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Prospects For Second Half Of 2013 - Managing Price Fluctuations:
New Fundamentals to Watch for the 2nd Half 2013
By: Ms. Khor Yu Leng

Ms Khor Yu Leng, B.A. (Oxon), M.Sc. (Econs). Yu Leng graduated from Oxford University in Philosophy, Politics & Economics and has a masters degree from the London School of Economics. She started her career as a corporate analyst and worked in the financial industry for various companies and clients including Citigroup. Since 2004, she has been a research specialist on resource-based industries and agribusiness, with a focus on palm oil and sugarcane in Asia and frontier markets. Her work for global corporate clients encompasses market research, political-economic analysis, and sustainability. Recent project assignments include reviews of the China edible oil refining and oleochemicals sectors, frontier oil palm projects in Africa, cane sugar projects in Indonesian Papua, and info briefs on resource sectors and infrastructure in Myanmar. She is also the writer of Khor Reports’ newsletters on palm oil and the political economy. Contact Yu Leng at Segi Enam Advisors Pte Ltd, Singapore. email: khorreports@gmail.com
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This paper examines three new fundamental drivers that are likely to impact prices achieved by plantations. First, there are shifts in price risk management approaches with the greater use of derivatives. This is expected to result in a wider dispersion of price outcomes. The review of CPO average selling prices achieved has become of greater interest to analysts, especially with varying volume growth and the presence of newer and more aggressive players. Secondly, prices achieved are also impacted by duty and tariff differentials, which are still prominent policy tools in the midst of growing trade tussles. Finally, the behaviour of non-traditional physical traders and their imputed impact on stocks build up in key markets is also a feature of the palm oil market that can add uncertainty. There has been prominent news about some traditional fundamentals of market supply and demand. These include juxtapositions of mooted Indonesia land bank restrictions and promised growth in frontier areas, as well as opportunity afforded by transfats limits versus saturated fats restrictions. We expect that these are longer-term in impact.


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Questions & Answers (4) :
Khor Yu Leng
4 years ago
Hi Ng Kian Seng. This is an important question as India and China are key import markets. Interestingly enough, the volume imported by China has been fluctuating around a fairly stable level over the last five years or more. According to the China National Grain and Oils Information Centre (an official oils & grain analysis department of China), palm oil import might be growing in slower pace in years to come (as we’ve seen in the last 2 years). The usage of palm oil in food is rather stable, while the non-food industry is still growing (but this is already looking large at 25% of palm oil imported). There is concern that demand there is “maxed out” for a while. In food use China is shifting more to soybean oil; as the China middle class grows, their consumption of meat is rising and soybean meal is in large demand and therefore soybean oil supply grows with it. Also, according to China analysts, the government wants to shift demand more to minor domestic oils, to support their rural sector. There are therefore headwinds to China imports of palm oil in the longer term, especially since China is already using oil & fats at above world average. India still has some way to grow as its per capita usage is lower; so it will be expanding demand. However, India prefers to process crude palm oil itself. Its vegetable oil processing sector is going through a bad patch and demanding higher import duties to protect itself as well as the rural farmers producing oils, but its government is not keen to allow this for now. China and India are shifting further into domestic agricultural subsidy regimes. Watch out if these countries start to protect more against imports, in the future as they seek to raise rural incomes, while its urban middle class expands. As for new products being developed – this is for sure. More new products will be developed in China, via transfer of technology from SE Asia to China. E.g. solid fats, most of China companies only produce up to shortening and margarine, but these companies move into producing specialty fats such as CBS, CBE and many others once they find that the market is large enough to buy what they plan to produce.
Khor Yu Leng
4 years ago
Hi Peter Lavina. Thank you for you comments and question. We should see more new “traditional” users in food and in the home and personal care (oleochemicals) segments in developing countries and in new geographies with rising population and incomes; notably in Africa which has been enjoying rapid economic growth in the past few years and where some parts are coming up from a low base of consumption – for instance West Africa had estimated consumption of 10kg per capita of oils and fats, so their usage can easily double and more to reach the world average. We can read of Wilmar and others extending their reach there. For, non-traditional users, let’s consider the expected implementation of moribund bio-diesel programs in key producing countries including Malaysia and Indonesia while the EU is getting less keen on biofuels, especially from crops including palm oil (concerns of indirect land use change impacts). While Indonesia is on a subsidy reduction mode and with limits to their biodiesel subsidy plan, Malaysia is expanding its efforts and plans to go from B5 to B10. 500,000 tonnes of CPO should be converted into palm biodiesel a year by Jul 2014, when biodiesel usage is fully implemented. The subsidy cost will be big though, rising to RM 1 billion, judging from estimates in those reports. These are the typical physical traders. Non-typical physical trading is reported to be big in China too – financial traders have come in. This parallels the experience in other commodity markets e.g. financial institutions entering the physical trade, owning and operating storage facilities and entering into long-term offtake arrangement with producers. Might this happen for palm oil? Paper trading is likely to expand a lot too. Currently, BMD’s FCPO paper trading is 3.6x global CPO production. It can become even higher – look at the oil market. Back in 2007, paper trading on public exchanges was already 6x oil production.
Ng Kian Seng
4 years ago
Dear Ms. Khor Yu Leng. Major palm oil consuming countries such as India and China do enjoy economic growth year-on year. This leads to changes in lifestyle and production processes. Going forward, do you see any new frontiers for palm oil sales in these countries i.e. new product segments, palm oil production processes etc., etc
Peter Lavina
4 years ago
Fig. 3 that you cited from the World Bank study is very interesting. I sent a question yesterday to Dr. Basiron regarding the correlation of petroleum and palm oil prices. Would there be new more users and non-traditional players in the future who could impact on prices?
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