Global Commodities ECONOMICS/EQUITY GLOBAL · 2020-02-06 · 2 ECONOMICS/EQUITY GLOBAL 21 March 2016 1) Have commodity prices passed the trough? Answered by Paul Bloxham There are

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This report must be read with the disclosures and the analyst certifications in

the Disclosure appendix, and with the Disclaimer, which forms part of it.

Issuer of report: HSBC Bank Australia Limited

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Global commodity prices have picked up in the past month,

after falling to 12-year lows

In a recent report, we set out why we believe the market for

most commodities will remain over-supplied for some time yet

Here we answer the top-12 questions we have had from

investors on our commodity prices outlook

Oversupplied, but for how long?

We recently published an update of our outlook for global commodity prices, arguing

that the markets for most commodities are over-supplied and that it would take some

time for this excess supply to be worked off (Global commodities: Oversupplied, but

for how long?, 4 March 2016). Over the past few weeks commodity markets have

rallied, so many of the questions we have received from clients on this report have

been about whether we see the recent lift in commodity prices as the beginning of a

broad-based upswing, or just a short-lived burst of optimism.

Below are the top-12 questions we have received on this report over the past couple

of weeks, with answers from a number of our sector specialists.

Investors’ top-12 questions

1) Have commodity prices passed the trough?

2) Is the recent oil price rally sustainable?

3) Why did iron ore prices surge recently and is the rise sustainable?

4) How much is China the driver of commodity prices?

5) How much has the USD changed commodity prices?

6) How will the deferral of oil & gas projects affect the prices outlook?

7) The US is going to start exporting LNG. What is that doing to the market balances

and to the outlook for pricing?

8) How will lower LNG prices affect the Australian LNG story?

9) Dairy prices are at low levels. Will a supply retreat lift prices?

10) How have recent movements in the BRL affected the outlook for sugar?

11) Palm oil has been oversupplied. How long before this is worked off?

12) Will recent climate agreements lift or lower commodity prices?

21 March 2016

Paul Bloxham Chief Economist (Australia and New Zealand)

HSBC Bank Australia Limited

[email protected]

+61 2 9255 2635

Gordon Gray*, CFA

Global Head of Oil and Gas Research

HSBC Bank Plc

[email protected]

+44 20 7991 6787

Thomas Hilboldt*, CFA

Head of Resources and Energy Research, Asia Pacific

The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2922

Alexandre Falcao

LatAm Agribusiness Analyst

HSBC Securities (USA) Inc

[email protected]

+1 212 525 4449

Jigar Mistry*, CFA

Analyst HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+91 22 2268 1079

Wai-Shin Chan, CFA

Climate Change Strategist


[email protected]

+852 2822 4870

Shishir Singh*

Southeast Asia Consumer and Retail Analyst


[email protected]

+852 2822 4292

Chris Leung*

China Consumer and Retail Analyst


[email protected]

+852 2996 6531

Daniel Smith

Economist (Australia and New Zealand)


[email protected]

+61 2 9006 5848

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Global Commodities ECONOMICS/EQUITY GLOBAL

Investors' top-12 questions

ECONOMICS/EQUITY GLOBAL

21 March 2016

2

1) Have commodity prices passed the trough?

Answered by Paul Bloxham

There are arguments in both directions, although we favour the view that commodity prices

have probably troughed.

On the downside, as we have already reached 1990s average levels in real terms and

commodity prices have already fallen to around historical lows (as we point out in the report),

further falls would support the idea that there may be a very long-term downward trend in

commodity prices. This has been proposed before. The Prebisch-Singer hypothesis (1950)

suggested that in the long term, the prices of commodities would fall relative to the price of

manufactures. The key explanation for this was that technical progress meant that less material

would be required to produce non-commodity output, weakening demand for commodities

relative to manufactures.

On the upside, a key argument is that global growth has become more commodity-intensive as

the emerging economies have become larger contributors to global growth and they are at the

'commodity-intensive stage of development'. That is, because growth in these economies

requires the building of more infrastructure and housing, it is more commodity-intensive than

growth in the developed economies, which is dominated by services. This is the argument that

we favour.

