Desmond Ng

Malaysian Palm Oil Council, Malaysia

Introduction

2016 has been a challenging and eventful year for oils & fats players in China. Challenging in the sense of continue slowing down of Chinese economy growth,which affected the overall demand for oils & fats especially from the industry sector. At the same time, it is eventful due to the various event/policies taken place in China as well as globally during the same year, where these events have impacted the market situation or more precisely, the import needs of vegetable oils in 2016.

Further decline in oils & fats demand growth due to slowing economy growth

Following the slowdown in economic growth, growth in demand for oils & fats in China has also seen a slowing down trend in recent years. Figure 1 clearly shows that the demand for oils & fats has been growing in the same pace as to the GDP growth of China. This could be explained as the slowing down of economy activities (GDP growth)indicated that a slowdown in industries activities where majority of the oils & fats being used, either for food or non-food purposes. This then lowered the growth of oils & fats needed for the purpose of industries production. China’s GDP growth in 2016 is estimated at 6.7%, which was the lowest since the country initiated the open-door policy in the 1980s, and this brought the growth of oils & fats demand at 340,000 MT, the lowest since 1993.

While demand of oils & fats in China relies heavily on import in either oilseeds or oils (Figure 2), the import of oils & fats in China has declined from 9.77 million MT recorded in 2015 to 8.10 million MT last year. Among these, the 3 major vegetable oils consumed in China have all witnessed negative growth in 2016 with palm oil recorded the highest drop in volume (Table 1). In 2016,palm oil import recorded the lowest volume since the abolishment of import quota imposed on palm oil in 2006 after the accession of China into WTO. In the same year,soybean oil import volume extended its declining trend since 2008, while rapeseed oil import has experienced its 3rdyear of declining import in China. Anyhow, this was not solely attributed to the slowdown in Chinese economic growth but due to other various reasons, which is why it is being coined as an eventful year in 2016.

Figure 1. GDP growth vs. oils & fats demand growth

Table 1. Imports of 3 major oils & fats in 2016 (MT)

First decline in cpo output in the new millennium

In 2016, crude palm oil productions in both Malaysia and Indonesia (which accounted for a total of 84%CPO global production) have declined significantly by 7.95% (Table 2) and subsequently led to the first decline in CPO production history since the new millennium.The decline was due to the long period of hot and dry weather, or known as El Nino phenomena which started in early 2015 and lasted for almost 15 months. As a result of this weather condition, the production of fresh fruit bunches (FFB) and oil yield of FFB in majority of the oil palm estates in Malaysia and Indonesia dropped significantly and subsequently the CPO output. With the decline of combined output estimated at 4.24 million MT in Malaysia and Indonesia, this restricted or limited the availability of CPO or processed palm products for export as both countries export at least 70% of their palm oil produced to more than 150 countries globally.With total export volume dropped significantly, and with China being the major importing country of palm oil in the world, import palm oil in China not spared from this trend in 2016.

Figure 2. Share of oils & fats supplies in China

Table 2. Global palm oil production (Mn. MT) and yield (MT/ha)

Table 3 clearly shows that palm oil imported from Indonesia and Malaysia in 2016 dropped between 23.3%and 25.4% against volume charted in 2015. However, the pace of decline seems to be higher than the decline in the total output of CPO in both major producing countries.What could be the other reasons led to the decline?

Table 3. Palm oil imports by country of origin in 2016 (MT)

If we look carefully into the types of palm products imported by China, we would find answer explainingthe bigger drop in percentage of import vis-à-vis total output of palm oil. Traditionally, the 2 major palm products imported by China are RBD Palm Olein (or more commonly known in industry as “24°C palm oil”)and RBD Palm Stearin (also known by some as “industrial grade palm oil” due to its application in early days which mainly confined to producing soap and oleochemicals,but in actual fact it is also an excellent raw material to produce trans-free solid fats such as margarine and shortening) (Table 4). While the imports of these two products are partly driven by the demand from relevant industries, the import duty structure of palm products in China has also played important role in this. Import duties for all palm products are set at 9% with exceptional for RBD Palm Stearin which is being set at 8% (melting point below 50°C) and 2% (melting point between 50°C and 55°C). However, the value added tax (VAT) of all palm products are not at par with RBD Palm Olein, RBD Palm Stearin and CPO being set at 13% while the other palm products at 17%. As such, it is more economical to import RBD Palm Olein and RBD Palm Stearin based on the tax structure.

Table 4. Palm products imports in 2016 (MT)

While RBD Palm Olein is mainly used in food processing and catering sectors, it is bound to be competing with other vegetable oils for the usage in China, especially when come to winter where RBD Palm Olein has to be fractionated to lower melting point for it able to be used in pure or blended form with other soft oils. However, this again depends on the price competitiveness of RBD Palm Olein against various soft oils, especially soybean oil and rapeseed oil, as there are certain applications where these 3 vegetable oils are substitutable among each other. For these applications,the users will not hesitate to switch to other oils when the price of one vegetable oil is not attractive.

