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Industrial Production has been steady during the last 2 quarters while Unemployment rate – worrisomeOperation Twist shall come to an end on June 30 and speculations are growing over its extension. Persistent higher unemployment rate is worrying the policy makers, doors remain wide open for QE3 (extension of Operation Twist) keeping in view the Presidential elections (due on 6th Nov 2012).
US to do better than RoW (Rest of World) in terms of change in growth rates
Sovereign debt concerns. High chances of Greece exiting the Euro Zone in coming couple of quartersSpain’s banking crisis came afresh sending tremors across the global financial markets.Changing political dynamics – towards anti austerity might lead to Partial implementation of austerity High unemployment – A major concernEuro Zone to go through recessionary pressures atleast for next 2‐3 quarters
Chinese economy cooling off as can be seen from the IP growth rates. Even during the Global Financial Crisis, IP growth was near 13%
The positive signals – Inflation cooling off, high possibility of stimulus (anywhere btw $200‐300 billion), interest rate cycle peaked so cut may be expected.
Rupee depreciation causing ripples in the spine of policy makers and importersRising Inflation and declining IP Growth may change the investors’ perceptionIf recent numbers are any indication, GDP growth below 6.5% for 2012‐13 should not be a big surprise
CPO export tax range has been revised to 7.5% to 22.5% (Earlier it was 1.5% to 25% based on CIF Rotterdam price ranges).The reference price (base export price) for crude palm oil will be calculated base on average prices at Rotterdam, Bursa Malaysia Derivatives or the Jakarta Bourse. (Earlier the same was based on mere CPO CIF Rotterdam prices) The export tax cap on palm oil Olein products (downstream) was cut to 13 percent (Earlier the same was 25 percent)
CIF Rot Price
($/ton)
Effective tax range ($/ton)
Earlier Revised Net tax change
750 ‐1000 22 ‐100 56‐135 36.4 ‐
38.5
1001‐1100 125 ‐165 150‐181.5 20.4 ‐
21.4
1100 ‐1150 192 ‐200 198 ‐207 5.5 ‐5.75
1150‐1250 230‐280 235‐262 ‐12
>1250 312.5 281.25 ‐31.25
In absolute terms, when CIF Rotterdam prices are reigning in the range of $ 750 ‐1000, industry shall end up paying a higher tax of $ 36‐38 With further increase in market and price volatility as the prices soar higher beyond MYR 3750 (>$1250/ton), industry players shall gain advantage from the present scenario by paying a lower tax of $30 from the
Malaysian refining industry shall now have intensified competition as Indonesia attempts to create market for itself.
More than pure refining industry, high degree value added industries viz. Specialty fats, Oleo Chemicals of Malaysia need to share its clientele base with the new supplier.Depreciation of MYR against USD from 2.99 to 3.2 (by 7%) since Mar’12 has temporarily rescued Malaysian Refining industry.
Indian Olein industry cannot compete with foreign originating cheaper oil.Vanaspati or modernly called IE fat industry shall have squeezed supply of feed stock – so in long‐run the industry shall become non‐economicalSpecialty fats and Oleo industries that are in nurturing stage too shall need policy support as higher feed stock prices might curtail their profitsAs such consolidation shall pick‐up pace apart from operating rates falling down sharply.
Indonesia Export tax restructuring –
Effects could be Seismic in nature
These are few to state, while given palm industry’s sheer size, ripple effects could be uncountable`
MALAYSIA INDIA
In addition, nations like Netherlands, Egypt, Saudi Arabia which are sole CPO importers too face similar crisis of their domestic refining industry.Countries like China who are RBD Olein importers have a price advantage with Indonesia’s competitive price quotes
Processing Cost MYR 75/ton Processing Cost INR 20/10 Kg
Highly leveraged due to multi oil refining avenues
These regions account for 75% of biscuit & confectionary industries and more than 80% of Vanaspati (vegetable oil hard fat) making. 80% of the feedstock used in these industries is stearin.
80% of Oleo industry is located in North and West India providing good scope for offloading byproducts
Hence, those CPO refiners who don’t have high end value addition facilities in place, will be FIRST to hit. While drilling it region wise, South Indian units are badly effected.
Rapeseed belts of EU, Delta tracts of US (which is yet to plant soybeans) and Indian KharifSeason (Which accounts for nearly 60% of Indian oilseed production) remain watchful in 1‐2 months.
US Spring Crops –Looming Dryness for Jun-July Months
Weather models forecast for persisting dry conditions with above normal temperatures for Jun‐July.Dryness in Southern belts to augment worries over planting soybeans post Winter Wheat Harvest.
US shall don the role of “Rescuer” for rest of the season with SA sidelining from Global trade, amidst limited supplies along with increased emphasis on domestic crush.Argentinean B10 norms of Biodiesel and corresponding B7 at Brazil remain the moot point of higher diversion to crush vis‐à‐vis exports.Indicative that demand is purely across the producing belts and stagnant across consumption regions.
Global Soybean Crush (Apr‐Aug)
2011 2012 Abs Change
Brazil 17.30 16.96 ‐0.35
Argentina 17.31 16.93 ‐0.38
US 17.38 17.74 0.36
Paraguay 0.78 0.70 ‐0.08
G‐4 52.77 52.33 ‐0.44
Source: TG Estimates; MT
Global Soybean Exports (Apr‐Aug)
2011 2012 Abs Change
Brazil 22.38 20.98 ‐1.40
Argentina 6.73 6.15 ‐0.59
US 5.98 9.48 3.50
Paraguay 3.19 1.56 ‐1.63
G‐4 38.29 38.17 ‐0.12
Source: TG Estimates; MT
Dry weather forecasts for Jun-July and tighter balance sheets of CY beans suggest for impending optimism in Soy complex in the weeks ahead while demand remains watchful.
