2008-09 Revisited Economic Downturn

& Effect on Palm Oil Trade

Paper by Dorab E Mistry, Director,
M/s. Godrej International Limited
At POTS- INDIA by MPOC
OnTuesday 15 December 2009
Taj Palace Hotel, New Delhi

Ladies and Gentlemen

It is always a great pleasure to speak to an audience in India. Over the years, many of you have attended
my speeches at Globoil India, the AGM of the Solvent Extractors Association and the IASC Congress jointly
hosted by SEA and COOIT. This is my second POTS speech in India in the last 2 years, the first having
been in Mumbai.

I take this opportunity to welcome in our beautiful and historic capital city, all delegates from the
Malaysian Palm Oil Council, the Malaysian Palm Oil Board and 3 dignitaries in particular. The first is His
Excellency Tan Sri Bernard Dompok who took charge earlier this year as Malaysia’s Minister of
Plantation Industries and Commodities. Tan Sri Bernard Dompok comes from the Palm Oil state of Sabah
and was Agriculture Minister and later Chief Minister of Sabah. The second person I wish to welcome very
warmly is my old friend Tan Sri Dr Yusof Basiron whom I have known since 1981 and who is now
entitled to be called Mr Malaysian Palm Oil. And the third person I wish to warmly welcome is my friend
Dato Lee Yew Chor, CEO of IOI one of Malaysia’s largest conglomerates. We in India have enjoyed the
friendship of many Malaysians in this industry and as brother nations, India and Malaysia have been long-
standing friends.

The concept of the Palm Oil Trade Fair & Seminar is quite unique and the MPOC has developed a very
interesting and successful format. The earlier POTS in Mumbai was a resounding success and I am
sure New Delhi will be the same.

At the time of the Mumbai POTS, the Malaysian side were complaining that Malaysia’s share of India’s
palm oil imports was very small. I am pleased to say that in the last year, this has been dramatically
rectified. The first step was the lowering and finally the removal of import duty on CPO by India and at the
same time, the relaxation of CPO exports by Malaysia.

On a personal note, I always look forward to speaking to an Indian audience because the players here are
most knowledgeable and understanding. Today everyone wishes to visit India and to do business with
India. We can justly say that Malaysia has been an old and long-standing friend of India and has
encouraged Indian companies to invest and prosper. My own organisation GODREJ was the first Indian
company to invest in Malaysia in 1962. Over the years, many Indian companies have invested in the
Malaysian palm oil industry. Many of you have visited Malaysia as guests of the MPOC and got to know the
industry at first hand. Every year, at the annual POC hosted by Bursa Malaysia, I am made to feel at home
by the very large contingent that comes to Kuala Lumpur from India. It is a matter of great pride for me
at these conferences to meet fellow Indians who come representing not merely Indian companies but
increasingly, major international companies.

At this stage may I congratulate Bursa Malaysia on its recent tie up with the Chicago Mercantile
Exchange. Soon, people will be able to trade BMD CPO futures on all the 60,000 Globex terminals
worldwide. The CME is also going to launch a US Dollar based CPO contract which will use the equivalent
closing prices of the Bursa Malaysia. This will increase the tradability of Palm Oil futures very considerably
and must inevitably attract greater fund participation in our market. I do not have to tell you what greater
fund participation brings!

Events so far
A few days ago, on Friday 4 December I spoke at a Palm Oil conference and gave out a Price Forecast for
the First Half of 2010. That forecast of a target of 3000 Ringgits for CPO futures on the BMD has become
the talk of the industry and has over-taken all other discussion. My paper has received a lot of feedback
from our industry and that equips me today to discuss the latest market scenario with the benefit of that
feedback.
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2008-09 Revisited - Economic Downturn and after
Let me first take you back to 27th February 2008 and the Annual Price Outlook conference in Kuala
Lumpur. You will recall those heady days of the Commodity Boom. I made a forecast that if certain
conditions were to happen, by the end of 2008, CPO prices could scale the record level of 4500 Ringgits.

Within 4 days of my words, the BMD futures touched a high of 4450 and then collapsed. The Commodity
Boom appeared to turn to Bust. The sub-prime crisis of the USA, which had remained localised and
contained, seemed to get completely out of hand. The U S Dollar began to strengthen and most markets,
from Equities to Agri commodities to Metals began a steep descent. Crude oil which had peaked at US$
147 per barrel began to fall rapidly. The countries of the developed world began to sink into recession. As
growth rates turned negative, Central Banks began to cut interest rates drastically. The collapse of major
investment banks and brokerages drew attention to a looming crisis amongst major international banks.
Western governments began to think the unthinkable and pumped money into banks and nearly
nationalised them.

