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22 September 2015
IVY NG, CFA Regional Head of PlantaAons [email protected] 603-‐22619073
Planta&ons Sector The Impact of El Nino on Global Vegetable Oil and Palm Oil Trade
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Important No&ce This presentaAon/material has been prepared by CIMB Investment Bank Bhd (“CIMB”)exclusively for your benefit and internal use in order to indicate, on a preliminary basis, the feasibility of possible transacAons. InformaAon contained in this presentaAon/material are intended for discussion purposes only and are subject to a definiAve agreement.All informaAon contained in this presentaAon/material belongs to CIMB and may not be copied, distributed or otherwise disseminated in whole or in part without the prior wri[en consent of CIMB. This presentaAon/material has been prepared on the basis of informaAon that is believed to be correct at the Ame the presentaAon/material was prepared, but that may not have been independently verified. CIMB makes no express or implied warranty as to the accuracy or completeness of any such informaAon. This informaAon is subject to change without noAce and its accuracy is not guaranteed. Neither CIMB nor any of its affiliates, advisers or representaAves make undertaking to update any such informaAon subsequent to the date hereof. The views expressed in this presentaAon/material accurately reflect the personal views of the analyst(s). Investors are advised to make their own independent assessment of the contents of this presentaAon/material, should not treat such content as advice relaAng to legal, accounAng, taxaAon, technical or investment ma[ers and should consult their own advisers. Insofar as the performance of any transacAons is contemplated, investors are to ensure that such performance will not be invalid or illegal by virtue of the laws of that jurisdicAon. CIMB or its affiliates (the “CIMB Group”) may from Ame to Ame do and seek to do business with the company(ies) covered in this presentaAon/material without further consultaAon with or noAficaAon to you.Nothing in this presentaAon/material is intended to be, or should be construed as an offer to buy or sell, or invitaAon to subscribe for, any securiAes. Neither the CIMB Group nor any of their directors, employees or representaAves are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, informaAon or ma[er (express or implied) arising out of, contained in or derived from or any omission from the presentaAon/material, except liability under statute that cannot be excluded.
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Contents SecAon1 Background on El Nino
SecAon2 El Nino and rainfall
SecAon3 PotenAal impact of El Nino on global vegetable oils trades
SecAon4 Historical impact of El Nino on CPO output
SecAon5 Historical impact of El Nino on India’s imports of edible oils
SecAon6 Historical impact of El Nino on soybean output
SecAon7 Historical impact of El Nino on CPO price
SecAon8 CPO price outlook
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Facts on El Nino What and Why? Refers to the large-scale ocean-atmosphere climate phenomenon linked to a periodic warming in sea-surface temperatures across the central and east-central equatorial Pacific. It is a naturally occurring phenomena that result from interactions between the ocean surface and the atmosphere over the tropical Pacific.
How o=en? El Nino episodes typically occur every 3-5 years. However, in the historical record this interval has varied from 2 to 7 years.
How long? El Nino typically lasts 9-12 months, and tends to develop during March-June, reach peak intensity during December-April, and then weaken during May-July. However, prolonged El Nino episodes have lasted 2 years and even as long as 3-4 years.
Why is this event strongest in Dec-‐Apr? El Nino is typically strongest during December-April because the equatorial Pacific sea-surface temperatures are normally warmest at this time of the year
When was the last El Nino? The last El Nino was in 2009/10 and it was a moderate El Nino event
Caveat: Not every El Niño event leads to the same climate conditions
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Monitoring El Nino In the ocean, ENSO is most commonly monitored through observed sea surface temperatures within a box region of the central and eastern tropical Pacific known as NINO3.4. El Niño is a function of the strength of departures from average in NINO3.4 and the Oceanic Nino Index (ONI) is the principal measure for this. North America’s operational definitions for El Niño is when the equatorial Pacific Ocean characterized by a five consecutive 3-month running mean of sea surface temperature (SST) anomalies in the Niño 3.4 region that is above the threshold of +0.5°C. (or ONI greater than or equal to +0.5°C) In the atmosphere, El Nino is monitored via the Southern Oscillation Index (SOI), a measure of atmospheric circulation that takes the difference of atmospheric pressure between Darwin and Tahiti. Sustained negative values of the SOI below −8 often indicate El Nino episodes.
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CPC issued El Nino Advisory on 5 March 2015
Historical Oceanic Nino Index (ONI)
Source: NOAA
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SST
Ano
mal
ies
(°C
)
Strong El Nino
La Nina
Moderate El Nino
Weak El Nino
• The Oceanic Niño Index (ONI) has become the de facto standard that NOAA uses to identify El Niño (warm) and La Niña (cool) events in the tropical Pacific
• Events are defined as five consecutive overlapping three month periods at or above the +0.5°C anomaly for warm (El Niño) events
• The threshold is further broken down into Weak (with a 0.5 to 0.9 SST anomaly), Moderate (1.0 to 1.4) and Strong (≥ 1.5) events
7
BOM upgraded ENSO tracker to El Nino on 12 May 2015
• The ENSO (El Nino Southern Oscillation) tracker was upgraded to EL NIÑO status on 12 May 2015.
