Palm Oil Sector

Tug Of War: Supply vs Demand

LEOW HUEY CHUEN JACQUELYN YOW

Director, ASEAN Plantation Research Research Analyst
hueychuen@uobkayhian.com jacquelyn@uobkayhian.com
+603 2147 1990 +603 2147 1995

April 2020
 Regional Plantation

Challenging times. Sector dynamics have changed over the CPO Price Trend
(RM/tonne)
past 2 months.
3,500
Key events to determine market direction:
3,250
• COVID-19: The most uncertain development and may
3,000
impact both supply and demand for palm oil.
2,750
– Supply declines: Operations of estates, mills,
2,500
refineries and transport affected by movement
restriction and manpower reduction. 2,250

– Demand weakens: No dining out, drop in household 2,000

1-Jan 15-Jan 29-Jan 12-Feb 26-Feb 11-Mar 25-Mar 8-Apr
income. Source: MPOB

• Crude oil price collapse: Always a supportive factor, but

now ….
– Non-mandatory: Bulk will disappear.
– Mandatory: Depends on incentives from CPO Fund
and penalties.

1
 Key Takeaways
Supply Demand Impact on Industry

COVID – 19 Issues: Assessment:

Issues:
(1) Operations halted / (1) Lower production -
(1) Lockdown/movement restriction
movement restricted operation shut down
Assessment:
(2) Retaining foreign workers (2) Higher cost – Fixed cost
(1) Demand from HORECA drop
(3) Transportation delay when operations halted
(2) Buy less as spending power
Assessment: (3) Crop losses due to worker
shrinks
(1) Crops losses shortages
(3) Less demand for fuel
(2) Poor quality oil
Potential short-term upside
(3) Worker shortage
(1) Demand for oleochemicals
(4) Field maintenance
(5) Replanting works

Slump in Crude Oil N.A. Issues: Assessment:

Price (1) Palm oil price > Crude oil (1) Lower plant utilization
Assessment: (2) Margin compression
(1) Non-mandated volume shrink
(2) Mandated volume at risk too -
funding issues

Conclusion 2020F 2020F Earnings risk

Revised: -3.7% (-3.5m mt) Revised: -1.9% (-3.4m mt) (1) Lower ASP ????
Previous: 0.2% (0.2m mt) Previous: 0.5% (0.4m mt) (2) Lower Production
(3) Higher cost of production
CPO Price Review

3
 CPO Price Trend
Average Selling Prices
CPO Spot Price (MPOB Local Delivery) (RM/tonne)
(RM/tonne) 1995 1,473
3,500 1996 1,192
1997 1,358
1998 2,378
3,250 1999 1,450
2000 997
2001 895
3,000
2002 1,364
2003 1,544
2,750 2004 1,610
2005 1,394
2006 1,511
2,500 2007 2,531
2008 2,778
2009 2,245
2,250
2010 2,705
2011 3,219
2,000 2012 2,764
2013 2,371
2014 2,384
1,750 2015 2,154
2016 2,653
1,500 2017 2,783
Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 2018 2,214
2019 2,127
Source: MPOB 3M20 2,661
4
Impact on Production

5
 Major Producers vs COVID-19 Cases

2019 Production: 75.8m tonnes Increasing Cases

(No. of cases)
4,000
Malaysia
Indonesia
Nigeria, 1% 3,500
Guatemala, 1% Colombia
Other countries, Colombia, 2%
3,000 Thailand
7%

