2008-09 in reaction to high costs), and it ended with sharp yearon-year declines in Q4 production of CPO and PK. Palm kernel output was hit harder than CPO in the downturn, but was displaying very strong growth again by the second quarter of 2011. Looking at the growth patterns, we must be close to the peaks. Malaysia’s and Indonesia’s year-on-year growth rates peaked in May-June, while the Thai rate of growth almost certainly touched its peak in July. What is the role of palm oil stocks? Until 2006, the year-on-year changes in CPO prices used to be fairly easily explained in terms of changes in Malaysian stock levels. 750 1,000 800 500 600 400 250 200 0 0 -200 -400 -250 -600 -800 Jan-01 -500 Jan-02 Jan-03 Jan-04 Price Change Jan-05 Jan-06 Stock Change Jan-07 Year-on-Year Stock Change, '000 tonnes Year-on-Year Price Change, M$/tonne 1,200 2,000 1,000 1,600 800 1,200 600 800 400 400 200 0 0 -400 -200 -800 -400 -1,200 -600 -1,600 -800 -2,000 Jan-01 -1,000 Jan-03 Jan-05 Price Change Jan-07 Jan-09 Stock Change Jan-11 Year-on-Year Stock Change, '000 mt Year-on-Year Price Change, M$/tonne Since 2007 stock and price changes have tended to move together. Prices are still growing year-onyear despite the big increase in Malaysian stocks. If stocks no longer determine CPO prices, we must look instead inside the price band • • • • It is clear that palm oil stocks (we use Malaysian stocks as the reference) no longer drive CPO prices. Instead, our theories must adjust to reflect the band. Logic suggests that, with a price band, a floor exists to CPO prices when high stocks have driven prices down so far that it becomes profitable to make and use biodiesel without any government subsidy. However, when stocks are low, food demand for oils should pull CPO far enough above the price floor for food use to compete oil away from biodiesel output. So, we expect the CPO premium over diesel to be inversely related to the stock level, i.e., the premium should be high when stocks are low and vice versa. 2.4 500 2.2 400 2.0 300 1.8 200 1.6 100 1.4 0 1.2 -100 1.0 Jan-07 -200 Jan-08 Jan-11 Jan-10 Jan-09 Premium of CPO over diesel Stocks EU premium over diesel, $/tonne MPOB Stocks, million tonnes Here we plot stocks against the CPO premium over diesel. Early in 2011, the premium was too high, but it is now back down near its average . 2.4 500 2.2 400 2.0 300 1.8 200 1.6 100 1.4 0 1.2 -100 1.0 Jan-07 -200 Jan-08 Jan-09 Jan-10 Jan-11 Stocks Premium of CPO over diesel EU Premium over diesel, $/tonne MPOB Stocks, million tonnes Looking ahead to falling palm oil stocks, the premium over diesel should rise a little, but not back to the peaks of early this year. In the background, competition between palm and soy oil in vital markets such as India keeps soy oil prices from moving too far above CPO. 105% 90% 95% 90% 80% 85% 80% 70% 75% 70% 60% 65% 60% 50% 55% 40% 50% Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 CPO % of SBO+CPO Imports Duty-paid CPO Import Price as % of SBO Palm Oil % of (Palm + Soy Oil) Imports Cif Tariff-Paid CPO/SBO Price Ratio . 100% This is why, with CPO’s premium now close to normal, the soy oil premium, which is already high, is not expected to rise much further. Premium over diesel, US$ per tonne 600 500 400 300 200 100 0 -100 -200 Jan-07 CPO Jan-08 Jan-09 SBO Jan-10 CPO Average Jan-11 SBO Average The new world is different from the old one. We have to analyse the petroleum market as well as supply-demand in vegetable oils. • • • • The picture I have described is quite different from that you may have expected. We are now in a “new world” in which vegetable oils trade in price band, created by biofuels, which links vegetable oils inextricably to the petroleum price. The old fashioned drivers of oils prices, i.e., supplydemand and stocks, are still a factor in setting prices, but the supply-demand balance only influences prices within limits that are set by petroleum. Therefore, I will end with a few remarks about the outlook for the petroleum market. What is the petroleum market doing? 2,500 125 2,000 100 1,500 75 1,000 50 500 25 0 0 2005 Q3.2006 Q2.2007 Q1.2008 Q4.2008 Q3.2009 Q2.2010 Q1.2011 Number of Oil Rigs Brent Crude Brent Crude North Sea Oil, $/barrel Number of rigs for oil Looking at short term oil supply, high prices are encouraging lots of drilling. This should boost output, especially when Libyan supplies return. 140 22 120 21 100 20 80 19 60 18 40 17 20 16 0 15 199 2 199 4 199 6 199 8 200 0 200 2 200 4 200 6 200 8 201 0 Brent Crude Moving Average of US Demand, mn bbl/day Demand, million barrels/day Brent Crude, $ per bbl. On the demand side, petroleum use in the US, still by far the biggest consumer, has stabilised, but high prices have pushed it below its peak. 150 100 125 95 100 90 75 85 50 80 25 75 0 70 199 1 199 3 199 5 199 7 Brent Crude 199 9 200 1 200 3 200 5 200 7 200 9 201 1 Moving Average US Stocks in Days of Demand US Stocks in Days of Demand Brent Crude, $ per bbl. Meanwhile, US stocks are still high in terms of its demand; yet, prices were much lower in the past, when stocks were also much lower. It is hard to see why petroleum prices should remain at current high levels • • • • • “The cure for high prices is high prices”. This is as true for petroleum as it is for other markets. High crude oil prices are stimulating new discoveries and output, including from deep offshore fields and from unconventional sources such as tar sands. High crude oil prices are also hitting demand, both as users save energy and turn to cheaper alternatives, led by natural gas, but also by making a double dip recession much more likely. This is why I believe the petroleum prices must fall, and this will have a direct and negative impact on all vegetable oil prices, as a result of the price band. • • • www.LMC.co.uk Acknowledgements: EIA, IMF, Jacobsen, MPOB, National Biodiesel Board, Oil World, OPEC, Public Ledger, SEA, TNS, UFOP, US Commerce Dept., USDA, World Bank • • Thank You New York 1841 Broadway New York, NY 10023 USA Oxford (HQ) 14-16 George Street Oxford OX1 2AF UK Kuala Lumpur 03-19, Subang Empire SOHO Jalan SS16/1, Subang Jaya 47500 Selangor Darul Ehsan Malaysia T +1 (212) 586-2427 F +1 (212) 397-4756 [email protected] T +44 1865 791737 F +44 1865 791739 [email protected] T +603 5513 5573 F +603 5510 0092 [email protected] © LMC International, 2011 All rights reserved This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International. 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