1. ©LMC International, 2015 1 26/10/2015 Conference Proceedings: Partnered by – Reshamwala Shipbrokers World vegetable oils markets today and tomorrow: “the biofuel tail wags the dog” Presentation by : Dr James Fry Globoil India 2015

2. ©LMC International, 2015 2 26/10/2015 World vegetable oils markets today and tomorrow: “the biofuel tail wags the dog” Presentation to Globoil 2015, by Dr James Fry, Chairman, LMC International www.LMC.co.uk

3. ©LMC International, 2015 3 26/10/2015 The key themes in today’s palm oil market I will start by reviewing the current state of the price band linking vegetable oil and petroleum prices. I review the special role of mandated and discretionary demand, for biodiesel in defending the price band. I then turn to the new factors, notably the response by producers to expensive fertiliser and Indonesia’s new export levies, that are affecting the market today, on top of the usual cycle in palm oil output growth. I will mention the weather, of course, and end with the implications of all these influences for the price outlook.

4. ©LMC International, 2015 4 26/10/2015 The price band is the best place to begin

5. ©LMC International, 2015 5 26/10/2015 The price band, with Brent at the floor to the range for EU oils prices since 2007, remains as valid as ever, with Brent leading oils prices down this year

6. ©LMC International, 2015 6 26/10/2015 Malaysian stocks are the key to the EU CPO-Brent price differential per tonne

7. ©LMC International, 2015 7 26/10/2015 The EU CPO premium over Brent is negatively correlated with stocks. High stocks imply a low premium, as now, and low stocks a high premium.

8. ©LMC International, 2015 8 26/10/2015 CPO prices remain linked to crude oil, fluctuating within a price band whose floor is set by Brent. It is evident that palm oil prices are still led within a price band by prices in the world petroleum market. There is also compelling evidence that the most important single factor determining where EU CPO prices stand in relation to crude oil is MPOB stocks. MPOB stocks play this role because they are the only reliable stock data available to the market and are published within two weeks of the end of the month. A major question to examine now is whether the market is reacting to stocks today or is starting to look ahead.

9. ©LMC International, 2015 9 26/10/2015 The significance of discretionary price-sensitive biodiesel demand in Indonesia and Argentina

10. ©LMC International, 2015 10 26/10/2015 Indonesian biodiesel sales fluctuate. With EU anti- dumping duties, exports now rely on free market price-competitive sales which are not viable today.

11. ©LMC International, 2015 11 26/10/2015 Discretionary biodiesel use emerges when it competes as a fuel. Indonesian exports to new price-sensitive markets, led by China, prove this.

12. ©LMC International, 2015 12 26/10/2015 Argentine local demand has crept up to a million tonnes, while exports fluctuate with policy shifts in the US and EU and with price-sensitive buying.

13. ©LMC International, 2015 13 26/10/2015 Argentina is similar to Indonesia in the price- sensitivity of its biodiesel exports. (Spikes come just before policy changes in the EU and US.)

14. ©LMC International, 2015 14 26/10/2015 Discretionary, price-sensitive, biofuel demand has been crucial in absorbing surplus oils stocks Many countries do not fill their mandates because their governments do not take proper action to enforce them. Among palm producers with mandates, Colombia and Thailand meet high targets. Malaysia has slowly lifted its mandate. Indonesia has not met its mandates so far. Argentina has done better with its soy biodiesel mandate. In both Indonesia and Argentina, we have seen price- sensitive demand for biodiesel (for export and locally) emerge when it become price-competitive as diesel fuel. In 2014, well over three million tonnes of biodiesel in all went to discretionary uses from Indonesia and Argentina.

15. ©LMC International, 2015 15 26/10/2015 What about price competition between palm oil and other leading vegetable oils?

16. ©LMC International, 2015 16 26/10/2015 EU spreads between palm oil and other vegetable oil prices rose over the past four months, helping CPO to lift its market share in countries like India.

17. ©LMC International, 2015 17 26/10/2015 India, as the biggest importer of vegetable oils, is crucial to the market balance by adapting imports to the landed discount of CPO on soybean oil.

18. ©LMC International, 2015 18 26/10/2015 Competition between palm oil and other oils For a long period, which lasted almost two years and extended until July this year, the differentials for soybean and rapeseed oils over CPO were quite low by historical standards. They jumped a great deal in subsequent weeks, as CPO prices fell (until the last few days) while those of other oils remained steady. If these wider differentials were maintained (which I don’t expect), palm oil should be able to regain sales, notably here in India, where it lost market share to soybean and sunflower oils in 2013/14 and 2014/15. (Here I must thank our hosts the Solvent Extractors’ Association for the superb job it does issuing prompt reliable statistics, like the MPOB. Thank you.)