Our global commodity team's forecasts imply that commodity prices have troughed, although we

see only a modest pick-up from here for most commodities as markets remain over-supplied

and we think supply retrenchment will take some time. Indeed, given that most markets are still

oversupplied, it would not be surprising if there was some modest retracement in the short run.

On the demand side, we still expect growth in China to continue to slow into the second quarter

before bottoming out, which could weigh on metals prices.

Looking at our forecasts, the weighted average of the commodities for which HSBC puts

together forecasts sees aggregate commodity prices still 15% lower in 2016, relative to the

2015 average, then rising by around 30% in 2017 (Table 1). Much of this lift is driven by our

forecast for oil prices, which sees Brent oil at USD45 a barrel in 2016 (lower than the USD53 a

barrel average in 2015) but lifting to USD60 a barrel in 2017. So a key question is whether the

recent lift in oil prices will prove to be durable (see the next question).

1. We see most commodity prices lifting in 2017, after falling in 2016

Commodity Unit 2015 2016f 2017f Long term

Aluminium USD/t 1666 1473 1473 2205 Copper USD/t 5512 4740 5402 7050 Nickel USD/t 11880 9260 11995 20600 Zinc USD/t 1938 1742 2095 2205 Iron ore USD/t 55 41 39 54 Thermal coal USD/t 59 51 53 64 Coking coal USD/t 90 83 90 105 Brent USD/b 54 45 60 75 WTI USD/b 49 44 59 74 Nymex gas USD/mBtu 2.63 2.30 3.00 3.50 Beef US cents/lb 200 158 152 na Pork US cents/lb 69 52 47 na

Source: Bloomberg; HSBC forecasts; Thomson Reuters Datastream



[email protected]

+61 2 9255 2635

3


21 March 2016

2) Is the recent oil price rally sustainable?

Answered by Gordon Gray and Thomas Hilboldt

We strongly believe that prices around current levels are unsustainable in the longer term. We

cannot rule out a near-term price correction after the recent rally, but view a return to the low

levels of early 2016 as highly unlikely.

In our view the rally has been driven by a number of factors: demand has been holding up well,

and estimates of 2016 non-OPEC output are continuing to decline. Overall, we see an

increasing market belief in the supply/demand picture moving slowly back towards balance. In

addition, widespread news-flow around a possible OPEC/ non-OPEC accord to freeze

production has added to improving sentiment, even though there is no certainty regarding an

outcome. Finally, we think the recent weakening of the USD, particularly against emerging

market currencies, has been a key source of support for crude prices in the past few weeks.

The rally has been accompanied by a sharp rise in speculative long positions in crude futures

markets, which could point to near-term downside pricing risks if it reverses. Moreover, we are

already seeing mainly US producers selling forward into the rally. Given that the market remains

fairly strongly oversupplied at the moment, it is too early to say with confidence that prices are

out of the woods.

Our unchanged second quarter Brent oil price assumption of USD40 a barrel indicates that we

expect prices to fluctuate around current levels in the near term, although rising US refinery

utilisation should lend some support in the quarter. Thereafter, we expect a substantial rally

over time. Seasonality and weakening non-OPEC output should bring the market back close to

balance in the second half of 2016, and in balance thereafter, while the supply/demand situation

looks increasingly tight later in the decade.

2. 2016 supply and demand growth outlook: evolution of IEA forecasts, mbd

3. ICE Brent – Futures and Options positioning by speculative traders (Managed Money) ('000 contracts)

Source: International Energy Agency (IEA) monthly oil market reports. X-axis dates refer to month of publication

Source: Thomson Reuters Datastream, ICE, HSBC

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jul Aug Sep Oct Nov Dec Jan Feb Mar

DemandNon-OPEC supply (inc OPEC NGLs)Call on OPEC crude

20

40

60

80

100

120

140

160

-200

-100

0

100

200

300

400

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Long Short

Net Long Brent (USD/b, RHS)

Gordon Gray*, CFA Global Head of Oil and Gas Research HSBC Bank Plc

[email protected]

+44 20 7991 6787

Thomas Hilboldt*, CFA Head of Resources and Energy Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited [email protected]

+852 2822 2922

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations


21 March 2016

4

3) Why did iron ore prices surge recently and is the rise sustainable?

