TransGraph Research Consulting Technology Commodity Price Risk Management solutions Mapping the market thought of the vegetable Oils Market by Nagaraj Meda, Chairman & Managing Director, TransGraph Consulting Pvt Ltd 21 Sep 2012 1
What business we are in? Refining business- CPO; Problem statement Setting risk management objectives 2
RBD-olein sales in Negative margins Description: Historical sales data 2010-12, Kandla CPO Vs RBD Olein, Stearin prices, Refining cost Rs.1.90/kg Refining margins Rs. per 10 Kg of RBD Olien Quantity sold (XYZ No of Occurances Company) % Occurance % Sales `-30 above 42 8100 5% 5% `-20 to -30 22 7300 3% 5% `-10- to -20 79 15400 10% 11% 0 to -10 170 26500 22% 19% 0 to 10 237 52000 31% 37% 10 to 20 76 21500 10% 15% 20 to 30 45 3500 6% 2% 30 to 40 32 2400 4% 2% 40 above 55 5500 8% 4% 758 142200 40% of times the refining margins are negative Summary: Sales Distribution Vis-à-vis Refining Margins WA Sales Qty Margins Sales Margins Sales Qty Per Occ Occurance% Qty% Negative Margins Xxxx 183 41% xx% Positive Margins xxxx 191 59% xx% xxxx 3
CPO Refining Price risk management Objective 1 CPO RBD Refinery RBD Olein RBD Stearin Risk management Objective Ensuring fixed processing Margins for refinery operations Solution Buy CPO in physical markets Have RMP & Hedge model Risk appetite Bearish: Hedge in futures Bullish: Carry inventory Basis Risk To be Managed (CPO Vs products) 4
Guidelines There is no straight solution to negative margins to positive margin through hedging. However, an informed decision making process would help to manage negative refining margins. Consider Define the various bands of negative and positive margins (as shown in the previous table) Define your risk appetite in those bands Decide the hedge % with respect those bands 5
Why hedging is always not fruitful? An Indian context. Malaysia CPO to Indian CPO Malaysia CPO to Indian Soy Oil Argentina Soy Oil to Indian Soy Oil 6
Facts about Hedging edible oil India based Palm oil refiners hedging is always not fruitful because Mal/Indo markets are always on sale pressure Indian markets are on import dependency after accommodating the domestic crop MYR, IDR and USD vs. INR fluctuations Variable tax structure of Indonesian tax By-product price realizations Hedge avenues available for Indian industry Palm BMD CPO Future (Malaysia Basis Market) MCX CPO futures (Basis Ex. Kandla Spot market) OTC (Customized products) 7
Hedging physical CPO exposure with CPO futures In order to hedge ABC company CPO price risk, we have choice between BMD and MCX palm oil futures. Indian importers buys CPO @ Indonesia/Malaysia. Quoted in USD/Ton; On the sell side, benchmark spot market is Kandla; Quoted in INR/10Kg Hedging in MCX, India Benchmark market for Palm oil futures is MCX and traded in INR/10Kg MCX has maximum three months futures contracts and no options contracts available; Saturday is open for trading. MCX contacts tracks the international BMD, CME; International spot palm oil; Indian spot markets and INR/USD markets. Having said the above relations price trends in MCX sometimes may not represent the true international market trends. Historically, MCX and Malyaisn spot CPO correlation (40 trading day window) is ranging between -53% to +99%. The deviation is because of INR/USD. Similarly, correlation between Kandla and MCX is in the range of +49 to +99%.
Hedging in BMD Context: BMD or MCX, which is more effective BMD traded in MYR/Ton. Physicals are priced in USD and sales happen in INR. Hence, MYR/INR price risk is open. Futures contracts in BMD are wide open for longer term hedging compared to MCX BMD futures is global benchmark market for Palm oil Historical correlation (40 day window) between Kandla spot and BMD 3M is in the range of -51% to +98% and correlation between Malaysia CPO and BMD 3M is in the range of +3.7% to 99%
Back Test In order to quantify the deviation in real time, we did a case study. The observations are as follows. Price data considered from Jun08 to Jun12; Assumed 40 days (Indian refiner holding period) exposure as one window; Back-to-back hedging on daily basis for one ton as an example. So, the operations on the first day is 1.1) buy at Malaysia CPO spot 1.2) sell on the same day at MCX cpo On 40 th day 2.1) sell physicals at Kandla CPO 2.2) liquidate MCX. Similarly we have done with BMD instead MCX. In such case, the first day is 1.1) buy at Malaysia CPO spot 1.2) sell on the same day at BMD cpo and On 40 th day 2.1) sell physicals at Kandla CPO 2.2) liquidate BMD.
