MAPPING THE MARKET THOUGHT of Currency, oil and oilseed complex BY MR. NAGARAJ MEDA, CMD

Review of Prior Price Forecasts: BMD CPO 3M Futures POC MALAYSIA: MAR’18 GLOBOIL DUBAI: APR’18 POTS MALAYSIA: AUG’18 TG Forecast: Since Mar’18, we have been maintaining outlook for prices to trade weak towards MYR 2200 or lower ahead of any recovery. Actual: Prices have been falling since Mar’18 level of MYR 2600 and are currently hovering around MYR 2150.

Global Crude Oil Insight

Decline in Iran and Venezuela output likely to be offset by the rise in Saudi, Russia and US production US sanctions against Iran after pulling out of the nuclear deal likely to adversely impact the Iran crude oil in the long term. Slump in Venezuela’s crude oil output amid economic constraints and US sanctions. OPEC general meeting on December 3rd 2018 likely to provide road map (increase in production quotas) for increase in output in next year. US crude oil production buoyed by flourishing Shale oil production amid firm trend in prices improving the profitability for producers is anticipated to keep up the growth momentum. For the coming year, OPEC production is expected to remain almost flat while the non-OPEC production growth is anticipated to increase to the tune of 1.8% YoY in 2019, driving global crude oil production higher.

Crude Oil Supply – Demand Balance Global crude oil demand expected witness steady growth in 2019 with trade disputes between US and China slowing down the demand growth rate. Holistically, with markets continuing the rebalancing trend with supply growth remaining in line with demand growth, crude oil prices are expected to trade on a mixed note in the medium term.

ICE BRENT CRUDE OIL PRICE OUTLOOK ICE Brent Crude Oil prices are consistently making higher highs and higher lows and are extending above USD 80. Prices are likely to extend further towards USD 87 and trade lower towards USD 70 in the coming 3-4 months. Subsequently a rally higher towards USD 90/91 in the months ahead.

Global And Indian Economy A Special Focus

Significant widening of merchandise trade deficit on account of higher crude import bill undermines the current account sentiments Sharp surge in merchandise trade deficit brought about by the increase in crude import bill caused worries that the current account deficit would fall beyond 2.5% of GDP for the year 2018 – 19, which resulted in sharp depreciation in Indian Rupee INDIA CURRENT ACCOUNT Attribute AMJ 2017 AMJ 2018 Merchandise -41.94 -45.75 Invisibles 26.96 29.92 Current Account Balance -14.98 -15.83 GDP 609.60 661.00 Current Account as % of GDP -2.5% -2.4% Source: RBI, All units in Billion USD unless mentioned otherwise Invisibles Services (70%) | Transfers (56%) | Investment Income (-26%) With in Services Software (93%) | Travel (11%) | Other services (-4%)

Expected decline in crude import volume to offset some of the increase in value moving forward; Software exports growth to remain buoyant For the first five months, crude import value is higher by USD 20 billion to USD 58.9 billion (Avg crude import basket price USD 72.8 vs 49.6). Exports value also increased by USD 6 billion to USD 20 billion. Moving forward, with expected decline in crude prices and volume (Iran sanctions and higher stock levels) trade deficit is likely to narrow. Year Crude import volume (MBpd) Annual Crude import volume (Mln barrels) Indian crude import basket price USD/bbl Total Crude import value (USD bln) Petroleum products import value (USD bln) 2016 – 17 4.189 1529 47.6 72.78 86.80 2017 – 18 4.317 1576 56.4 88.86 109.11 2018 – 19p 4.382 1599 72.5 115.93 135.00

Successive Rate Hikes From RBI May Aid Inflows Into Debt Markets Successive rate hikes from RBI shall aid debt markets sentiments which are mainly bogged down by the global developments in the recent month. FII outflows during the first quarter had already resulted in sharp fall in foreign currency reserves from around record highs of USD 426 billion to just above USD 400 billion. Despite the sharp fall in reserves and sharply higher import bill, at the current values the existing foreign currency reserves would cover our entire imports for about 9.3 months which is still higher than the 2013 crisis period. Keeping this in mind, any positive trigger in exports (Chinese exports being uncompetitive due to tariffs and Rupee depreciation) should help the current account deficit coming down in the coming months

