FGV Annual Integrated Report 2019

16 FGV HOLDINGS BERHAD 2019 PALM OIL MARKET REVIEW 2019/2020 SUGAR MARKET OVERVIEW OUR MARKET LANDSCAPE In 2019, the palm oil industry experienced a second consecutive year of lower prices with the average price of palm oil down 7.2% year-on-year to RM2,077.50 per MT. This was largely due to high palm oil stock of 3.2 million MT at the start of the year. Demand, however, was buoyant given that lower prices of palm oil improved its competitiveness against other vegetable oils. Overall output in 2019 recorded marginal growth compared to 2018. Demand in 2019 was largely driven by Malaysia’s three largest export destinations. Exports to China increased by 34% year-on-year as it replenished stock ahead of the Chinese New Year festive season, while lower prices and lower domestic crop output attracted Indian buyers, driving exports up 76% year-on-year. In Europe, even against the backdrop of the European Union’s move to progressively phase out the use of palm oil in its biodiesel, Malaysia recorded a 9% year-on-year improvement in exports to the region. Strong demand was also seen in other destinations, including Indonesia, the United States, Italy, Japan and Iran. Total demand in 2019 reached 24.05 million MT, which consequently led to low stock levels at 2 million MT as of end-2019. Lower stocks led to a revival in palm oil prices as it reached a high of RM2,826 per MT in December 2019. Global sugar production for 2019/2020 is expected to reduce by 6 million MT (from the previous season of 2018/2019) to 178 million MT due to lower production in India and Thailand (the world's second and third largest sugar producers after Brazil). Brazil's production remains almost unchanged compared to the previous season of 2018/2019 at about 26 million MT, and is expected to produce more sugar in the next season due to the slump in oil prices which consequently makes ethanol production unattractive. Thailand which has been affected by dry-weather in key planting areas, is expected to produce 8.2 million MT for the season of 2019/2020 as compared to 14.6 million MT in the previous season. Global sugar consumption is expected to be flattish and almost unchanged from the previous season of 2018/2019 at about 182 million MT as countries utilizes the surpluses and carry-stocks from previous seasons. Sugar consumption for the next season of 2020/2021 is expected to increase but on a smaller quantum due to the worldwide movement restriction imposed (as an effort to curb the COVID-19 pandemic) caused the closures of restaurateurs, hoteliers and the Food & Beverage Industry. Consumption for the next season of 2020/2021 is forecasted to be around 184.5 million MT against 185 million MT of sugar production. 2020 PALM OIL MARKET OUTLOOK We expect palm oil prices to trade higher from the previous year, ranging between RM2,200 and RM2,400 per MT. Key factors for this include: 1. Biodiesel demand – Demand from Indonesia’s B30 andMalaysia’s B20 implementation is likely to absorb any significant rise in production and leave inventories at around 2 million MT. Indonesia’s B30 implementation may use up to 10 million MT of palm oil while Malaysia is projected to consume up to 1.3 million MT, which is 75% and 5% higher, respectively, compared to the previous year. Indonesia plans to implement B50 biodiesel by 2021 and will then be consuming as much as 14 million MT of palm oil, which will continue to tighten supply. 2. Lower production – The impact from the cutback in fertiliser usage in 2019 and weather challenges is likely to impact production in 2020. Malaysia’s production is expected to be lower at around 19.3 to 19.6 million MT following three years of higher production. 3. The impact of COVID-19 – The COVID-19 pandemic threatens stoppages of operations in the estates and mills, which will affect CPO supplies. As countries step up their fight against the pandemic, new restrictions on logistics services will also affect movements of CPO, thereby impacting inventory levels. China's recovery from the pandemic after not more than three months of lockdown in Wuhan, which caused restrictions on movement of trade between countries, provides relief as demand for CPO is expected to increase as China replenishes its stockpile. Nevertheless, competition remains from Indonesia due to its lower cost and there is expected to be excess quantities from India and other countries as they embrace the challenges of the pandemic in their respective countries, which may involve logistical restrictions on the movement of CPO and stoppages of business operations in the destination countries. While CPO price remains stable for the first quarter of 2020 in spite of the COVID-19 challenges, the duration for recovery from the pandemic across the world is crucial for the CPO outlook. In Million MT 2019 2018 YoY % Price (RM/MT) 2,077.50 2,238.50 7.2 Production 19.86 19.52 1.7 Exports 18.47 16.49 12.0 Imports 0.98 0.84 16.1 Local Disappearance 3.57 3.39 5.5 End Stock 2.01 3.22 37.6 INDIA CHINA EU 4.41 milMT 2.51 milMT 2019 2018 75.40% 33.92% 9.51% MALAYSIA’S PALM OIL EXPORTS 2.49 milMT 2.09 milMT 1.86 milMT 1.91 milMT 2019 2019 2018 2018 OUR ORGANISATION Sources: Malaysian Palm Oil Board (Economics and Industry Development Division), UOB Kay Hian Asean Plantation Highlights, Oil World, Futuresource, USDA