price and supply-demand outlook in the vegetable oil market today by dr james fry, lmc international...
Post on 19-Dec-2015
213 views
TRANSCRIPT
Price and Supply-Demand Outlook in the Vegetable Oil Market Today
by Dr James Fry, LMC Internationalto PALMEX Thailand, September, 2011
www.LMC.co.uk
• 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.
Outline of my presentation today
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.
0
100
200
300
400
500
600
700
800
900
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
EU P
rice
s, U
S$ p
er tonne
Brent Crude Palm Oil Soy Oil Rapeseed Oil
Palm oil was actually less expensive than crude oil
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.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
EU P
rice
s, U
S$ p
er tonne
Brent Crude Palm Oil Soy Oil 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.
0
400
800
1,200
1,600
2,000
2,400
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
EU P
rice
s, U
S$ p
er tonne
Brent Crude Palm Oil PKO 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.
-200
-100
0
100
200
300
400
500
600
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Pre
miu
m o
ver die
sel,
US$
per
tonne
CPO SBO CPO Average SBO Average
• 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.
The emergence of a price band is the major revolution in vegetable oil pricing
Biodiesel demand has changed the balance within the oil and meal sectors
Biofuels have pulled demand growth rates for oil ahead of those for protein meal. This boosts the reliance upon high oil-content crops.
0
50
100
150
200
250
300
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Mea
l in S
oym
eal E
quiv
alen
t (m
illion tonnes
)
0
25
50
75
100
125
150
Oil (M
illion To
nnes)
Meals, Soymeal Equivalent Oils
• 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.
Until ten years ago, the growth rates in the demand for oils and meals were similar
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.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Oil Palm Rapeseed Sunflower Soybean
Oil y
ield
, tonnes
per
hec
tare
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.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oil Palm Rapeseed Sunflower Soybean
Mea
l conte
nt of c
rop o
utp
ut
Palm oil has captured market share thanks to rapid output growth. It has overtaken soybean oil to become the world’s most important oil.
0
10
20
30
40
50
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Million T
onnes
Palm Oil Palm Kernel Oil Rapeseed Oil
Soybean Oil Sunflower Oil
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%
• 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.
The new global balance of consumption growth plays to oil palm’s strengths
Biodiesel demand is very sensitive to the biodiesel premium over diesel
Biodiesel use in Germany and the US, reacts quickly to swings in the biodiesel premium over diesel. This links biodiesel to diesel prices.
180
220
260
300
340
380
420
460
500
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Month
ly B
iodie
sel D
eman
d, '00
0 to
nnes
-100
-50
0
50
100
150
200
250
300
Prem
ium
, US$ p
er tonne
US + German Demand Average US & German Biodiesel Premium
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.
40
50
60
70
80
90
100
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
UK D
eman
d ('
000
tonnes
)
-50
50
150
250
350
450
550
Bio
diesel P
remiu
m o
ver Diesel (U
S$/tonne)
Demand Biodiesel Premium
• 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.
Biodiesel demand has been affected by high price differentials earlier this year.
Understanding vegetable oil prices
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.
The main factors behind vegetable oil price levels today now include biofuels
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.
-2
-1
0
1
2
3
4
5
6
7
8
2006/07-2007/082007/08-2008/09 2008/09-2009/102009/10-2010/112010/11-2011/12
Oil O
utp
ut Gro
wth
, million tonnes
Soybeans Rapeseed Sunflower Palm Sum
High prices will slow 2011/12 world demand growth and cause it to lag behind output growth, after two years when demand exceeded output.
0
1
2
3
4
5
6
7
8
9
2006/07-2007/08
2007/08-2008/09
2008/09-2009/10
2009/10-2010/11
2010/11-2011/12
Oil O
utp
ut an
d D
eman
d G
row
th, m
illion tonnes
Demand Output
Oil output will be sustained in 2011 by cutting oilseed stocks. Biofuel price sensitivity will be crucial to balancing world oil supply vs. demand.
0
2
4
6
8
10
12
2006/07-2007/08
2007/08-2008/09
2008/09-2009/10
2009/10-2010/11
2010/11-2011/12
Oil O
utp
ut Gro
wth
, million tonnes
Oil in Seed 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.
Seed stocks provide a cushion for oil output
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.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1997 1999 2001 2003 2005 2007 2009 2011
Movi
ng a
ve. y
r-on-y
r M
alay
sia
outp
ut ch
ange
.