CAD To Widen To Around 2.3% Of GDP And Pushing Bop Negative Indian Balance of Payments (USD Billion) Item 2016 – 17 2017 – 18 2018 – 19p Current Account Merchandise -112.44 -160.04 -195.00 Invisibles 97.15 111.32 128.00 Total Current Account Balance -15.30 -48.71 -67.00 GDP at Current Prices 2276 2599 2860 CAD as % of GDP -0.7% -1.9% -2.3% Capital Account FDI 35.61 30.29 42.00 FPI 7.61 22.11 2.00 Others -6.74 38.99 10.50 Total Capital Account Balance 36.48 91.39 54.50 Balance of Payments 21.55 43.57 -12.50 Primary Balance (CAD + FDI) 20.32 -18.43 -25.00 Overall, widening of CAD during the first quarter just as capital account witnessed heavy outflows had augmented the weak BoP scenario. As the primary balance continues to remain in negative levels, sentiments shall continue to hinge on FII flows. In this regard, 2019 being an election year and looking at the current political environment sentiments are likely to remain volatile. *Note: Others include net commercial borrowings, short term loans, banking capital, Rupee debt service and other capitals

Strong Growth Momentum Witnessed All Round Sector OND’17 JFM’18 AMJ’18 Growth Y-o-Y FY’18 Agri, Forestry & Fishing 5.67 4.76 4.20 3.1% 4.5% 5.3% Mining & Quarrying 0.89 1.15 1.01 1.4% 2.7% 0.1% Manufacturing 5.27 5.94 5.69 8.5% 9.1% 13.5% Electricity, Gas, Water Supply & Other Utilities 0.64 0.65 0.71 6.1% 7.7% 7.3% Construction 2.37 2.41 2.49 6.6% 11.5% 8.7% Trade, Hotels, Transport, Communication & Broadcasting 5.65 6.37 5.99 6.8% 6.7% Financial, Real Estate & Professional Services 5.58 5.56 7.61 6.9% 5.0% 6.5% Public Admin, Defense & Other Services 4.01 4.16 3.92 13.3% 9.9% GVA 30.08 31.01 31.63 7.6% 8.0% Net Taxes 2.35 3.76 2.11 11.6% 9.3% 11.7% GDP 32.43 34.77 33.74 7.0% 8.2% Source: MOSPI, Values at basic prices, 2011 – 12 prices, All units in lakh crore unless mentioned otherwise

India fiscal account – Revenue receipts growth is seen declining Sector 2017-18 Actuals 2018-19 BE Apr – July 17 18 Growth Apr - July 18 as % of BE Revenue Receipts 14.25 17.26 2.91 3.36 15.4% 19.5% Non-debt Capital Receipts 1.16 0.92 0.13 0.14 9.8% 14.9% Total Receipts 15.51 18.18 3.04 3.49 15.1% 19.2% Revenue Expenditure 18.79 21.42 7.13 7.78 9.1% 36.3% Capital Expenditure 2.63 3.00 0.95 1.11 17.0% 37.1% Total Expenditure 21.43 24.42 8.08 8.90 10.1% 36.4% Fiscal Deficit 5.92 6.24 -5.05 -5.40 7.0% 86.5% Source: CGA, All units in lakh crore unless mentioned otherwise. BE= Budget Estimate, RE= Revises Estimate GST collections in the month of August were reported to have dropped to INR 93,960 crore, lowest this fiscal, due to the lowering of taxes towards the end of July. Further, Kerala floods also led to delay in tax filings in the state. Fiscal deficit for April to July was reported at 86.5% of the budget estimate. Marginal decline in growth of the revenue receipts may weigh on sentiments in the very near term.