Price trends & Correlations Day to Day correlations Jun2008 to Aug2012 MCX BMD KANDLA Mal NCD.Soy MCX 100% 93% 100% 93% 85% BMD 100% 93% 99% 66% KANDLA 100% 93% 85% Mal CPO 100% 67% NCD.Soy 100% 1 st day to 40 th day correlations Jun2008 to Aug2012 MCX BMD KANDLA Mal CPO NCD.Soy MCX 100% 81% 89% 80% 78% BMD 100% 81% 82% 76% KANDLA 100% 84% 72% Mal CPO 100% 69% NCD.Soy 100%
Derivative & Physical P&L 40 day Trading window Description CPO Malaysia FOB Vs MCX CPO Malaysia FOB Vs BMD Physical P&L 198412 198412 Derivative P&L -198520 288730 Hedge P&L (Total) -108 487141 Correlation between Derivative P&L Vs. Physical P&L (-1 is ideal) -0.947-0.908 Hedge Effectiveness (-100% ideal) -99% +69%
Hedge & Physical P&L 20 day trading window Description CPO Malaysia FOB Vs MCX CPO Malaysia FOB Vs BMD Derivative P&L 110278 110278 Physical P&L -74730 172581 Hedge P&L (Total) 35548 282859 Correlation between Derivative P&L Vs. Physical P&L (-1 is ideal) -0.851-0.818 Hedge Effectiveness (-100% ideal) -147% +64%
The whole essence Every business wants to do their 100% of the sales volumes on the green days resulting into heavy competition. Therefore doing back to back pricing physically is not possible and so hedging becomes compulsory. Also if one has to do business on red days, some position taking is inevitable. Therefore risk management and price forecasting are two essential pillars for running refining business. 14
Price outlook Global Oil & Oilseed Dynamics TransGraph Consulting Put Ltd Slide TransGraph Consulting Put Ltd Slide 15
SA weather despite ongoing lag in Brazil planting, prospects are still buoyant for higher soybean crop Though Brazil has received rainfall during past last two weeks, planting pace is bit slower than previous year. So that it requires additional rainfall of minimum 40-60 mm across key soybean growing belts to pave the way for robust pace of planting. Argentina has received decent rains but planting will start only after third week of October Signs of mild El Niño might turn congenial for crop developments TransGraph Consulting Put Ltd Slide 16
Anticipated recovery in SA Soy crop likely to ease the global bean tightness South America BS 11/12E 12/13F Y-o-Y Abs Chng Beginning Stocks 46.2 32.5-13.7 Area 47.1 52.2 5.1 Output 115.3 148.3 33.0 Domestic Crush 76 79.7 3.7 Exports 48.3 59.9 11.6 End-stocks 32.5 36.5 4.0 Area: Million Ha, Other: Million tons With anticipated higher price realization as compared to other competitive crops, Soybean acreages are anticipated to rise by 5.1 mil ha SA output is likely to rise by 33 million tons y-o-y to 148.3 million tons Higher output lead to 11.6 mil tons y-o-y rise in bean exportable surplus of SA to 59.9 million tons Caution is required that Brazil soy planting progress is bit lagging as compared to last year. In Mato Grosso planting completed in 5% of expected area vs. last year 6% whereas in Parana 8% of area done vs. last year 11% TransGraph Consulting Put Ltd Slide 17