• This followed El Niño thresholds being exceeded in the tropical Pacific oceanic and atmospheric data, and consensus among climate models monitored by the Bureau that the event would be sustained.
Historical SOI trends
Source: BOM
-‐40
-‐30
-‐20
-‐10
0
10
20
30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
8
Consensus forecasts on El Nino probability
Consensus Probabilis&c ENSO forecasts
Source: IRI Source: IRI
Season La Niña Neutral El Niño
ASO 2015 ~0% ~0% 100%
SON 2015 ~0% 1% 99%
OND 2015 ~0% 1% 99%
NDJ 2015 ~0% 2% 98%
DJF 2015 ~0% 3% 97%
JFM 2016 1% 5% 94%
FMA 2016 1% 12% 87%
MAM 2016 2% 23% 75%
AMJ 2016 5% 40% 55%
• The current El Nino could last till 1Q 2016. • CPC revealed that the two biggest El Niños on record were in 1982-83 and 1997-98. • This year's episode is slightly stronger, in terms of sea-surface temperatures, than the
1982-83 El Niño was at this point in its development, but it's weaker than the 1997-98 episode was at the same point.
Consensus Probabilis&c ENSO forecasts
9
El Nino and rainfall
• El Nino conditions in the tropical Pacific are known to shift rainfall patterns globally. • The most reliable effects of El Niño are deficient rainfall over Indonesia and northern South America, • and excess rainfall in southeastern South America, eastern equatorial Africa, and the southern US.
Source: International Research Institute for Climate and Society (IRI)
10
Global soybean and oilseeds produc&on map
Source: CIMB/FAS
11
El Nino and global vegetable oils trade • Palm oil supply may be impacted by the lower rainfall or drought in Indonesia, Thailand and
Malaysia. The lower rainfall will result in weaker palm oil yields and output on a lagged basis. • India typically receives lower rainfall from its monsoon during El Nino which could hurt its oilseeds
production. This could help boost its demand for imported edible oils. • Some soybean planting areas may be impacted by the El Nino conditions as well.
World major producers of palm oil in 2014 World major importers of palm oil in 2014
Indonesia 52%
Malaysia 33%
Thailand 3%
Colombia 2%
Nigeria 2%
PNG 1%
Others 7%
India 18%
China 13%
EU 17%
USA 3%
Pakistan 5%
Others 44%
Source: CIMB/MPOB
12
El Nino and Malaysia CPO produc&on
Historical impact of El Nino on Malaysia’s palm oil yield and production
Source: CIMB/MPOB
Type Period Intensity Chge in FFB yield Chge in CPO yield CPO output growth El Nino May 82-‐Jun 83 Strong -‐10.5% -‐10.4% -‐14.1% El Nino Aug 86-‐Feb 88 Moderate -‐22.8% -‐23.1% -‐0.2% El Nino May 91-‐ Jun92 Moderate -‐0.1% -‐1.4% 3.8% El Nino Sep 94-‐May 95 Moderate 2.8% 2.0% 8.2% El Nino May 97 -‐ Apr 98 Strong -‐16.3% -‐16.8% -‐8.3% El Nino May 02-‐Feb 03 Moderate 5.7% 4.5% 12.1% El Nino Jul 04-‐Jan 05 Weak 1.5% 1.9% 7.1% El Nino Sep 06-‐Jan 07 Weak -‐2.9% -‐2.5% -‐0.4% El Nino Jul 09-‐Apr 10 Moderate -‐6.1% -‐6.1% -‐3.3%
• Negative impact on FFB and CPO yields in six out of 9 events. • Slower-than-usual CPO output growth in six out of 9 events ( 29 years CAGR : 6%). • The biggest decline in Malaysian CPO output was reported during strong El Nino episode. • CPO output fell 14% in 82/83 El Nino and 8.3% in 97/98 El Nino • Sharp rise in new mature area help to offset the declining yield in 86/88
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El Nino and global palm oil output
Historical impact of El Nino event on Indonesia and global CPO output
Source: CIMB/Oil World
Type Period Intensity Chges in global CPO output Chges in Indonesia CPO output El Nino May 91-‐ Jun92 Moderate 5.2% na El Nino Sep 94-‐May 95 Moderate 8.5% na El Nino May 97 -‐ Apr 98 Strong -‐4.3% na El Nino May 02-‐Feb 03 Moderate 8.5% 13.1% El Nino Jul 04-‐Jan 05 Weak 8.9% 13.9% El Nino Sep 06-‐Jan 07 Weak 4.2% 8.4% El Nino Jul 09-‐Apr 10 Moderate 1.4% 5.7%
• Negative impact on global CPO output in one out of seven past El Nino events. • Slower than usual CPO output growth in four out of seven events. (19 years CAGR : 7.6%) • Indonesia estates reported slower output growth during last El Nino event.