Emerging economies’ currency market developments EM country Nominal GDP 2017 (USD Billion) Current Account Balance 2017 (USD Billion) Current Account Balance as % of GDP 2017 Inflation (current) Interest Rates (current) China 12015 165 1.4% 2.3% 4.4% India 2611 -51 -2.0% 3.7% 6.5% Brazil 2055 -10 -0.5% 4.2% Russia 1527 40 2.6% 3.1% 7.3% Mexico 1149 -19 -1.6% 4.9% 7.8% Indonesia 1015 -17 -1.7% 3.2% 5.5% Turkey 849 -47 -5.5% 17.9% 24.0% Argentina 638 -31 -4.8% 34.4% 60.0% Poland 525 0.0% 2.0% 1.5% Thailand 455 49 10.8% 1.6% Turkish Lira fell by as high as 90% this year compared to 2017 year end levels against the US Dollar on account of widened CAD. Also, President Erdogan’s calls for lower interest rates despite inflation running close to 18% added pressure on the Currency. Further, ongoing diplomatic dispute between Turkey and the U.S. which resulted in sanctions being slapped on each other has also intensified Turkey’s economic woes. The sharp depreciation in the currency has augmented the worries that there could be bond defaults as Turkey has significantly higher dollar denominated debt compared to its emerging market peers. This has led to concern of contagion effect on emerging markets which had earlier attracted significantly higher inflows into debt markets during the QE period. However, countries such as China and India do not have much of dollar denominated debt.

USD Dollar Index & EURUSD Spot Price Outlook Dollar Index (.DXY) has entered a downside correction upon testing 97 recently. Within this correction a test of 92 is likely in the coming 2-3 months ahead of resumption of the uptrend above 97 in the medium term. EURUSD spot pair is likely to hold above 1.15 on any weakness and recover towards 1.21 in the coming 2-3 months ahead of turning weak towards USD 1.12 and lower in the medium term.

USDINR Outlook USDINR Spot pair is likely to hold above 70.50 on initial appreciation and depreciate towards INR 74.50 in the coming 2 to 3 months ahead of appreciating towards INR 70.50 in the coming 5 to 6 months.

Global Veg-oil And Oilseeds Fundamental Dynamics

Global Supply Veg-oils and Oilseeds Europe Ukraine – Russia Canada 2018-19 Canola output 20.1MMT, down 1% Y/Y Canola oil output down 2% Y/Y @ 3.9 MMT USA Soybean production 2018-19 up 5% Y/Y Crush up 9% Y/Y Soy oil end-stocks @ 1.83MMT vs 1.24MMT China 18-19 Total oilseed and soybean output change marginally Y/Y at 60.45 MMT & 14.2 MMT respectively India Soybean 2018-19 output up 15% Y/Y Total oilseed production in 2018-19 up 6% Y-o-Y Brazil Record soybean output @ 118.5 MMT for 17-18 Exports up 21% Y/Y Export to China 58MMT Europe Rapeseed 18-19 output @19.6MMT, down 11% Rape oil output 18-19 down 7% Y/Y @9.1 MMT Ukraine – Russia Ukraine 18-19 Sunseed output up 15% @15MMT Russia 18-19 Sunseed output down 11% - 10.3 MMT Malaysia – Indonesia 2017-18 Malaysia output @ 19.55 MMT, up 4% Y/Y 2017-18 Indonesia output @ 37.04 MMT up 13% Y/Y Argentina Soybean production 2017-18 37% down Y/Y Crush 9% down Y/Y Soy oil 17-18 end-stocks down 13% Y/Y @ 0.28 19

Stable Import Demand For 2018-19 Global Veg-oils Key Importers Demand USA China Middle East Europe Stable Import Demand For 2018-19 Import Demand in MMT India 20

Malaysia – Indonesia 2018-19 Production Acreage: 5.19 M Ha Yield: 3.87 MT/Ha Production: 20.09 MMT Malaysia production rising only by 3%, due to larger acreage of mature plantation. Out of total Plantations, 89% is mature in 17-18. Global palm oil production pegged at 69.85 MMT for 2018-19, up 5% Y-o-Y INDONESIA Acreage: 9.88 M Ha Yield: 3.94 MT/Ha Production: 38.91 MMT Indonesia palm oil output estimated to rise 5% Y-o-Y, mainly due to improving yield. Out of total plantation, 77% is mature in 17-18.

Malaysia Regional Production Better OER rate moderately compensates for lower per-day production pace at P. Malaysia and Sabah. P. Malaysia (53%) Sabah (26%) Sarawak (21%) Oil Extraction Rate Oct’17-Sep’18 P. Malaysia 19.6% vs 19.4% LY Sarawak 19.8% vs 20.1% LY Sabah 20.7% vs 20.5% LY Per-Day-Production lagging behind last year & 3-year average at more than 3/4th of Malaysia.

Indonesia Regional Production Sumatra (68%) Kalimantan (28%) Favourable rains during late 2017 aid 2018 palm oil production at Sumatra.