Thailand, 4% Ecuador, 1% 2,500

90% of world
2,000 palm oil
Malaysia, 27% production
Indonesia, 57% 1,500

1,000

500

0
15-Feb 22-Feb 29-Feb 7-Mar 14-Mar 21-Mar 28-Mar 4-Apr

Source: Oil World Source: Worldometer

6
 Malaysia: 3 Major Producing States Have
High Confirmed Cases
The known and unknown
Kelantan P : Planted Area • Sabah (26%)
P: 3% O : CPO Production
O: 2%
- Impacted by previous
Terengganu
stop work order
P: 3% - Estates with Covid-19 cases
O: 3%
Kedah remain closed.
P: 2%
O: 2% Sabah - ~70% of Sabah production
P: 27%
O: 26% • Sarawak (21%)
Perak
P: 7%
- Estates asked to stop work as
O: 10% workers tested positive for
Pahang COVID-19
P: 13%
Selangor O: 14% • Johor (16%)
P: 2%
O: 3% - Village closure – Smallholder
Sarawak operations and transport of FFB
P: 27% disrupted.
Johor O: 21%
P: 13% - Some estates opted to stop
Negeri
Sembilan
O: 16% operations voluntarily
P: 3% Impact
O: 3% Melaka
P: 1% • Crop (FFB) losses
• Quality issues – High FFA & low
DOBI-value CPO
Source: Ministry of Health, MPOB, UOB Kay Hian
• Labour shortages - FWs leave for
7 home when unemployed
 Indonesia: Possible Widespread
Transmission of COVID-19?
• The epicenter of the outbreak
Aceh P : Planted Area
P: 3.1%
West Kalimantan East Kalimantan
O : CPO Production
is JAKARTA
P: 8.0% P: 6.0%
O:4.0% North Central
Sumatra
O: 11.2% O: 7.6%
Sulawesi • Key palm oil producing
P: 15.1% P: 0.9%
West Papua
Provinces still recording cases
O: 11.5% Riau O: 1.5%
P: 23.9% P: 0.3% but low in numbers.
O: 20.3% Riau Island O: 0.6%

P: 0.1%
• Most major companies have
O: 0.2% instated stringent Covid-19
Papua
P: 0.3% SOPs for estates and mills.
Belitung O: 0.5%
P: 2.0% COVID-19 Cases In Indo @ 12 Apr 20
O: 2.0% Province Number of cases
West Sumatra
P: 5.7% Jakarta 2,044
O: 3.5% West Jawa 450
East Jawa 386
Jambi
Southeast Banten 281
P: 5.7%
Central Sulawesi
O: 6.4% South Sulawesi 222
Kalimantan P: 0.3%
Bengkulu South Central Jawa 200
P: 11.9% O: 0.6%
P: 2.4% Kalimantan
O: 10.8% West Bali 81
O: 2.7% P: 3.9% Sulawesi North Sumatera* 65
South Sumatra O: 4.1% P: 1.3%
O: 1.6%
Papua 63
P: 9.5%
O: 8.6% South West Sumatera* 44
Lampung Banten West Java
P: 1.5% P: 0.1% Sulawesi East Kalimantan* 35
P: 0.1%
O: 1.9% O: 0.1% P: 0.5% Yogyakarta 27
O: 0.1%
O: 0.5%
South Sumatera* 21
Source: kawalcovid19, Director General of Estate Crops, UOB Kay Hian, West Kalimantan* 13
Others 309
8
*Major producing areas
Impact on Demand

9
 Nothing Can Escape

(% yoy)
GDP Growth VS Vegoil Demand • The demand for commodities at
6.0 large is coming from the real
Vegoil Demand Growth economy.
5.5
World GDP growth
• As global economic growth is
5.0 turning sharply negative,
demand for raw materials and
4.5 energy has literally evaporated.
4.0 • Likely to witness demand
contraction in 2020.
3.5
• Collapse of crude oil prices will
3.0 directly impact biodiesel
demand.
2.5

• 2019 global biodiesel usage

2.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
represent ~19% of total global
Source: Oil World, Bloomberg oils & fats consumption.

10
 Palm Oil Demand: Risk Factors

2019 Consumption: 78.6m tonnes Food Use – Decline in consumption

• Demand impacted due to lockdown in
major consuming countries.
• This demand will not rebound in the short
Food Use
term due to contraction of economies as
66% highlighted by IMF & WB
• Currency depreciation in the emerging
markets could reduce demand further
Energy (biofuels) Energy (Biofuels) – Foregone demand
22%
• Most vulnerable segment
Chemical • Estimated at 40% to 45% non-mandated
9% (discretionary sector) volume
• Destruction from
Other (animal
feed, etc) - Collapsed demand for crude oil as
3% economic activities contract.
- Mandated sector will de-stabilise –
Source: Oil World
Need for heavy subsidies.
11
 Food Use

