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

3. 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.

4. Global Crude Oil Insight

5. 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.

6. 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.

7. 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.

8. Global And Indian Economy A Special Focus

9. 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%)

10. 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

11. 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

12. 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
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

13. 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

14. India fiscal account – Revenue receipts growth is seen declining
Sector
Actuals 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.

15. 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.

16. 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.

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

18. Global Veg-oil And Oilseeds Fundamental Dynamics

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

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

21. Malaysia – Indonesia 2018-19 Production
Acreage: 5.19 M Ha
Yield: 3.87 MT/Ha
Production: MMT
Malaysia production rising only by 3%, due to larger acreage of mature plantation.
Out of total Plantations, 89% is mature in
Global palm oil production pegged at MMT for , up 5% Y-o-Y
INDONESIA
Acreage: 9.88 M Ha
Yield: 3.94 MT/Ha
Production: 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

22. 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.

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

24. 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

25. 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 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.

26. 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.
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%.

27. 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

28. 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 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 million tons.
0 to +4
> +4

29. 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

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

31. Chinese Soy Demand – Need For Feed
Total soymeal consumption in 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)

32. 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 % of protein content – could potentially reduce soymeal demand by 21.5 – 22 MMT – Equivalent to 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

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

34. Rising Emphasis On Ghee In India Shift Towards Dairy Fats Could Limit Veg-oil Imports To Certain Extent
MMT MILK PRODUCTION
INDIA TOTAL GHEE 2.05 MMT
Organized Sector Ghee KTs
Ghee - A good option over vegetable fat !!!
Health consciousness leading to shift towards dairy fats.
Ghee prices fell nearly 26% to INR /Kg in past one year.
Butter prices nearly 27% to INR /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

35. 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.

36. 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.

37. 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 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
Argentina Soy oil 1M forward terminated the Primary wave-B down near the recent low of USD 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.

38. 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.

39. 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.