Forecasting OND’18 Production And Stocks MALAYSIA PROJECTIONS (in MMT) OND’18 JFM’19 PRODUCTION 5.39 4.53 EXPORTS 4.31 4.16 END-STOCKS 2.91 2.52 INDONESIA PROJECTIONS (in MMT) OND’18 JFM’19 PRODUCTION 11.31 9.14 EXPORTS 7.82 6.58 END-STOCKS 4.42 4.10

Breaking Down Europe Palm Oil Demand Only 30% of palm oil is consumed directly as food. Biodiesel and industrial demand contribute 70% palm oil disappearance. Palm oil demand for food use is diminishing over past few years on rising health consciousness, emphasis on more healthier alternatives and concerns over esters’ carcinogenic effects. Steadily improving FAME production capacity utilization over the years to keep palm oil demand for feedstock healthy. EU palm oil import demand for 2018-19 projected at 6.94 MMT vs 6.61 MMT LY. Industrial and biodiesel demand for palm oil 4.78 MMT vs 4.55 MMT LT. Palm oil food demand projected at 2.05 MMT – plunging 4% Y-o-Y.

Assessing Chinese Palm Oil Appetite Speciality fats contribute to around 35% of the total Chinese palm oil consumption. With increasing population, palm oil demand from this sector is likely to stay stable. 2018-19 Palm oil import demand projected up around 5% Y-o-Y. Over 6-year period, consumption for Speciality fats is growing at CAGR 1.5%, while Fried food consumption is rising at CAGR 4.4%.

Shining Biodiesel Sector Sep’17-Sep’18 Sep’17-Sep’18 Crude Oil Price Up 60% Key Veg-oil Prices down around 20-25% Global biodiesel margins have been improving past one year – benefited from higher crude oil price and weak veg-oil prices. Aggressive biodiesel blending into fuels across major countries can ease the pressure of veg-oils supply glut. B5-B10 B10-B12 (Equivalent) B10-B20 B10 B10-B12

State Production Share Bumper US Soybean Production Healthy Yields Across Major Producing States – Drought related Loss In Minor States WA OR CA MT ID NV AZ UT WY CO NM TX OK (30) KS (40) NE (60) SD (49) ND (34) MN (48) IA (62) MO (45) AR (50) LA MS (53) AL GA FL SC TN (49) NC (38) IL (51) WI MI (47) OH (58) IN KY (55) WV VA (42) PA NY ME VT NH NJ DE MD MA CT RI Yield Change State Production Share < -3 8% -3 to 0 0 to +4 36% > +4 45% US 2018-19 SOYBEAN Yield Y-o-Y Change Bushel Per Acre < -3 (00) – State Yield -3 to -1 Weather conditions have remained mostly favourable this season, despite moderate drought like conditions during Jul-Aug across >10% US region. Overall, US Soybean production is pegged around 4.64 Bln Bushels or 125.5 million tons. 0 to +4 > +4

Record US Soybean Crush Abundant Production Of Meal and Oil Predominant Argentina markets GLOBAL SOYMEAL EXPORTS US 17/18 record crushing pace allowed healthy production of soybean oil and soybean meal. US gained share in meal exports: 20% vs 15% last year 5% of Global soymeal share = 3.2MMT = 7% US production US ramped up 17/18 biodiesel production, with higher amount of soyoil used in feedstock 17/18 Biodiesel production – 6.6 MMT vs 6.0 MMT LY 17/18 Soyoil as feedstock – 3.13 MMT vs 2.81 MMT LY

Exporter turning Net-Importer Tracking Soy-Complex Exports Brazil Benefitted From Chinese Tariffs – Argentina Needed Imports Due To Lower Crop Exporter turning Net-Importer

Chinese Soy Demand – Need For Feed Total soymeal consumption in 2017-18 estimated 72.7MMT Around 72% soymeal demand is from pork production at China. Feed formula – 20% of Soymeal equivalent protein content Soybean Demand Rationing – A Potential Solution Model-1 – A Low protein meal Model-2 – Substituting the demand Reduce an equivalent of 27 – 27.5 MMT of soybean import demand. (3.7% protein = 10 MMT Soymeal equivalent demand)