Answered by Jigar Mistry and Paul Bloxham

We believe that two factors drove the recent surge of iron ore prices: 1) a seasonal restocking

cycle in China combined with supply disruptions (floods in Australia and cold-weather-induced

mine shutdowns in China) and 2) improving sentiment around China’s efforts to stimulate its

economy. However, in our view, the rally will be short-lived, as stagnating demand, excess

supply and deflating costs take control once the short-term events have played themselves out.

Historically, iron ore prices have moved up in the first quarter of the calendar year as Chinese

steel traders restock before the holiday season. This year, the surge was particularly

noteworthy, as it coincided with supply tightness following lower shipments from Australia and

Brazil (floods) and lower ore production from Chinese mines (severe cold weather).

Besides seasonality, sentiment received a boost around the National People’s Congress (NPC)

meeting in China. NPC guided for a higher budget deficit and higher money-supply growth,

ultimately signalling rising liquidity in the system, which is positive for commodity prices in the

shorter run. At its peak in March 2016, iron ore was the best-performing globally traded

industrial commodity on a year-to-date basis, rising more than 50%.

However, as the wave of liquidity pulls back, the focus will shift back to fundamentals, which are

not very encouraging, in our view. We believe that stagnating demand (global steel production

fell 7% in January 2016), excess supply (we expect 149 million tonnes of surplus in next two

years) and cost deflation (lower cash costs due to lower commodity prices) will make the current

rally in ore prices unsustainable. Iron ore prices have fallen by 15% from their peak (benchmark

at USD54 a tonne now) in recent days, but they still trade at a higher level than our forecast of

USD41 a tonne for 2016 as a whole.

4. Seasonality has played its part in iron ore pricing…

5. …as Chinese steel traders restock before the holiday season

Source: JPC, HSBC Source: Company data, HSBC calculations Note: Aggregate EBIT/t for steel majors

30

50

70

90

110

130

150

170

190

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

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Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Iro

n O

re s

po

t p

rice

(US

D/t

)

Q1 Spot Price Quarterly Average6

8

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16

18

20

22

24

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

mt

2010 2011 2012 2013

2014 2015 2016



[email protected]

+61 2 9255 2635

Jigar Mistry*, CFA

Analyst

HSBC Securities and Capital Markets (India) Private Limited

[email protected] +91 22 2268 1079

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

5


21 March 2016

4) How much is China the driver of commodity prices?


This varies depending on the commodity. As we point out in the report, China has driven

marginal demand for metals in recent years, but has not been the main source of marginal

demand for oil, gas or edible oils. China has been the dominant source of demand for

aluminium, copper, zinc, nickel, iron ore and coal over recent years (Chart 6). In the case of

copper, demand has fallen in the rest of the world outside of China. In contrast, for oil and gas,

China neither dominates over use or marginal demand. For metals we argue that weaker

Chinese demand, combined with a significant ramp up in supply have both contributed to the fall

in prices back to 1990s levels, in inflation-adjusted terms. For oil, we see the boost in global

supply as the much larger driver of the fall in prices.

6. China drives marginal metal demand 7. Prices have fallen less in SDR terms

Source: World Bank Source: Thomson Reuters Datastream

5) How much has the USD moved commodity prices?


The recent sell-off in the USD has been a contributing factor to the recent lift in commodity

prices. As we show in the report, commodity prices have moved by almost as much in special

drawing right (SDR) terms as they have in USD terms, suggesting that the rally in the USD from

mid-2014 and through 2015 contributed to the significant fall in commodity prices through that

year (Chart 7).

As HSBC's foreign exchange strategy team have in mind that the USD rally is complete, and

that it is likely to fall this year, this should be somewhat supportive of commodity prices (see

Currency Outlook: Negative rates: always and everywhere, 11 March 2016 and Currency

Outlook: No "sweet 16" for the USD, 6 January 2016).

-5 0 5 10 15 20 25 30 35

Aluminium

Copper (refined)

Nickel

Iron ore

Zinc

Lead

Thermal Coal

Oil

Gas

Palm oil

Soybean oil

Growth in demand for various commodities2010 to 2014 (%)

China

Rest of world

90

100

110

120

130

140

150

160

170

90

100

110

120

130

140

150

160

170

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Industrial Input Commodity Price IndicesIn USD and SDR terms, 2005=100

SDR terms

USD terms

Index Index

Paul Bloxham Chief Economist (Australia and New Zealand) HSBC Bank Australia Limited

[email protected]

+61 2 9255 2635


[email protected]

+61 2 9255 2635


21 March 2016

6

6) How will the deferral of oil & gas projects affect the prices outlook?