One result of this crisis management was that Western Governments did precisely what they had advised
the developing countries NOT to do in previous crises like the Asian crisis of 1997. Then came major
Stimulus packages to try and keep the recession as short as possible to avoid major employment. The
biggest Stimulus package came in China. Side by side, the USA made political history as a young senator
from Illinois Barack Obama won a landslide victory to become President.

The year 2008 saw CPO prices bottom at 1335 Ringgits as CPO production went through what I call its
periodic High Cycle and oilseed production in Ukraine and Russia underwent a massive increase.

The main developments of 2008 and 2009 can be summed up as follows:

The high prices of the Commodity Boom of 2007 and early 2008 triggered a big Supply response.

Then as prices collapsed in the face of looming recession and large production, the commodity world
appeared to face a crisis.

The big population countries like China and India came to the rescue of commodity producers. Both China
and India and indeed most of Asia kept growing at a steady pace of 7 to 8 percent and this kept demand
on an even keel.

The large Stimulus Packages and low interest rates prevented a repetition of the Great Depression of the
1930s. Stock markets bottomed out in March 2009 and since then we have seen an unprecedented
recovery in Equities markets. This has been mirrored by a similar 70 percent recovery in metal prices and
a 50 percent recovery on agri commodity prices.

Gradually, the developed countries have also clawed their way back to growth although the growth rates
are quite feeble at present.

The Palm Oil and indeed the entire Vegetable Oil market had two major strokes of good fortune in 2007-
08 and that rescued the trade from any damaging price collapse. Analysts like me who were
pessimistic and made bearish forecasts at POC in March 2009 had to quickly retract and to
change direction.

The saviours of the world vegetable oil industry were INDIA and the link to Bio diesel.

In early 2008 the Indian government responded to very high world prices by removing the import duty on
crude unrefined vegetable oils and reduced the duty on refined oils to 7.5 percent. Then throughout the
second half of 2008 and early 2009, with an eye on the upcoming general elections, the Indian
government followed an inflation control policy. With the benefit of hindsight, it can be said that this
inflation control policy was a masterstroke and proved to be extremely popular with the Indian public.
They succeeded in bringing inflation down to Zero. Coupled with other populist measures, the government
was re-elected with a strong majority and can justifiably feel vindicated with its approach.
The result of NIL import duty in India was a dramatic lowering of prices of edible oil. Let me give you
some figures:

In March 2008, RBD Olein in wholesale was costing Rupees 62,000 pmt.
By October 2008 it had fallen to Rupees 42,000 and
By November/December 2008 it was at bottoming out at Rupees 30,000.
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Thanks to the strength of the Rupee, today despite a major rally in world prices, RBD Olein is still
available at Rupees 38,000 per tonne.

As I have always said, India is a typical Price Elastic market. Lower prices encourage higher per
capita consumption. In the oil year which began in November 2008, we saw unprecedented rise in Indian
per capita consumption. What is more, India began to import large tonnages of sunflower oil and soya oil
which had hitherto been neglected. India stepped up imports of Palm ofcourse. The resourceful Indian
Refining industry discovered the joys of double fractionation and gave birth to Super Olein.

The dramatic rise in vegetable oil imports can be seen in the following table

000 2009-10 2008-09 2007-08

Soya oil 900 1000 750
Palm oil 6950 6700 5270
Sun oil 500 600 30
Lauric oils 250 250 200
Vanaspati 50 50 50
Others ------ 50 -----
Total 8650 8650 6300

The jump in Sunflower oil imports from the Black Sea came as a God Send to the farmers and crushers of
Ukraine and Russia. Without Indian demand, Sunflower oil would have traded at a discount to Palm oil for
a long time.

During 2008, CPO went through a High Cycle of production. Palm oil stocks in Malaysia peaked at 2.265
million tonnes in November 2008 whilst combined
Palm stocks in Malaysia and Indonesia were in excess of 5 million tonnes. Yet prices did not sink to
previous lows and held up remarkably thanks to India’s insatiable appetite. In the oil year 2008-09,
India’s per capita consumption rose by an amazing 1.4 kilos driven by low prices and total imports rose by
2.35 million tonnes.

In the end it turned out to be a win-win situation for the producers of vegetable oil in Malaysia, Indonesia,
Ukraine, Russia, Brazil and Argentina, for the Indian government and the Indian consumer.