Addressing China’s Soymeal Demand Targeting Lower Imports Of Soybean Ahead MODEL-1 MODEL-2 LOW PROTEIN FEED FORMULA Chinese authorities have been lately promoting low-protein formula. A standard or currently followed feed formula requires 20% protein content. Adopting a low-protein formula – with only 12- 13% of protein content – could potentially reduce soymeal demand by 21.5 – 22 MMT – Equivalent to 27-27.5 MMT of soybean demand. A low-protein formula would allow China soybean imports from US to drop down to insignificant levels. SUBSTITUTING THE DEMAND Partly reducing protein content and partly replacing soymeal with alternative meals. Lowering the protein content by 5% - 5.5% could lower soymeal demand by around 15 MMT – in turn lowering soybean import demand by 19 MMT. This is possible with replacement of around 5-6 MMT of soymeal with alternatives such as rape meal, sun meal, cottonseed meal and palm kernel meal. Sources for alternatives 1-2 MMT of Rape meal from Canada, EU and India. 1 – 1.5 MMT of cottonseed meal from India, Turkey, Argentina and Sub-Saharan Africa 1 MMT of Sun meal from Ukraine and EU

India Oilseeds And Veg-oil Basket 0.5 MMT up Y-o-Y India total oilseed production for 2018-19 (Kharif and Rabi combined) is projected to rise 7% Y-o-Y. With a steady rise in consumption (@4% Y-o-Y), we project imports to rise by nearly 1MMT to around 15.77 MMT for 2018-19.

Rising Emphasis On Ghee In India Shift Towards Dairy Fats Could Limit Veg-oil Imports To Certain Extent 166.24 MMT MILK PRODUCTION INDIA TOTAL GHEE 2.05 MMT Organized Sector Ghee 546.1 KTs Ghee - A good option over vegetable fat !!! Health consciousness leading to shift towards dairy fats. Ghee prices fell nearly 26% to INR 310-320/Kg in past one year. Butter prices nearly 27% to INR 230-240/Kg in past one year. DAIRY FAT PRICE = 4 X (VEGETABLE FAT PRICE) Vegetable fat based products preferred in confectionary, bakery and Ice cream Industry. Dairy fat preferred over vegetable fat for premium products in above industry

BMD CPO 3M Futures (MYR/MT) Preferred Elliott Wave Count According to Elliott wave Analysis, prices are in a verge of completion of Primary wave-E of a triangle, which is unfolding into a Double Combination in Intermediate degree waves. BMD CPO 3M Futures prices are likely to extend its weakness to place a significant bottom in the region of MYR 2100/2050, and recovers higher for the medium-term towards MYR 2450/2500 in the coming 4 to 6 months.

CME Soybean Futures Elliott Wave Count CME Soymeal Futures Elliott Wave Count CME Soybean futures prices are likely to weaken further towards USc 780 in the coming couple of months ahead of a gradual recovery towards USc 900 in the coming 5 to 6 months. CME Soy-meal futures prices are likely to extend further lower towards USD 290/280 in the coming couple of months ahead of a gradual recovery back towards USD 330 and higher in in the coming 5 to 6 months.

CME Soy Oil Futures Elliott Wave Count Argentina Soy Oil 1M Fwd Price Outlook CME Soy oil 1M futures prices according to Elliott wave analysis, prices have terminated the Primary wave-B down near the recent low of USc 26.88 and currently unfolding into a fresh impulse. Hence, prices are likely to recover towards USc 31.3/31.80 in the coming 4 to 6 months with any weakness holding above the support of USc 27.60. Argentina Soy oil 1M forward terminated the Primary wave-B down near the recent low of USD 615.53 and currently unfolding into a fresh impulse. Hence, prices are likely to recover towards USD 700/720 in the coming 4 to 6 months with any weakness holding above the recent low of USD 620.

NCDEX Soybean Futures: Price Direction NCDEX Soy Oil Futures: Price Direction NCDEX Soybean futures prices are likely to extend further lower towards INR 3050 and witness a gradual recovery towards INR 3550 in the coming 5 to 6 months. NCDEX Ref. Soy oil prices are likely to place a bottom near INR 720 and drift higher towards INR 780 in the coming 4 to 6 months.

MCX CPO Futures: Price Direction MCX CPO Futures prices are likely to place a bottom near INR 575/580 and drift higher towards INR 630 in the coming 4 to 6 months.