In our view, the biggest fall in industry investment since the mid-1980s will have a substantial,

long-lasting effect on global supply and through it, on prices.

We are already seeing the impact on US tight oil. The US liquids rig count (the number of active

rigs drilling for liquids) has fallen more than 75% from its late 2014 peak. Despite some

impressive productivity improvements (partly due to high-grading of resources), US output will

probably fall by more than 0.5 million barrels a day this year, having grown by over 1.5 million

barrels a day in 2014 alone. The main driver of this decline will be onshore tight oil production,

where we see volumes more than 0.7mbd lower year on year. We would expect US

unconventional output to recover with a material rally in prices, but the extent of that recovery is

likely to be constrained by far tighter credit availability than was the case in 2010-14.

Meanwhile, we expect to see increasing signs of slowing conventional output across the globe.

Already in 2016, while there are areas of growth such as Brazil and Canada, we can see

evidence of the impact of sharply lower capex on mature field declines and near-term

developments. Excluding the US, we expect a modest fall in non-OPEC output this year, and

believe our forecasts could prove optimistic. Even within OPEC, growth prospects are becoming

constrained. Iran is increasing exports following the easing of sanctions. However, growth has

stalled in Iraq under the pressure of weak prices, after impressive increases in 2014-15.

In the longer term, the most dramatic impact on global supply and hence on prices is likely to

come from the almost-total hiatus of new major project sanctions at the moment – a situation

which is likely to last into 2017. Final investment decisions on a swathe of major developments

are being deferred under a combination of balance sheet pressure and a need to optimise

project economics. In our view these volumes (notably some of the major deep-water projects)

are needed to offset mature field declines and meet growing global demand in the coming

years. The constraints on new project start-ups are a major factor behind our expectation for

broadly zero overall growth in non-OPEC output from 2016 to 2020, despite a recovery in

volumes in the US.

8. Changes in supply and demand, 2014-20e, mbd

9. Call on OPEC and OPEC crude supply, mbd

Source: BP, IEA, US EIA, HSBC estimates Source: BP, IEA, US EIA, HSBC estimates. **Excludes Indonesia (~0.71mbd)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015e 2016e 2017e 2018e 2019e 2020e

Demand Non-OPEC (inc OPEC NGL) supply Call on OPEC

25.0

27.0

29.0

31.0

33.0

35.0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Call on OPEC crude** OPEC crude supply

Current production

Gordon Gray*, CFA Global Head of Oil and Gas Research

HSBC Bank Plc

[email protected]

+44 20 7991 6787

Thomas Hilboldt*, CFA Head of Resources and Energy Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2922


7


21 March 2016

7) The US is going to start exporting LNG. What is that doing to the market balances and to the outlook for pricing?


The growth in US exports of LNG – along with major new project start-ups in Australia – are

driving a dramatic expansion of capacity worldwide which will see global LNG output rise by

nearly 50% over the period 2015-20. Despite strong underlying growth in demand, we expect

this to result in a period of significant oversupply in the global market that could persist for

several years.

The substantial majority of prospective supply from both regions has been sold under long-term

contracts with price linkage to crude. However, a portion (we estimate 10-15%) has not, and will

need to be absorbed by spot and short-term markets. The pressure on LNG markets has

already been seen in a slump in spot prices, with Asian LNG pricing of the order of USD5-

6/mBtu vs the mid-teens for much of the period 2012-15.

The European gas market is likely to bear the brunt of pressure from excess spot LNG, being

the only major liquid spot market in the world with substantial regasification capacity. Already

European spot prices have fallen to the equivalent of USD4-5/mBtu. We expect sustained

pressure on European prices as US LNG supply grows, and uncontracted volumes increasingly

compete with pipeline supplies from Russia, North Africa and elsewhere in Europe. As a result,

while we see crude prices recovering steadily in the next couple of years as the market tightens,

we can see the gas market – particularly in Europe – remaining under sustained pressure for a

more prolonged period.