FFB reduction – a major contributor for production decline so far in 2012.Seasonal Recovery on cards for Q2‐Q3.Thus, monthly CPO output at Malaysia to improve towards 1.48‐1.5 MT in June‐July. (1.27 MT in April’12)Overall Malaysian CPO output for 2012 to stay close to 18.5 MT, down by 2% Y‐o‐Y while Indonesian CPO output might remain 5‐6% higher around 25.8 MT.
Stunted Supply Growth to Eat away the Carry-in for Next Season
29
Rich supplies of Palm from SE Asia during 2011 (11.3% higher production from Malaysia and 10% from Indonesia) translated into ample carry‐in for 2012 season.Lower availability of Rapeseed and Soy oils to augur the demand for palm oil during 2012.Global veg oil stocks to steeply plunge towards 10.2 MT, 12.5% drop on yearly basis
Global Veg. Oil S'n'D Dynamics (MT)
4.4
1.4
3.0 2.62.30.9
2.72.0
0.5
‐0.7
0.5
‐0.6
‐0.1
2.1
‐0.1
1.7
8.1
4.2
6.86.2
‐2.0
0.0
2.0
4.0
6.0
8.0
2010‐11 2011‐12e 2010‐11 2011‐12e
Incrementa l Suppl ies Incrementa l Demand
Palm oil Soy oil Rape oil Sun oil Total
Falling Supplies while relatively firm demand to eat away into stocks
Price Realization (% Change) during Mar‐May’12 vs.
same period LY – MINOR CEREALS
Higher prices realizations for oilseeds to translate into higher acreages this yearCotton to lose some acres to better performing Soybeans and GNPulses and cereals to face stiff competition from oilseeds owing to poor returns.
Price Realization (% Change) during Mar‐May’12 vs.
same period LY – PULSES
Price Realization (% Change) during Mar‐May’12 vs.
BMD Palm oil futures prices are retracing back upon honoring a crucial level at MYR 3620. According to Elliott wave analysis prices are running as the Primary wave C of Cycle wave 2. Although initial gains are expected, potential of such gains could remain limited above MYR 3300/3350. Subsequently prices could extend lower towards MYR 2500 remains open in the coming 2-3 months ahead of turning higher.
Prices to bounce initially to 3200 MYR and shall turn to bearish mode towards 2750 and eventually to 2500 MYR in long-run. However, in the event of unexpected stimulus packages from US and EU, prices could stench short-term bounce to MYR 3350/3400 and turn lower from there
In BMD CPO futures prices a 4-year cyclicality is been observed as shown above. According to the same come Oct’12 prices are likely to place a major bottom and enter a fresh bull run.
CME soyoil futures prices are considered to be stretching lower as the Primary wave C of Cycle wave 2 according to Elliott wave analysis. Within the same prices could target 43 cents in the coming 2-3 months ahead of turning higher. Potential of upside above 54 cents seems limited.
NCDEX Soy Oil Futures prices have witnessed a setback from INR 790 and weakened towards INR 710 finding follow through selling. Possibility of initial gains towards INR 760 could be seen ahead of such extended weakness in the coming month. In the medium term extended weakness towards INR 650 shall remain open.
NCDEX Soybean futures prices are forming a triangle while hovering mixed within INR 3250-3450 as the overall weakness from the May’12 high of INR 3785 is intact. While the existing consolidation is seen as an upside correction , prices upon a retest of INR 3450 shall attract good renewed selling pressure to turn lower and prompt extension of the underlying weakness towards INR 3000 and lower in the coming months.
MCX CPO Futures prices are hovering near INR 540 after weakening from the May’12 high of INR 635 exhibiting a weak tone. Owing to the oversold short term oscillators possibility of minor gains towards INR 580 remains open ahead of extended weakness towards INR 500 in the coming months.
The global oil and oil seed complex is likely to maintain the current underlying weakness in the medium term while weather vagaries could prompt minor upside potential in the short term.
So finally how Indonesia policies impact industry in the wake of my weak price outlook
It will be double wammy…..For Indonesian CPO Sellers
• As prices fall and incidental tax will be high in lower price brackets – much to shell-out to Govt.
For Malaysia and India• Indonesia vendors will resort to more aggressive selling of Olein and that is killing for refining industries in both these nations.
It is only matter of time, counter-intuitive policy revisions are bound to come, especially India and Malaysia could react Following are the likely policy changes possible.By Malaysia:1.Could initiate a dialogue with Indonesia2.lift the export quota ceiling of CPO and employ similar tax structures followed by Indonesia on CPO –
level playing field
By India:1.Logically, base import price could be revised from $484/ton to 950/1000$ per ton. It will double the
incidental tax ensuring margin making scope for the refiners
a)
If this happens, Olein
prices will shoot higher tentatively translating into demand destruction2.Could initiate a dialogue with Indonesia3.Or Origin shift to Central America in the longer run
Overall the source countries priorities in order are1.
Find markets for the palm oil2.
Find market for the refined products to ensure development of industry.There
should
be
balance
and
source
countries
can
not
risk
the
first
point
at
the
cost
of
second
point. The balance between export ratio of products and materials in the soybean industry at
countries like USA should be observed by Indonesia.
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