1. © 2016 LMC International. All rights reserved. www.lmc.co.uk Making sense of the vegetable oil market today Presentation by James Fry At Globoil, Goa, September 2016

2. © 2016 LMC International. All rights reserved. Globoil, September 2016 The obvious place to begin is the weather. Is there something special about this El Niño? Is palm oil output responding to El Niño in line with past experience? How much will world palm oil production fall this year and how much is it likely to rebound next year? Why didn’t prices go higher? The price band is part of the answer as the spread between vegetable oils and crude oil hit biofuel demand. The availability of other oils, including stock releases, is the other big factor. In different ways, Indonesian and Chinese governments have introduced price stabilisers into the oils market. I end with a discussion of the outlook for oils prices. Where to begin? 2

3. © 2016 LMC International. All rights reserved. Globoil, September 2016 The progress of the El Niño and its impact on palm oil production 3

4. © LMC International, 2016 Globoil 2016 4 16/11/2016 The 2015-16 El Niño closely followed the path seen in 1997-98. However, the ONI curve may be flattening, and so it is unclear whether La Niña is on the way.

5. © LMC International, 2016 Globoil 2016 5 16/11/2016 Malaysian quarterly year-on-year growth paths are similar in 1996-99 and since 2014, but growth lags a bit this time, reflecting the slower expansion in areas.

6. © LMC International, 2016 Globoil 2016 6 16/11/2016 Indonesia’s quarterly year-on-year growth path since 2014 is not very different from Malaysia’s in 1996- 99, but growth has been fairly consistently slower.

7. © LMC International, 2016 Globoil 2016 7 16/11/2016 Our forecasts using detailed regional analyses track Malaysia’s 1996-99 path fairly closely. They point to year-on-year growth in output by Oct-Dec this year.

8. © LMC International, 2016 Globoil 2016 8 16/11/2016 This plots year-on-year changes in CPO production in the main palm producers by half year. The 2017 H1 rebound will almost offset the 2016 H1 collapse.

9. © 2016 LMC International. All rights reserved. Globoil, September 2016 This El Niño has had a bigger impact than the last (1997- 1999) mega-El Niño. The year-on-year Indonesian and Malaysian growth rates are both tracking a similar shape to Malaysia in the 1990s, but with the 2014-2016 curves shifted down a bit. This lower rate of growth may simply reflect the slowdown in the expansion in oil palm areas. By the way, the uncertainties about what is happening in Indonesia are very important right now. My figures describe a 2.8 million tonne fall on 2015 in Jan-June (H1) while GAPKI implies a fall of only 1.1 million tonnes. My forecasts predict a year-on-year drop of 0.6 million in July-Sept (Q3) and a rise of 0.2 million in Oct-Dec (Q4). In H1.2017, world CPO output should grow 4 mn tonnes. 9 The impact of El Niño on CPO output

10. © 2016 LMC International. All rights reserved. Globoil, September 2016 The price band and palm biodiesel demand 10

11. © LMC International, 2016 Globoil 2016 11 16/11/2016 The price band is still there, but as happened back in 2010-2011, the spreads between the prices of vegetable oils and Brent crude are again very large.

12. © LMC International, 2016 Globoil 2016 12 16/11/2016 You can see that EU premia of vegetable oils over Brent are well above average, but they have been higher, as happened in both 2008 and 2010-2011.

13. © LMC International, 2016 Globoil 2016 13 16/11/2016 The EU CPO premium over Brent is set by MPOB stock levels, but fears of El Niño damage kept the premium high despite record stocks late last year.

14. © LMC International, 2016 Globoil 2016 14 16/11/2016 Equally crucial is Indonesia’s subsidised biodiesel use, which depends on the CPO-gasoil spread. At today’s prices, only 1.8 million tonnes a year can be funded.

15. © 2016 LMC International. All rights reserved. Globoil, September 2016 Very low palm oil stocks explain the high CPO premium over Brent. However, it is interesting to see that, whereas late last year with all-time peak stocks the market was looking ahead to El Niño, this time it is gripped by short term panic and is not looking ahead to life after El Niño. Till November, CPO output will grow on a seasonal basis, and by then the recovery from El Niño should be evident. Meanwhile, we are now seeing evidence of the reaction of subsidised biodiesel demand to high CPO-Brent spreads. Indonesia’s CPO Fund can only subsidise 1.8 mn tonnes at today’s prices, far below the volume needed for a B20 mandate. We also see cash-strapped governments delay the introduction of B10 mandates in Brazil and Malaysia. 15 Today's prices and the price band

16. © 2016 LMC International. All rights reserved. Globoil, September 2016 Competition for palm from other oils 16

17. © LMC International, 2016 Globoil 2016 17 16/11/2016 While palm oil prices have been pushing upwards, soft oils prices have been steadier, squeezing the spreads between soft oils and CPO in the EU.