Robust recovery in SA crop - likely to suffice the global bean shortage World Soybean BS (Mil Tons) 12/13F Y-o-Y Abs Chng Beginning Stocks 53.6-16.6 Production 258.1 21.0 MY Exports 93.7 3.7 Crush 226.9 1.5 Consumption 256.7 2.3 Ending Stocks 53.1-0.5 Source: USDA, TG Estimate Projected robust recovery in South American crop shall result in 21.0 mil tons y-o-y rise in global bean output for 12/13 MY Anticipated incremental porduction shall suffice bean shortage in the market and hence end stocks might remain flat for 12/13MY Import based bean crushing nations are praying for higher SA crop from ongoing season TransGraph Consulting Put Ltd Slide 18
Soaring stockpiles pressurizing palm oil prices A review of co relation between CPO prices and Inventory levels confirms the existence of high level inverse relationship between the duo thus going forward it strengthens the fact that palm oil prices could be safely assumed to be bearish in the near term 19
Malaysian Palm Oil Balance sheet Malaysian Monthly Balance Sheet Parameters Sep'12 e Oct'12 f Nov 12 f Opening stocks 2.12 2.47 2.65 Production 1.91 1.94 1.82 Imports 0.05 0.04 0.08 Total 4.08 4.46 4.55 Exports 1.44 1.66 1.64 Dom consumption 0.17 0.15 0.11 Ending Stocks 2.47 2.65 2.79 Source: MPOB; TG Estimates Robust production seen Sep-Nov 12 period with favorable weather and easing tree stress. Malaysian second half output pegged around 10.6 MT vs. 7.81 MT in first six months. Malaysian palm inventories might cross 2.50 MT mark by Oct 12 thus infusing weaker sentiments to trade. 20
Indian developments 21
Kharif crop estimates : Soy leads Soy is the leader this time in terms of grabbing acreages and production. Cotton lost acreage battle to soybeans and also due to bad weather GN is hit due to bad weather Sun continued its extinction mode As such, we estimate overall oilseed output to drop by 1.37% on yearly basis. Indian Oilseed crop estimate 2011-12 2012-13 f % Change Cotton 105.5 95.7-9.30 Soybean 96.5 109.6 13.52 Groundnut 34.1 29.4-13.77 Sunflower 1.2 0.8-31.16 Niger 1.0 1.1 2.94 Sesame 3.9 4.0 2.00 Others 4.9 5.0 2.20 Total 242.3 240.6-0.71 Source: Industry, TG Research; Units: LT
Indian soybean A-Y-P trends Area (M ha) A.P. Chhattisgarh Karnataka M. P. MH Raj Rest of India Grand Total 2011 0.15 0.13 0.22 5.76 2.52 0.74 0.06 9.58 2012 0.18 0.15 0.20 6.05 3.07 0.79 0.06 10.50 Yield (T/ha) 2011 1.05 0.89 0.88 1.03 1.00 0.93 0.86 1.01 2012 1.10 0.90 0.70 1.06 1.06 0.97 0.86 1.04 Prod M tons 2011 0.15 0.12 0.20 5.94 2.52 0.68 0.05 9.65 2012 0.19 0.13 0.14 6.41 3.26 0.77 0.06 10.96 Source: SOPA and TG Research Higher price realization attracted sizeable increase in acres to Soy beans this year and that is much noticed in Maharashtra at the expense of Cotton. Maharashtra is likely to out perform other states in terms of yields increments too there by resulting in ~14% jump in soybean crop of India to 10.96 MT. 23
Moderate Domestic Supply growth Need for Higher Imports Indian edible oil Balance sheet (Nov-Oct) 2011-12e 2012-13f Abs. Change Beginning stocks 1.68 1.64-0.03 Dom. Production 7.01 7.51 0.50 Imports 9.40 9.70 0.30 Tot. Supply 18.08 18.85 0.77 Demand 16.44 17.10 0.66 Ending Stocks 1.64 1.75 Source: TG Research, Industry; Units: MT Soy oil + Rapeseed oil shall contribute Demand to grow by 4-4.5% on y-o-y Higher imports for next year looks inevitable.