Hence, due to the tightening of CPO supply in 2016,the supply-demand gap of palm oil has to be partially satisfied through the digestion of stock available in the country (Figure 3). Palm oil stock in China dropped from 1.02 Mn. MT at the beginning of the year to 428,000 MT as of 30 Dec 2016. As a result of this, RBD palm olein price slowly moved up from RMB 4,560/MT to RMB 6,700/MT during the same period.

Figure 3. Palm oil stock vs. price in China

Of course, the price difference among the vegetable oils again depends on the supply-demand balance of not only from palm but also other oils, and 2016 witnessed another major event taken place that has disrupted the supply-demand balance of vegetable oils and its prices,and subsequently affected the needs importing RBD Palm Olein in 2016.

Release of temporary state reserve rapeseed oil

Administered from end 2015 after the Chinese government decided to change its measure in supporting the rapeseed farmer, all the temporary state reserve rapeseed oil will be slowly released into the market through auction, and 2016 marked the year where the auction of this reserved rapeseed oil was in full force.From the estimated reserve volume of 6.18 million MT of rapeseed oil as of end 2015, which was purchased &stored annually since 2009 (with some small quantity being auctioned before 2016), 3.39 million MT were being auctioned and released into the market in 2016 (Table 5).As qualities of some of these oils have deteriorated along the years, the auction base-price was far lower than the market price of rapeseed oil and even soybean oil despite the cost to refine it to edible quality. This became attractive to many traders and shifted their attention to these rapeseed oils instead of purchasing rapeseed oil or soybean oil from the market. Besides that, as these rapeseed oils became so competitively priced, it also took over some market share from RBD Palm Olein especially from the blended cooking oil segment, and the decline of RBD Palm Olein import volume clearly reflected this scenario.

Furthermore, the release of state reserve rapeseed oil not only affected the trade of RBD Palm Olein but also the needs to import soybean oil and rapeseed oil during the same period (refer Table 1). Besides that, the import of rapeseed, which contains balance amount ofoil & meal in it, was also being affected during the same year. Table 6 clearly showed that the import of rapeseed in China dropped in 2016 for the second consecutive year. Another event took place in China in 2016 was the announcement on the requirement for lower impurity of imported rapeseed from 2% to 1% which was suppose to be effective on 1 April 2016 and then postponed to 1 Sep 2016 (but later being suspended upon bilateral meeting between the Chinese and Canadian country leaders) had deterred some importers and traders to purchase this oilseed, and subsequently contributed to the slowdown in import volume. Finally, the decline in global rapeseed production has also affected the import activities of rapeseed in China.

Table 5. State reserve rapeseed oil (RSO) auctioned

Continuous increase in soybean import but slower rate

When studying the palm oil demand in China, we have to also study the supply-demand balance of soybean,and its derivatives. As Chinese government encourages the local crushing of soybean mainly to produce soybeanmeal (and soybean oil became by-product in the situation)for the development of its animal feed and livestock industry since 1990s, China has started import more and more soybean every year (Figure 4) and this led to the rising output of soybean oil in the country.

Table 6. Rapeseed imports in 2016 (Mn. MT)

Figure 4. Soybean import in China (2000～2016)

While growth of oils & fats demand outpaced the local production in early years, it created rooms for import of vegetable oil with majority being palm oil. Prior to 2013,growth of oils & fats import outpaced the consumption growth in China in past 10 years (6.4% vs. 5.0%), but direct import of oils & fats dropped subsequently (-7.5%per annum during 2013～2016). While this is partly due to the slowdown in consumption growth at the same period(+1.6%/annum), the main reason could be attributed to the growth of oils imported in the form of seeds which was more significant at 11.8%! (2003～2016). From 2003 to 2016, import of oilseeds grew 11.7% on average per year, among which soybean import grew at an average rate of 11.3% and accounted for more than 90% of total oilseeds import. As all imported soybean were meant for oils & meals production, oils brought into the country in the form of oilseeds was actually the one that supporting the average supply growth of 4.4% in oils &fats production during the same period.

By virtue of higher growth in soybean oil production using imported soybean at 885,000 MT/annum against the local demand growth at 550,000 MT, this squeezed the market opportunity for importation; and palm oil being the major oil that could only be sourced through importation have been affected. As a result, palm oil import from 2013 to 2015 was stagnating or on downward trend (6.19, 5.63 & 6.03 Mn. MT) as compared to the peak import volume of 6.59 Mn. MT recorded in 2012.