2019 Consumption: 78.6m tonnes • Steep COVID-19 curve in major

consuming markets
• Demand for food will be significantly
Bangladesh Nigeria Thailand affected in the immediate term due to
2% 3% 4% Pakistan
shutdown of food outlets. If a recession is
4% Malaysia
5% averted, demand could unfold in 3Q20
Others
30% Rising COVID-19 Cases In Major Consuming
China Countries
9% (No. of cases)
140,000
EU India China
120,000
11% Italy Spain
100,000 France Germany
Indonesia
19% India 80,000
13%
60,000

40,000

20,000

0
22-Jan 5-Feb 19-Feb 4-Mar 18-Mar 1-Apr
Source: Oil World
Source: Worldometer

12
 Energy Use: The Most Worrying Aspect
CPO Is At High Premium To Gasoil Price
(US$/tonne) (US$/tonne) From SUPPORTIVE to DESTRUCTIVE
1,400 500
1,300
1,200
Palm Oil (LHS) 400 • Oil World cut global biodiesel demand
1,100 Gasoil (LHS) 300
1,000 Premiumt (RHS) by 3.9m tonnes to 43.5m tonnes for
200
900 2020, first drop since 2015
800 100
700
600
0 - SBO : -1.5m tonnes
500 -100
400 Discount (RHS)
-200 - PO: -1.1m tonnes
300
200 -300 For palm oil: Indonesian biodiesel mandate
2010 2012 2014 2016 2018 2020
Source: Oil World is the key element.
Higher Biodiesel Global Demand
(m tonnes) • Dilemma: Not enough funding to
50
support the mandate
40
• BUT: Rupiah depreciation – A reason to
30
blend more to save on forex
20
Some hope: EU rapeseed crushing is
10 expected to be reduced as rapeseed oil
0 demand for biodiesel is eroding.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F
Source: Oil World
13
 Biodiesel - Indonesia
Progress of Indonesia Biodiesel &
('000 kl) Disbursement of Incentives Indonesia's Options
9,000
Exports
8,000 • Seek government assistance to top up
7,000 Domestic Consumption
6,000
funding (Estate Crop Fund).
5,000 • Change the pricing formula.
4,000
3,000 • Increase the export levy.
2,000
1,000 • Implement penalty of Rp6,000/litre more
0 forcefully.
2009 2011 2013 2015 2017 2019 Feb-20
Source: APROBI
CPO Funding May Not Be Enough To Support Indonesia Biodiesel and Gasoil Prices
(Rp/liter)
Allocation for biodiesel incentive 70% 80% 10,000
Biodiesel Gasoil
Estimated fund available in 2020 Rp t 28.50 28.50 9,000

Biodiesel incentive Rp t 19.95 22.80 8,000

7,000
Price spread (biodiesel – diesel fuel index) Rp/litre 4,000 4,000
6,000

Max volume can be sudsidise m kl 4.99 5.70 5,000

Biodiesel required under B30 m kl 9.59 9.59 4,000

Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20
Source: UOB Kay Hian Source: BPDP, EDMR

14
Conclusion

15
 Conclusion
CPO Prices Have A Higher Correlation to Supply
• Sector prospects seeing a drastic
(yoy% chg) (yoy % chg) change
24.0 120
20.0 Production Demand CPO (RHS) • At this juncture, no one really
16.0 70 knows the state of the current
12.0
8.0 20 supply & demand balance or if it is
4.0 at a market equilibrium.
0.0 -30
-4.0 • Production expected to decline,
-8.0 -80 but demand destruction could be
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F
Source: Oil World, UOB Kay Hian severe.
Change in Inventory VS CPO Price • Conclusion:
(m tonnes)
1.0
(RM/tonne)
4,000 • Palm oil stocks will rise
Net Add (LHS) CPO Prices (RHS)

0.5
3,500 • CPO price peak is over
3,000
• Expect a more moderate
0.0 2,500
trading range of RM2,200-
2,000
-0.5 RM2,500/tonne
1,500
-1.0 1,000 • CPO price for 2020: RM2,300 -
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20
RM2,400/tonne
Source: Oil World, UOB Kay Hian 1Q20: RM2,661/tonne
16
 Thank You

We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any
responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only
and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the
exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any
securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities
related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an
underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal
basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the
meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA).

In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc ("UOBKHUS") which accepts responsibility for the contents.
UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this
report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained
from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such.
All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or
the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or
employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other
securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Any such non-U.S. persons may have
purchased securities referred to herein for their own account in advance of release of this.

17