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Backgrounder on India edible oils market • India is the largest importer of edible oils and palm oil in 2014 • The country imported around 59% of its total edible oils consumption in 2014. • Palm oil’s market share of India’s total edible oils import and consumption was 64% and 38%,
respectively in 2014.
India : Breakdown of India’s edible oils output 2014 (9.5m tonnes)
India : Breakdown of India’s edible oils consump&on in 2014 (20.6m tonnes)
Soyabean oil 13%
Co[on oil 12%
Ground nut oil 5%
Sunflower oil 2% Rapeseed oil
26%
Bu[er 27%
Others 15%
Soyabean oil 16%
Co[on oil 5%
Ground nut oil 3%
Sunflower oil 9%
Rapeseed oil 12%
Bu[er 10%
Palm oil 38%
Others 7%
Source: CIMB/Oil World/MPOB
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India monsoon season
India oilseeds producing region
Latest update on India’s monsoon progress
Source: CIMB/Oil World/USDA/IMD
Source: CIMB/Oil World
• Monsoon period : July- Sep • India monsoon deficit was 15% as at 18/9/15
16
El Nino and India oilseeds produc&on
Historical impact of El Nino on India’s crop production
• Most of past El Nino events resulted in weaker soybean, groundnut and rapeseed production. However, some non-El Nino years also lead to weaker output.
• India’s soybean output fell in 5 out of 7 El Nino events. (-4% to -20%) • India’s groundnut output fell in 7 out of 7 El Nino events (-5% to -41%) • India’s rapeseed output declined in 4 out of 7 El Nino events (-11% to -29%)
Source: CIMB/ Solvents Extractors Association (Dr BV Metha presentation slides (19/6/2015)
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India’s edible oils import trends
India imports of edible oils and palm oil (1994-2014)
• India recorded higher palm oil imports in 3 out of 5 El Nino events. • India imported higher than usual edible oils in 4 out of 5 El Nino events. • Palm oil share of imports could drop during El Nino due to lower discount against soybean oils
Source: CIMB/Oil World/NOAA
0.4 0.9 1.3 1.5 1.7 3.3 3.7 3.5 3.5 4.0 3.5 3.3 3.2 3.7
5.8 6.8 6.6 6.7
7.8 8.5 7.7
0.1 0.3 0.3 0.6 0.9
1.7 1.7 1.9 1.7 1.5 1.3 2.2 2.0 1.6
1.1
2.1 2.5 2.0
2.6 2.7 4.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Palm oil imports Other imports ('000 tonnes)
El Nino (May 97 – Apr 98)
El Nino (May 02 – Feb 03)
El Nino (Jul 04 – Jan 05)
El Nino (Sep 06 – Jan 07)
El Nino (Jul 09 – Apr 10)
18
El Nino and US soybean produc&on • Positive yield deviation in nine out of 11 years (82%). • Lower than average abandonment in 6 out of 11 years (55%). • Increased planted acreage over March intentions in 6 out of 7 years (86%)
US soybeans : Years with El Nino conditions (where average quarterly ONI is > 0.5)
Source: Agribanks Insights report (July 2015)
19
Soybean crop progress in US
20
El Nino and global soybean output • Good soybean output growth registered double-digit growth in 4 out of the 6 past El Ninos • We observed weaker or slower global soybean production observed post El Nino
Global soybeans : Years with El Nino conditions (where average quarterly ONI is > 0.5)
Source: CIMB/Oil World
Type Period Intensity Chges in soybean output in El Nino year
Chges in soybean output one year a=er El Nino
El Nino Sep 94-‐May 95 Moderate 17.1% -‐8.9% El Nino May 97 -‐ Apr 98 Strong 20.1% 1.3% El Nino May 02-‐Feb 03 Moderate 6.5% -‐5.5% El Nino Jul 04-‐Jan 05 Weak 16.7% 2.7% El Nino Sep 06-‐Jan 07 Weak 6.8% -‐7.3% El Nino Jul 09-‐Apr 10 Moderate 22.9% 1.9%
21
El Nino : CPO and soybean oil prices behaviour • CPO price tends to react positively to EL Nino. • Exact impact depends on the intensity and length of the El Nino as well as distribution of rainfall • Last nine episode (exclude 04/05) showed that average monthly CPO price rose by 13-40%
Source: CIMB/Bloomberg
Price changes during ENSO cycle
Type Period Intensity yoy chg*
CPO Soybean oil El Nino May 82 -‐ Jun 83 Strong 12.8% 17.9% El Nino Aug 86 -‐ Feb 88 Moderate 33.1% -‐3.8% El Nino May 91-‐ Jun 92 Moderate 16.9% 1.6% El Nino Sep 94 -‐ Mar 95 Moderate 39.7% 28.1% El Nino May 97 -‐ Apr 98 Strong 22.5% 15.1% El Nino May 02 -‐ Feb 03 Moderate 26.5% 18.8% El Nino Jul 04 -‐ Jan 05 Weak -‐10.1% -‐16.0% El Nino Sep 06 -‐ Jan 07 Weak 32.3% 19.3% El Nino Jul 09 -‐ Apr 10 Moderate 32.1% 16.2% * Calculated using average prices in the impacted calendar years