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.
-100%
-50%
0%
50%
100%
150%
200%
1997 1999 2001 2003 2005 2007 2009 2011
Mov
ing
aver
age
year
-on-
year
out
put c
hang
e .
Malaysia Thailand
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.
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Q1.2009 Q3.2009 Q1.2010 Q3.2010 Q1.2011
Year
-on-
year
gro
wth
, %
Malaysia Indonesia Thailand 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.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Q1.2009 Q3.2009 Q1.2010 Q3.2010 Q1.2011
Yea
r-on-y
ear gro
wth
, %
Malaysia Indonesia Colombia
• 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 year-on-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.
We are near the peak of the current palm oil and palm kernel growth cycles.
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.
-800
-600
-400
-200
0
200
400
600
800
1,000
1,200
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Yea
r-on-Y
ear Price
Chan
ge,
M$/
tonne
-500
-250
0
250
500
750
Year-o
n-Y
ear Stock C
han
ge, '000 to
nnes
Price Change Stock Change
Since 2007 stock and price changes have tended to move together. Prices are still growing year-on-year despite the big increase in Malaysian stocks.
-2,000
-1,600
-1,200
-800
-400
0
400
800
1,200
1,600
2,000
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Yea
r-on-Y
ear Price
Chan
ge,
M$/
tonne
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
Year-o
n-Y
ear Stock C
han
ge, '000 m
t
Price Change Stock Change
• 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.
If stocks no longer determine CPO prices, we must look instead inside the price band
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 .
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
MPOB S
tock
s, m
illion tonnes
-200
-100
0
100
200
300
400
500
EU p
remiu
m o
ver diesel, $/to
nne
Stocks Premium of CPO over diesel
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.
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
MPOB S
tock
s, m
illion tonnes
-200
-100
0
100
200
300
400
500
EU P
remiu
m o
ver diesel, $/to
nne
Stocks Premium of CPO over diesel
In the background, competition between palm and soy oil in vital markets such as India keeps soy oil prices from moving too far above CPO.
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010
Cif T
ariff
-Pai
d C
PO/S
BO P
rice
Rat
io .
40%
50%
60%
70%
80%
90%
Palm
Oil %
of (P
alm +
Soy O
il) Imports
Duty-paid CPO Import Price as % of SBO CPO % of SBO+CPO Imports
This is why, with CPO’s premium now close to normal, the soy oil premium, which is already high, is not expected to rise much further.
-200
-100
0
100
200
300
400
500
600
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Pre
miu
m o
ver die
sel,
US$
per
tonne
CPO SBO CPO Average SBO Average
• 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., supply-demand 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.
The new world is different from the old one.We have to analyse the petroleum market as
well as supply-demand in vegetable oils.
What is the petroleum market doing?
Looking at short term oil supply, high prices are encouraging lots of drilling. This should boost output, especially when Libyan supplies return.
0
500
1,000
1,500
2,000
2,500
2005 Q3.2006 Q2.2007 Q1.2008 Q4.2008 Q3.2009 Q2.2010 Q1.2011
Num
ber
of r
igs fo
r oil
0
25
50
75
100
125
Bren
t Cru
de N
orth
Sea Oil, $/b
arrel
Number of Oil Rigs Brent Crude
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.
0
20
40
60
80
100
120
140
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Bre
nt Cru
de,
$ p
er b
bl.
15
16
17
18
19
20
21
22
Dem
and, m
illion b
arrels/day
Brent Crude Moving Average of US Demand, mn bbl/day
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.
0
25
50
75
100
125
150
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Bre
nt Cru
de,
$ p
er b
bl.
70
75
80
85
90
95
100
US Sto
cks in D
ays of D
eman
d
Brent Crude Moving Average US Stocks in Days of Demand
• “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.
It is hard to see why petroleum prices should remain at current high levels
• Thank You
• 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
New York1841 Broadway
New York, NY 10023USA
T +1 (212) 586-2427F +1 (212) 397-4756
Oxford (HQ)14-16 George Street
Oxford OX1 2AFUK
T +44 1865 791737F +44 1865 791739
Kuala Lumpur03-19, Subang Empire SOHO
Jalan SS16/1, Subang Jaya 47500Selangor Darul Ehsan
Malaysia
T +603 5513 5573F +603 5510 [email protected]
© LMC International, 2011All 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.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk.
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.