Anyhow, as mentioned earlier, the release of state reserve rapeseed oil also deterred the interest of traders to trade other oils such as soybean and palm oil and this up to certain extend has affected the demand and interest to import & crush soybean in 2016 (Table 7). Besides that,the decline in South American soybean and depreciation of renminbi has also increased the import cost of soybean for crushing, whereby US soybean increased from RMB 2,850/MT from beginning of the year up to RMB 3,550/MT at the end of 2016, a 25% increase in 2016.Nevertheless, the 2016 soybean import situation was seen as exceptional case as soybean import and production in China is mainly driven by the demand for animal feed which meant for the production of livestock products.As can be seen from Figure 5, China’s meat demand projected to continuously rise. In another word, the growth of soybean meal (and oil) production is very much depends on the demand for livestock products in the country, which linked to the urbanization progress of the country. Hence, while China’s GDP growth is expected to slowdown, the progress of urbanization will continue and this will drive the soybean oil output despite possible slowdown in oils & fats demand growth in near future.

Figure 5. China’s meat demand projected to continuously rise

Table 7. Soybean imports in 2016 (Mn. MT)

Outlook for oils & fats market in 2017

Reviewing the oils & fats consumption in China could help us to easily identifying that the growth rate (Table 8) and absolutely volume (Figure 1) have been slowly declining in recent years. While the decline could partly associated to the slowdown in economy growth, it would be more due to the consolidation or reform of industries activities taking place in the country since the financial crisis in 2009. However, should this phase of consolidation being fully undertaken, it is expected that the growth in oils &fats demand (in volume) will increase despite the slower growth in GDP of China.

Table 8. Major oils & fats consumed in China (2010～2016)(Mn. MT)

Hence, as Chinese industries activities are still in the midst of consolidation and reform, it could be projected that the outlook for oils & fats demand in 2017 is still very much in tandem with the growth of GDP witnessed in past several years. So, what is in place for the demand of various major oils & fats in 2017?

Referring to the state reserve rapeseed oil auctioned up to end 2016, the reserve remained was at 2.27 Mn. MT and most industry players are of the view that this volume will not be fully auctioned as some would be remained as strategic reserve for the government to use it as and when it is needed. Furthermore, the reserve rapeseed oil to be auctioned are those purchased in 2013 which comprised mainly oil produced using local rapeseed and hence, non-GMO. This caused some of the success bidders of these batches of rapeseed oil to only sell it when it fetch relatively good premium. As such, it is not expected to be channelled into the market as compared to those rapeseed oils released before mid-2016. In another word, the successful auctioned rapeseed oil is very unlikely to affect the market price of rapeseed and soybean oil in 2017, and allow the market return to its normal supply-demand balance.

Hence, as local production of rapeseed for this coming season is unlikely to see any significant jump, it is largely predicted that the demand for rapeseed oil or rapeseed will be satisfied through importation but not at the competitive price against those auctioned state reserved rapeseed oil released in first half of 2016. In another word,it will not able to compete with soybean oil as it was in the first half of 2016 and as such will not have significant impact on soybean oil and subsequently palm oil demand.

As mentioned earlier, supply-demand balance of soybean oil is very much depends on animal feed demand in the country and this is expected to continue grow in 2017. As such, soybean import will continue to rise and soybean oil supply will increase further, but the quantum would be very depends on the growth of livestock industry in the same year.

Since oils & fats demand is forecasted to grow approximately 500,000 MT (based on the GDP vs.demand growth pattern identified and forecasted GDP growth of 6.5% for 2017), it is interested to know what is in place for palm oil for 2017?

Palm oil import would recover to above 5.00 Mn. MT for 2017

Reviewing the 2016 import figure of palm oil showed that the import of palm oil has been affected by drop in output, release of state reserve rapeseed oil and continuous competition from soybean oil produced using imported beans. Anyhow, despite the significant drop in palm oil import (-1.43 Mn. MT), the consumption of palm oil in China only dropped 740,000 MT and pegged at around 5.00 Mn. MT, where part of the demand being satisfied by digesting the stock in the country. In another word, under such competitive landscape experienced in 2016, the demand recorded in the same year indicated that the volume indicated an inelastic demand of palm oil in China. This is largely due to its superior functional properties in certain food processes which are irreplaceable by other oils & fats should there be no significant price difference.

Hence, it is forecasted that the minimum demand for palm oil in China (without taking into account the additional 500,000 MT increase of total oils & fats demand in 2017)would be at least 5.00 Mn. MT in 2017. Since stock level of palm oil in China has been in relatively low level (less than or close to one-month buffer stock required to make sure that the demand is not disrupted), demand for palm oil would be largely satisfied through importation in 2017, especially when the CPO output is expected to recover in this year as well!In another word, import of palm oil in China is forecasted to reach at least 5.00 Mn. MT, an increase of 520,000 MT as compared to last year.