The other likely effect of the impending oversupply will be to stall the next wave of major

unsanctioned LNG projects, which points to a potential tightening of the market in the next

decade. On one hand, LNG construction costs still need to fall further, while on the other, the

ability to contract long-term sales volumes under reasonable terms is likely to remain extremely

difficult in the current market environment.

Gordon Gray*, CFA Global Head of Oil and Gas Research

HSBC Bank Plc

[email protected]

+44 20 7991 6787

Thomas Hilboldt*, CFA Head of Resources and Energy Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2922



21 March 2016

8

8) How will lower LNG prices affect the Australian LNG story?

Answered by Paul Bloxham and Daniel Smith

Australia is in the process of completing eight major LNG projects, two of which have already

brought exports on stream. When all of the projects come on line, which is expected to occur

over the next 12-24 months, Australia will overtake Qatar to be the world's largest exporter of

LNG. This should provide significant support for Australia's GDP growth over coming years

(Chart 10).

As much of the LNG is forward sold on long-term (20-25 year) contracts, the volumes are

ramping up despite the recent significant falls in LNG prices (Chart 11). These projects also

have large fixed costs, so even if some of the projects are operated at a short-term cash loss,

the export volumes are likely to rise because the loss would be even larger if production did not

go ahead. Finally, it is worth noting that from Australia's perspective, the lower prices may be

less important than the ramp-up in export volumes as these projects are over 80% foreign

owned.

10. Australia's LNG export volumes to rise 11. LNG prices have fallen sharply

Source: BREE; HSBC forecasts Source: IMF

9) Dairy prices are at low levels. Will a supply retreat lift prices?

Answered by Chris Leung

A supply retreat is positive to the dairy price recovery. However, we believe this is difficult to

achieve in the short term given that milk supply from Europe is still expected to increase by 1%

this year, despite the fact that New Zealand's supply is expected to decline by 5%. Note that

Europe’s annual milk supply is 6.5 times bigger than New Zealand's, but Europe’s annual

exports of skim milk price and wholesale milk price are just half that of New Zealand.

On the other hand, global demand has also softened given China’s growth is slowing and the

collapse in oil prices has weakened the spending power of countries reliant on oil such as

Algeria and Mexico. For China, although the domestic raw milk price has recovered slightly,

(rising by 4% since September 2015 on the back of a reduction in excess milk powder

inventory), we believe it will remain at a low level this year, as there is a large price gap between

international and domestic raw milk prices.

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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Gas pricesIndex, 1990s average = 100

Russian

Indonesian

Henry Hub

US inflation


[email protected]

+61 2 9255 2635

Daniel Smith Economist (Australia and New Zealand)


[email protected]

+61 2 9006 5848

Chris Leung* China Consumer and Retail Analyst The Hongkong and Shanghai Banking Corporation Limited [email protected]

+852 2996 6531


9


21 March 2016

10) How have recent movements in the Brazilian Real affected the outlook for sugar?

Answered by Alex Falcao

A weak Brazilian Real (BRL) is good for domestic production. Given that sugar is priced in USD

in the global market, while costs are BRL denominated for sugarcane farmers in Brazil,

producers benefit from a depreciation of the BRL against the USD. And though international

sugar prices are USD-denominated, the fact that Brazil represents c45% of global exports

means that sugar prices generally follow trends in the BRL; that is, there is a strong positive

correlation. Furthermore, as international prices for sugar have decreased since 2011, sugar

production has continued to grow and has remained more profitable for domestic farmers as

BRL devaluation acts as a natural hedge for producers in times of weaker global prices.

Moreover, as domestic ethanol prices are capped by prices at the pump set by the Government,

BRL devaluation is often more favourable for sugar than for ethanol production.

12. Domestic (BRL) and international (USD) sugar prices

Source: Reuters, HSBC

Note that the domestic sugar industry is facing other issues such as elevated debt levels at

Brazilian mills and increased mill closures over the last few years. Offsetting these difficulties

have been increases in mechanization and sugarcane yields. When considering the industry

holistically, the recent devaluation has been supportive for the industry where planted area and

production expectations are forecast to continue growing. Chart 13 shows our expectations

through 2018e where sugar production grows at a 2.4% 3yr-CAGR above our expected 3yr-

CAGR of 1.9% for yields, with ethanol production lagging behind at a 1.4% 3yr-CAGR as

producers will likely favour increased sugar production at the expense of ethanol production

given the caps of domestic ethanol prices.