19. ©LMC International, 2015 19 26/10/2015 Looking ahead: factors to take into account

20. ©LMC International, 2015 20 26/10/2015 Discretionary biodiesel: Indonesian CPO came very close to Brent once in 2015, but then bounced back. Discretionary biodiesel is not now viable.

21. ©LMC International, 2015 21 26/10/2015 Fertiliser is a crucial input. Here I plot not the price of fertilisers, but the fertiliser-CPO price ratio. It is now at its highest level since 2008, hitting its use.

22. ©LMC International, 2015 22 26/10/2015 The impact of lower fertiliser use in response to high fertiliser prices may be seen in the year-on- year CPO output growth in 2010 in Malaysia.

23. ©LMC International, 2015 23 26/10/2015 Output: Year-on-year quarterly growth in CPO output (i.e., Q2.2015 on Q2.2014) will slow on the back of lower fertiliser use and recent droughts.

24. ©LMC International, 2015 24 26/10/2015 Export levy: This shows how much PME can be funded (at $50 Brent = $460 gasoil) as FOB CPO prices rise using 60% of Indonesia’s export levy.

25. ©LMC International, 2015 25 26/10/2015 Influences on palm oil prices going into 2016 The failure of fertiliser prices to fall with CPO over the past year has reduced application rates. This will hit production in the usual slowdown in South East Asian output after November. So far, while there have been droughts in eastern South East Asian palm regions, it is impossible to blame them yet on a full El Niño, but these past droughts are already affecting production. Discretionary biodiesel sales are not viable at current prices, but if Indonesia’s levy fund subsidises local biodiesel, as was originally intended, its impact could be large.

26. ©LMC International, 2015 26 26/10/2015 If there is an El Niño: With A.H. Ling we forecast CPO output in our S.E. Asia quarterly report under different weather conditions. This is for Malaysia.

27. ©LMC International, 2015 27 26/10/2015 Wider factors behind vegetable oils prices Year-on-year CPO output growth is declining, even without a full El Niño which makes growth negative. For soybeans, crushing remains strong, with the US running well ahead of 2014 rates and China rebuilding its pig numbers. This will inevitably boost soy oil supply. Rapeseed oil output is down while sun oil output is flat. This implies a higher CPO premium over Brent in 2016 and a narrower spread between soy oil and CPO. The rise in the premium depends on the effectiveness of Indonesia’s new fund managing export levy revenues. Brent crude, the floor to oils prices, will not rise. In fact, I think it will fall a bit when Iran resumes crude exports.

28. ©LMC International, 2015 28 26/10/2015 Stocks: Projecting our diagram of stocks vs. the CPO premium over Brent, you can see why I expect the premium to turn upwards shortly.

29. ©LMC International, 2015 29 26/10/2015 Laurics: To many people’s surprise, there is a nice inverse relationship between the PKO premium over Brent and MPOB PKO stocks.

30. ©LMC International, 2015 30 26/10/2015 The price outlook in 2016 The FOB CPO price, even without an El Niño, should go above $600 during Q1.2016. This assumes that the Indonesian fund implements its subsidies in full. An El Niño would take prices well above $700 by mid-year, with world CPO output in 2016 below that in 2015. If Indonesia’s fund still pays out its subsidies against this tight backdrop for CPO, it is likely that soy oil, whose supplies will be supported by a high level of crushing for meal, would move to a discount on palm oil by mid-year. Among laurics, coconut oil will remain at a high spread over PKO, due to the high prices of short chain alcohols. PKO will see its premium over Brent rise as palm output slows, but the PKO-CPO spread should shrink by $50.

31. ©LMC International, 2015 31 26/10/2015 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, 2015 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 Singapore 16 Collyer Quay #21-00 Singapore 049318 Singapore Tel: +65 6818 9231 info@lmc-sg.com

32. ©LMC International, 2015 32 26/10/2015 New from LMC Oils Price View – a monthly report in PowerPoint LMC’s monthly price forecasting service presents:  Price forecasts six months ahead for each of the major vegetable oils, including the lauric oils, as well as refined palm products and also tallow. Supporting analysis that includes: Key price developments that month Insights from key global markets and sectors What you get: The LMC report – this is supplied as a PowerPoint presentation. Excel price model – that allows you to make your own price forecasts. Please contact Chen Lan at Lchen@Lmc.co.uk or +44 1865 791737 for more details.

33. ©LMC International, 2015 33 26/10/2015 Conference Proceedings: Partnered by – Reshamwala Shipbrokers