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'000 tons
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Malaysia CPO production is expected to fall 33% from
Oct peak
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2014
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Mother Nature dictates again
It is the same reason every end year: holiday-makers shy away from beach resorts in
many South-East Asia’s beach resorts during Nov – Feb period given discouragingly
heavy rainfalls. And it is the same heavy rainfall that also discourages palm oil
production in key producing countries such as Indonesia and Malaysia (accounts for
86% of global supply), which typically, translate into a year-end rally in crude palm oil.
2011
Structured Products
Highlights
 We are approaching the end of the year, where high rainfalls discourage both
beach holiday-goers and palm oil production in South East Asia.
 Seasonally high rainfalls from Nov – Feb traditionally lower palm oil output in
Indonesia and Malaysia. Translating this into price should mean some upside
bias till early next year.
 Aside from seasonal factors, as we approach the end of 2014, we recognise
that the dynamics in 2015 may present itself in a different light versus what we
saw this year.
2010
Corporate FX &
Wednesday, November 19, 2014
2009
com
Commodities Research: CPO
prisi
ng
Treasury Advisory
The Coming Monsoon
MY CPO Production ('000 tons)
2015 Projected Production
Source: Bloomberg, MPOB, OCBC Bank
If it’s of any consolation to palm oil bulls, this year-end should be of little difference
from past-years: we look for crude palm oil (CPO) futures to take a step up to end
MYR2,350/MT at year-end as CPO production slows. Specifically, the Malaysian Palm
Oil Board (MPOB) estimated that its domestic palm oil stocks could drop 14.0% to 1.8
million tons by the end of 2014, from Oct’s 2.2 million tons. Indonesia’s palm oil
inventories on the other hand, is estimated to have fallen 12% from August to
September’s 2.2 million metric tons, according to Bloomberg estimates, as production
19 November 2014
Commodities Research
tapered on dry weather in 2014, and the incoming wet season would mean lower production for the rest
of this year.
Biodiesel in the spotlight again
But as we move on from 2014 to usher in 2015, we recognise that the palm oil dynamics may change.
Topping the list is the world’s increasing biofuel consumption, as well as Indonesia and Malaysia’s
promise to ramp up biodiesel demand in their respective economies. In fact, according to the
Indonesian Palm Oil Association (GAPKI), the extent of the increase in biofuel demand in 2015 (up to
2.8 million tonnes from 2014’s 1.8 mllion tonnes) will reduce 2015 export quantity to 19.5 million tonnes
(down from 2014’s 20.0 million tonnes).
Global biodiesel demand
250000
million litres
200000
150000
100000
50000
2005
2006
2007
2008
2009
2010
2011
2012
2013*
2014*
2015*
2016*
2017*
2018*
2019*
2020*
2021*
2022*
2023*
0
Ethanol
Biodiesel
Source: OECD-FAO Agricultural Outlook 2014 – 2023
*Indicates forecasted demand
Meanwhile, the proposed biodiesel B7 programme in Malaysia, specifically involving blending of 7%
palm biodiesel with 93% petroleum diesel, will be implemented gradually, starting with Peninsular
Malaysia in November, and Sabah and Sarawak in December. The B7 programme is estimated to
consume an additional 575,000 tonnes of biodiesel, adding to other B7 programmes worldwide
including EU, Thailand and Indonesia, while Colombia implemented their own B8 and B10 programme.
Mil tons
2014
2015
Net Chg
Indonesia
Production
Export
29.5
20.0
31.5
19.5
2.0
-0.5
Malaysia
Production
Export
20.2
17.9
20.5
18.2
0.3
0.3
Source: GAPKI, MPOB, OCBC
Revisiting El Niño’s probability
Another factor that may lift crude palm oil further would be the re-emergence of El Niño risk in 2015. If
we recall the El Niño concern back in May 2014, weather forecasters were predicting a 70% probability
of a severe El Niño symptom this year, and an absence of such may mean a postponement of it to
2015, given the 4 – 6 years cycle between each severe El Niño symptom.
Treasury & Strategy Research
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19 November 2014
Commodities Research
According to our statistical models, we did find that agricultural prices increase on El Niño symptoms,
as adverse weather conditions get translated into poorer harvest conditions. However, price behavior
varies across commodities: in regards to palm oil, prices typically have 9 – 12 months lag, while wheat
prices have been found to be sensitive to weather changes. In correlation studies, palm oil prices enjoy
the highest correlation with the Oceanic Niño Index.
As such, given the likelihood of an El Niño phenomenon in the coming year, we recognise that this
weather wildcard will not only inject upside risk for palm oil prices, but also other agricultural
commodities, including soybean, which is a close competitor for palm oil.