22
Project muted El Nino impact on 2015 palm oil prices Current weak CPO prices due to slower demand growth for edible oils in 8M15 High CPO inventories in Malaysia and soybean stocks globally can act as a buffer against any potential shortfall in palm oil supply in the short term. This could cap the potential upside to CPO prices due to weather risks. The recent strengthening of CPO prices partly driven by concern over dry weather in some parts of palm oil region. Project CPO prices to trade in the range of RM1,800-2,200 per tonne in the near term. Latest spot CPO price is RM2,006.50 and CPO futures prices for Oct-Dec were hovering in the range of RM2,034 to 2,103 per tonne yesterday.
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El Nino : CPO and global soybean stocks
Source: CIMB/Oil World
10%
15%
20%
25%
30%
35%
10
30
50
70
90
110
93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12 13/14
Soybean stock Stock/Supply (Soybean stock - m tonnes) (Stock/supply ratio)
El Nino
El Nino
El Nino
El Nino
Global soybean stock trend
Global palm oil stock trend
10%
15%
20%
25%
-‐
5.0
10.0
15.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Global palm oil stock Stock/Supply (Palm oil stock - m tonnes) (Stock/supply ratio)
El Nino
El Nino El Nino
El Nino
24
El Nino a key wild card for CPO price in 2016 We expect El Nino to act as a potential catalyst for CPO price in 2016
Current observations of lower rainfall experienced in key palm oil regions are expected to negatively impact CPO output in 2016
Indonesia biodiesel demand is expected to recover from Sep/Oct, following the implementation of CPO levy to help fund the price gap between biodiesel and diesel.
Malaysia and Indonesia governments are working on price stablization mechanisms.
CIMB projects CPO price to average RM2,450 per tonne in 2016 CPO price discount against soybean oil could narrow when El Nino impacts on palm oil supply are more evident.
Key risks to our price view : (1) sharp decline in crude oil price; (2) slower global growth and edible oils consumptions; (3) lower than expected decline in palm oil yields
Source: CIMB/Oil World
25
Palm oil areas impacted by lower rainfall so far
Source: CIMB/Columbia
Rainfall in South Sumatra Rainfall in Central Kalimantan Rainfall in South Kalimantan
0
50
100
150
200
250
300
350
400
450 (mm)
0
50
100
150
200
250
300
350
400 (mm)
0
50
100
150
200
250
300
350
400 (mm)
26
CPO and soybean oil prices
Source: CIMB/Oil World/MPOB/Bloomberg
CPO prices discount against soybean oil prices
-‐100
0
100
200
300
400
500
Jan-‐97 Jan-‐98 Jan-‐99 Jan-‐00 Jan-‐01 Jan-‐02 Jan-‐03 Jan-‐04 Jan-‐05 Jan-‐06 Jan-‐07 Jan-‐08 Jan-‐09 Jan-‐10 Jan-‐11 Jan-‐12 Jan-‐13 Jan-‐14 Jan-‐15
(US$ per tonne)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Soybean Oil (LHS)
CPO (LHS)
(US$ per tonne)
Historical CPO and soybean prices
27
Conclusion
• The El Nino event has historically resulted in below-average rainfall in the two largest palm oil-producing countries in the world (Malaysia and Indonesia), Australia and India.
• Severe drought at the palm oil estates will have negative impact on palm oil yields.
• The impact of drought at the estates on production would typically be felt on a lagged basis (6-24 months).
• The exact impact on FFB yields will depend on the El Nino’s strength and impact of rainfall patterns in the key planting areas
• Our study of El Nino events revealed that Malaysian palm oil output rose at a slower rate, with 1-year lag, and CPO prices reacted positively every time El Nino occurred.
• The El Nino news has not boosted CPO price so far as there are current sufficient stock buffer for edible oils and biodiesel demand has been weak in 2015.
• We expect current El Nino news to have a more positive impact on CPO price only in 2016, when current high stocks have been pared down and Indonesia’s biodiesel implementation gains tractions.
Thank You Very Much