13. Brazilian sugar and ethanol production and yields*

Source: UNICA, HSBC *Sugar and Ethanol produced to RHS scale, yield to LHS scale

0

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20

30

40

50

60

70

Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14

Sugar Price USD Sugar Price BRL

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2000 2002 2004 2006 2008 2010 2012 2014 2016e 2018e

Sugar Produced (k tons) Ethanol Produced (k m3) Yield (ton/Ha)

Alexandre Falcao LatAm Agribusiness Analyst

HSBC Securities (USA) Inc

[email protected]

+1 212 525 4449


21 March 2016

10

11) Palm oil has been oversupplied. How long before this is worked off?

Answered by Shishir Singh

The fall in palm oil prices has been due to a confluence of many factors, both on the supply and

demand sides. Since palm oil competes with several other oilseeds in the vegetable oils market,

a record soybean harvest coupled with continued demand for animal protein (soybean’s primary

product), displaced palm products in China. Moreover, demand from India also fell sharply from

mid-2013 to mid-2014 as its currency came under pressure following talk of the US Fed tapering

quantitative easing. Finally, the sharp fall in crude oil prices relative to crude palm oil (CPO)

prices since 4Q14 eliminated palm oil demand for discretionary fuel blending and the biodiesel

policy in Indonesia failed to support CPO.

14. Global vegetable oil production split by crop (USDA, MY*15-16 estimate)

15. YoY growth Millions of MT in global vegetable oil production is declining

Source: USDA est., Thomson Reuters Datastream. Total = 178.6MT. *Marketing year ends in September of the following year i.e. MY07 is YE September 2008.

Source: USDA estimates

All these bearish factors have either already reversed or are in the process of reversing now, in

our view. CPO prices are up 21% YTD to USD636/MT (FOB Malaysia) as the impact of El Niño in

2H15 takes its toll on production. The buoyancy in CPO prices is also supported by lower

production of competing oilseeds, which make up the rest of the vegetable oil market. The

supply of the top-three oilseeds (soy, rapeseed and sunflower seed) has grown by 8% p.a. in

the last three years but is set to decline for a mixture of reasons including weather, low prices

and a strong dollar. In our view, the broad-based production decline is enough to work through

2-3 weeks of surplus inventories and keep vegetable oil supply growth at decade-lows in 2016.

16. Chinese & Indian imports growth steady…

17. … decline in inventories lifting CPO prices

Source: Bloomberg, SEAI Source: Bloomberg, SEAI

On the demand side, we expect palm oil demand to grow by 5.7% YoY, around its long-term

trend growth of 5.5% p.a. in 2016. This would add 3.3MT to global demand in 2016, particularly

supported by:

39%

29%

15%

8%9%

Palm

Soy

Rapeseed

Sunflower

Others

-5.0

0.0

5.0

10.0

2010 2011 2012 2013 2014 2015e

Palm Oil Soybean OilRapeseed Oil Sunflower Oil

-25.0-20.0-15.0-10.0-5.00.05.0

10.015.020.025.0

Dec

-10

Mar

-11

Jun-

11S

ep-1

1D

ec-1

1M

ar-1

2Ju

n-12

Sep

-12

Dec

-12

Mar

-13

Jun-

13S

ep-1

3D

ec-1

3M

ar-1

4Ju

n-14

Sep

-14

Dec

-14

Mar

-15

Jun-

15S

ep-1

5D

ec-1

5

China Palm oil imports Trailing 12-m YoY%

India Palm oil imports Trailing 12-m YoY%

300

450

600

750

900

1,050

1,200

1,3501.00

1.50

2.00

2.50

3.00

06 07 08 09 10 11 12 13 14 15 16

Malaysia palm oil inventory (mn tonnes)Crude palm oil price (USD/Tonne, RHS)

Shishir Singh* Southeast Asia Consumer and Retail Analyst The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 4292


11


21 March 2016

An increase of 1.0MT in Indonesian demand, primarily driven by an increase of 0.8MT in

demand for biodiesel after the implementation of new policy in July 2014. This revised

policy has linked biodiesel prices to CPO prices instead of depressed crude oil prices. The

government has also established a plantation fund, which is collecting levies on palm oil

exports to subsidize biodiesel uptake in the country.