18. © LMC International, 2016 Globoil 2016 18 16/11/2016 The big price influence in Jan-June was China’s sale of oil from State reserves. This, plus a high soy crush, capped local oils prices. Olein is now uncompetitive.

19. © LMC International, 2016 Globoil 2016 19 16/11/2016 Monthly crush for big soy and rapeseed exporters and importers (including China’s reserves sales) implies the growth in their oil supply is small vs CPO output swings

20. © 2016 LMC International. All rights reserved. Globoil, September 2016 Key factors in the next few months 20

21. © LMC International, 2016 Globoil 2016 21 16/11/2016 The first, and most important, influence on prices in the next few months is surely this diagram that you saw earlier, showing the palm recovery from El Niño.

22. © LMC International, 2016 Globoil 2016 22 16/11/2016 Another factor that will grow in more importance by year-end is the US biodiesel market. It is nearing a million tonnes/month including Argentine imports.

23. © LMC International, 2016 Globoil 2016 23 16/11/2016 Thanks to surging imports (in case the US moves to a producer’s from a blender’s credit), its biodiesel use will exceed the overall advanced biofuel mandate. ( This mandate combines biodiesel and sugar ethanol mandates. )

24. © 2016 LMC International. All rights reserved. Globoil, September 2016 CPO output will resume year-on-year growth, but we have the seasonal slowdown after November. So MPOB stocks will settle at 1.75-1.80 million tonnes in Oct-Dec, and will then fall back until they soar from Q2 onwards. We face the usual rumour mill about soybean and canola harvests, but Canada, US and Black Sea (sun) are all set for record crops. Soy crushing margins are low, putting meal demand and prices in the spotlight. Soy oil is being sustained by sales it is starting to take from CPO on price, but most of all by US biodiesel demand. These will slow in Q1 after a flurry to pick up the $1/gallon blender’s credit in case it vanishes; but the EU Court ruling against EU anti- dumping duties on biodiesel from Argentina and Indonesia holds out the prospect of resumed sales to that big market. 24 The outlook for palm and soybeans

25. © 2016 LMC International. All rights reserved. Globoil, September 2016 Winter biodiesel demand will underpin EU rapeseed oil prices, and widen their spread over soy oil. (Will China resume sales from its reserves at these prices?) Sun oil (with non-GM seeds) will fill gaps in the EU food market and its price will settle between soy and rapeseed oils. Brent crude is going nowhere, with another year of supply surpluses widely expected. So I have assumed $45/bbl. This means EU CPO will ease to around $700 in Nov-Dec ($650 FOB), move up briefly in Jan-Feb, and then fall to $600 ($550 FOB) as the year unfolds. EU soy oil will trade between $760 and $800 from Oct-Feb (Argentina FOB $680-$720) with EU sun oil between $800 and $820, and EU rapeseed oil between $820 and $850. 25 Softseeds and prices in the oils complex

26. © 2016 LMC International. All rights reserved. Globoil, September 2016 Thank you 26

27. © 2016 LMC International. All rights reserved. Globoil, September 2016 Singapore 16 Collyer Quay #21-00 Singapore 049318 Singapore T +65 6818 9231 info@lmc-sg.com 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. © LMC International, 2016 All rights reserved New York 1841 Broadway New York, NY 10023 USA T +1 (212) 586-2427 F +1 (212) 397-4756 info@lmc-ny.com Oxford 4 th Floor, Clarendon House 52 Cornmarket Street Oxford OX1 3HJ UK T +44 1865 791737 F +44 1865 791739 info@lmc.co.uk Kuala Lumpur B-03-19, Empire Soho Empire Subang Jalan SS16/1, SS16 47500 Subang Jaya Selangor Darul Ehsan Malaysia T +603 5611 9337 info@lmc-kl.com www.lmc.co.uk

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