Technical Analysis & Price Outlook 25
CME Soy Oil Futures Continuation, Cents/lbs. (Scenario 1) CME Soy oil futures prices are depicting a broad consolidation within 60-48 cents since Jan 11. From Elliott wave perspective prices are currently processing the Primary wave 2 unfolding as a double combination. Therefore a test of 48 cents remains open in the coming months and subsequently prices could trade higher towards 58/60 cents in the months ahead 26
CME Soy Oil Futures Continuation, Cents/lbs. (Scenario 2)
BMD CPO Futures Continuous, Elliott Wave Count BMD CPO Futures prices have placed a low near MYR 2200. From Elliott wave perspective prices are likely to be processing the Primary wave C of Cycle wave 2.. Primary wave C prices are likely to form a diagonal structure wherein a broad consolidation within MYR 2200-3000/3100 is likely to form in the coming 4-6 months. 28
NCDEX Soy Oil Futures Cont, INR/10 Kg NCDEX Soy Oil Futures prices have fallen sharply during the previous month amid heavy selling pressure from INR 820 and are currently hovering near INR 600 as the underlying weakness is still intact. Prices are likely to stay mixed within INR 630-580 in the coming weeks ahead of a recovery coming month.
NCDEX Soybean Futures Cont, INR/Qtl. NCDEX Soybean futures prices are witnessing downside corrective phase after making all time high and testing upper channel line resistance at INR 5064 in July 2012. Prices are likely to extend further weakness towards INR 2800 ahead of turning higher towards INR 3700 in the coming months.
Soy Meal FAS Kandla, USD/MT Soy meal FAS Kandla prices turned negative after making all time high near USD 797 which also happens to be 261.8 % Fibonacci Extension level considered as strong resistance. Presently prices are witnessing down side correction and extension of further weakness towards 2008 high of USD 500 ahead of turning positive seems possible in the coming months.
Rapeseed Oil Jaipur Spot Market.. INR/10Kg Rapeseed Oil Jaipur Spot prices after posting an all time high at INR 848 gradually retreating finding selling pressure. Prices may find support near INR 710 on further weakness which is also Rising trend line support and trade higher subsequently towards INR 750 in the coming months.
NCDEX Rapeseed Futures Continuation, INR/ P. Qtl NCDEX Rapeseed Futures prices, after testing upper channel line resistance turned weak and tested middle channel line support. Prices are keeping the underlying weak tone intact upon staying below the 27-Week EMA while declining consistently from the September 12 high of INR 4538. Possibility of further weakness towards INR 3700 ahead of turning positive towards INR 4100 remains on cards in the coming weeks.
Rapeseed Extract Ex-Kandla Spot, INR/MT Rapeseed Extraction Ex-Kandla Spot prices after approaching the long term resistance line near INR 20000 turned weak and closed below 13 week EMA in the last week. Prices are likely to witness further downside correction towards INR 15500 ahead of turning higher towards INR 18000 in the coming months.
MCX CPO Futures Continuation, INR/10Kg MCX CPO Futures prices have fallen sharply from INR 580 during the previous month as the downside corrective phase is on the verge of getting concluded. Possibility of a test of INR 390 remains open in the coming weeks. Upon holding above the same prices could eventually form a base below INR 450 for recovery in the months ahead
Price Direction n Range Markets Last Closing (October 12, 2012) Price Direction & Range (1-2 Months) BMD CPO Futures, MYR/MT 2500 Likely to stay above MYR 2200 and gradually inch higher towards 2700 CME Soyoil Futures, Cents/lbs 50.92 Likely to weaken towards 48 cents ahead of turning higher towards 54 cents NCDEX Soy Oil Futures, INR/10Kg. 646.10 Likely to stay mixed within INR 580-640 ahead of a recovery. NCDEX Soybean Futures, INR/Qtl 3182 Likely to find support near INR 2900 /2800 on any further decline and turn positive. Soy meal FAS Kandla, USD/MT 550 Likely to take support near USD 500 on further weakness and trade higher towards USD 600. Refined Mustard Oil Jaipur, INR/10Kg 795 Likely to find support near INR 710 on any further decline and turn higher eyeing INR 750. NCDEX Rapeseed Futures, INR/Qtl 4133 Likely to find support near INR 3700 on any further weakness and turn higher towards INR 4100. Rapeseed Extract Ex-Kandla Spot, INR/MT 16500 Likely to trade on sideways to weak towards INR 15500 ahead of turning higher towards INR 18000. MCX CPO Futures, INR/10Kg 426 Likely to trade mixed within INR 390-440 ahead of a recovery.
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