An increase of 0.5MT in Chinese demand as the displacement of palm by soy is abating.

We believe that China’s consumption of animal protein is now near saturation levels seen in the

EU and the US. This is likely to reduce demand for soymeal as an animal feed and, as a

consequence, the supply of soy oil, which is a by-product of soybean crushing. Soymeal is

the primary product of the crush, accounting for 78% of output. We expect this to leave

palm oil with a sizable share of the vegetable oil market.

An increase of 0.8MT in Indian demand. Indian demand has recovered since the

parliamentary elections in mid-2014. Barring sharp macroeconomic deterioration, we see

little risk to our forecast of continued growth palm oil’s biggest market since India’s per-

capita consumption of vegetable oils is well below global benchmarks, and competition from

soy is relatively benign, given the low requirement for animal protein due to a large

vegetarian population.

These supply and demand side dynamics imply a gap of 4.8MT between CPO supply and

demand growth this year. This deficit amounts to as much as 8% of annual global demand and,

in our view, easily exceeds the surplus inventory in the system. Unsurprisingly, a correction in

Malaysian inventories, though partly seasonal, has been sharp versus the record levels in

November 2015. This has catalyzed the rally in CPO prices and we forecast CPO prices to

reach USD700/MT by 4Q16 (up 10% versus the current price)

12) Will recent climate agreements lift or lower commodity prices?

Answered by Wai-Shin Chan

Although climate change is by nature long term, preparations for the transition to a low-carbon

economy and to build resilience to the impacts must begin now. The landmark deal that was

agreed in Paris in December should provide a boost to regulatory changes, which in turn may

affect commodities prices. In general, however, different commodities are affected by climate

change in different ways and over different timeframes.

Agricultural commodities, for example, can be a victim of climate change impacts – hence

possible higher prices when crops are damaged by droughts or floods. These impacts tend to

be more localised and episodic. Over time, yields would change given rising temperatures and

varying water availability. Some crops may see higher yields, others lower yields, depending on

the variety or species. Given the importance of global food security, many countries plan to

modernise their agricultural practices as part of their climate pledges.

Energy commodities, and especially fossil fuels, are also likely to be affected by the climate

agreement, but more so over a longer timeframe. For example, many countries intend to

restructure their energy systems – by making them more efficient and by using more renewable

energy, both of which should lower the growth of future demand for fossil fuels.

This is exemplified by China’s recent 13th

Five-Year Plan, which sets energy and climate targets

to 2020 and makes low carbon a key development theme over the next five years. Many

industries including power generation are to be made more efficient and lower carbon. As such,

China’s growth in the demand for energy commodities should be slower than in previous years.

So in answer to the question, it really depends on the speed of implementation of the Paris

Agreement.

Wai-Shin Chan, CFA

Climate Change Strategist The Hongkong and Shanghai Banking Corporation Limited [email protected]

+852 2822 4870


21 March 2016

12

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Paul Bloxham, Gordon Gray, Thomas C. Hilboldt, Alexandre

Falcao, Jigar Mistry, Wai-shin Chan, Shishir Singh, Christopher Leung and Daniel Smith

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's

existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons

when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different

securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and

therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should

carefully read the entire research report and not infer its contents from the rating because research reports contain more

complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12

months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will

be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a

Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is

between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more

than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,

change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,

regional market established by our strategy team. The target price for a stock represented the value the analyst expected the

stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as

Overweight, the potential return, which equals the percentage difference between the current share price and the target price,

including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the

succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,

the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or

10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12

months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,

stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the

past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

As of 20 March 2016, the distribution of all ratings published is as follows:

Buy 47% (27% of these provided with Investment Banking Services)

Hold 39% (27% of these provided with Investment Banking Services)

Sell 14% (18% of these provided with Investment Banking Services)

13


21 March 2016

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to

current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current

model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis

for financial analysis” above.

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banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.

This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as

such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that

company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 21 March 2016.

2 All market data included in this report are dated as at close 21 March 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research

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confidential and/or price sensitive information is handled in an appropriate manner.


21 March 2016

14

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