Agricultural Prices and Weather Extremities
3
El Nino
2.5
5 years
(Agricultural Prices lag approx 9 - 12 months)
6 years
2
125%
5 years
3 years Nov 09 - ?
Strong
4 years
1.5
4 years
Moderate
1
Weak
0.5
65%
35%
5%
0
-0.5
La Nina
95%
-25%
Weak
-1
-1.5
Moderate
-55%
Strong
-85%
-2
Oceanic Nino Index
Apr-13
Sep-11
Feb-10
Jul-08
Dec-06
Oct-03
May-05
Mar-02
Jan-99
Aug-00
Jun-97
Nov-95
Apr-94
Sep-92
Jul-89
Feb-91
Dec-87
May-86
Oct-84
Mar-83
Jan-80
-115%
Aug-81
-2.5
Agri Prices yoy (OCBC Calculation)
Source: National Oceanic and Atmosphere Administraion (NOAA), Bloomberg, OCBC Bank1
Watch out for demand fluctuations in 2015
According to the MPOB, export demand for palm oil is expected to increase to 18.2 million tonnes in
2015, from 17.9 million tonnes in 2014, on the back of strong demand from India and China. In this, we
recognise that 2015 is likely to offer a rosier global economic backdrop, and with it, offer healthy
demand outlook for palm oil. The growth concerns in key export palm oil destinations, specifically India,
EU and China, are present at this juncture.
Firstly, India, being Malaysia’s top palm oil destination, may likely raise import taxes on refined
vegetable oils to protect local producers. Currently, India levies a 2.5% tax on crude vegetable oils and
10% tax on refined vegetable oils, and the taxes may go as high as 10% on crude vegetable oils and
25% on refined vegetable oils, according to the petition by the Solvent Extractors Association of India
(SEA). Still, while we do not think that tax hikes may be so severe, there is possibility for it to occur as
recent low inflation print at 5.5% in Oct 2014 versus its 11.1% peak in Nov 2013 suggest the economy’s
ability to stomach higher food prices.
Secondly, EU, which is the second largest export destination for Malaysia, still faces economic growth
challenges into 2015. According to the Eurozone Commission, the EU economy is underperforming
compared with other post-crisis recoveries, and subsequently downgraded its economic outlook for
1
Note: Agricultural prices is calculated by a weighted average of wheat, soybean, corn, rice, crude palm oil and sugar
Treasury & Strategy Research
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Commodities Research
2015. Specifically, the growth forecasts for Germany (1.1%) and France (0.7%), being the two largest
Eurozone economies, saw the sharpest downgrade. On this, the likely weakening of the Euro, amid a
less-than-rosier growth outlook, may eventually discourage consumption demand, palm oil included.
Lastly, China, as the third biggest export destination, has collectively seen a 22.8% contraction in palm
oil demand in the first 10 months of 2014 over the same period last year. Many factors come into play in
this contraction print, as China currently undergoes the shadow-banking curbs, corruption clamping,
and the overall risk-adverse environment in the Asian dragon. A clear example on how the current
reforms affected palm oil demand may be seen from the difficulty to secure credit by China’s secondlargest palm oil importer, Shandong Changhua Food Group, given that banks had halted loan approvals
and affected its import capabilities. Meanwhile, Chinese palm oil inventories climbed to near historical
highs at roughly 1 million tonnes in 3Q14, thus discouraging import demand. We perceive a sustained
weak Chinese import demand for palm oil, given the high inventories, and sustained reform efforts in
2015.
Benin
Vietnam
Japan
Philippines
United States
Pakistan
Netherlands
EU
India
China
Malaysia top ten CPO destination
(Oct 2014)
16%
14%
12%
10%
8%
6%
4%
2%
0%
Source: MPOB, OCBC
The balance between demand and Mother Nature
To be sure, growth concerns in key palm oil consumers may limit import growth in 2015. However, we
believe that healthy biofuel demand, both globally, and new initiatives by Indonesia and Malaysia, may
counteract low palm oil import demand as a vegetable oil. Also, let’s not forget the likelihood of an El
Niño symptom in 2015, and its effect on agricultural prices. Lastly, should growth trends in key import
countries turn positive, palm oil demand may eventually pick up in 2015, in line with Malaysia’s
estimates. As such, with the seasonally low production from Nov – Feb 2015, palm oil looks to end a tat
higher at MYR2,350/MT in 2014. In 2015, the pick-up in biofuel and weather wildcards should inject
further upside to MYR2,600/MT.
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Commodities Research
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