In terms of the worldwide oils and oilseed industry, the Downturn was short lived and not painful.

The link with fuel prices as a result of Bio diesel mandates also ensured that prices did not fall below what
I can only call “the Bio diesel parity threshold ”.

Malaysian and Indonesian plantations cut back on the use of expensive fertiliser until early 2009 when
fertiliser prices finally declined. This meant somewhat anaemic CPO production in the first half of 2009 and
led to a major recovery in prices. Other than that, there was only one other major impact of the Downturn
on our industry. The Oleochemicals sector went through a very tough time as demand collapsed. We are
seeing a revival of demand only in the last few months.

Defaults
Whenever there is upheaval in the market place, there is always a spate of Defaults and Arbitrations. This
Downturn was no exception and India had its fair share of Defaulters. Indians defaulted on oil and pulse
imports and in turn suffered defaults on meal exports. Some of the worst defaulters were agencies of the
Indian government. It would be appropriate if even at this late stage, the Indian government were to
make that entity honour its commitments and redeem the good name of India.

On balance, it can be said that the Downturn of 2008-09 has left the Palm Oil industry stronger and better
equipped to face the future. The Palm Oil trade is now more selective in its choice of counter-party. A
general shake-out has left fewer but larger and better financed players in the trade.

Let me also say that in the last few years, the Indian Refining and Packing industry has modernised and
changed beyond recognition. The Indian consumer has moved strongly in favour of packaged and branded
cooking oil.

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I cannot end this review of 2008-09 without a word on the courage, resilience and fortitude of the people
of my native city of Mumbai. The events of 26th November 2008 tested Mumbai and indeed India. I am
glad to say that Mumbai has bounced back strongly and India as a nation is today more united, more
focussed and more determined.

INDIAN Import Prospects for 2009-10

My thanks as usual to the Solvent Extractors Association of India for their statistical help at all times
and to my friend Govindbhai Patel, India’s most astute and reliable statistician. I shall not be surprised
if India’s imports actually exceed the estimate of 8.65 million tonnes displayed in my earlier table. There
are 3 reasons for this:

First, Indian farmers are at present very reluctant sellers of oilseed. Crushers in India are facing a very
tough time. They are sandwiched between historically high oilseed prices and a strong Rupee. The strong
Rupee keeps the local price of imported oil under check and also restrains the export price of meal. I also
suspect, and we shall only know this at the end of the present oil year, that India’s oilseed production may
actually be lower than first estimated.

Second, the sky high price in India of pulses like Dal makes oilseeds like groundnut and soybean very
attractive for direct human consumption.

Third, and most important, we can expect per capita consumption to rise by 4 to 5 percent this year,
despite the big jump already registered last year. The Indian economy continues to grow strongly, per
capita incomes are rising and per capita consumption must rise. Indian per capita income has now crossed
the threshold of USD 1000 and this is often regarded as the Take Off stage for consumption and growth.
Besides, as prices of all food products are rising, the Indian consumer will find vegetable oil very attractive
in price.

Therefore, it will not surprise me if consumption registers a strong growth in the current year.

The Indian government is rightly concerned about food price inflation. They have taken many
commendable steps to provide relief to consumers. I would submit that the weightage given to different
food items in the calculation of Price Indices needs to be brought up to date. Groundnut oil is now an
exotic oil and pure mustard oil also has a declining share. Due and appropriate weightage must be given
to RBD Palm Olein and a new category of Blended Cooking Oil should be added. These changes will
reflect the correct position and show that Cooking Oil in 2009 is one of the very few products
that are actually cheaper than in 2008.

Position of Palm Oil in the market place

As you will have seen in the Table, Palm oil dominates Indian imports. The factors that give Palm oil such
domination are easy to see.

Palm oil is easy to trade, even for small and medium sized importers. It is also easy to ship and available
virtually on the doorstep of these important markets. Above all, it is an extremely versatile oil which is
available in abundance. Lastly, the promotion work done by Malaysia is legendary. Several of you have
been invited from time to time to visit Malaysia and build up linkages with producers, refiners and
shippers. The Malaysian government sponsored organisations like PORIM, MPOB and MPOC have also
spent vast amounts of effort on promoting and developing diverse uses of Palm oil. You could almost say
that other oils do not have the benefit of such promotion and development. Malaysia and Palm oil are an
excellent example how a good product can be made irresistible by sustained promotion and customer
care.

Global Scenario - Domination of Palm in World Vegetable Oil Growth

Let me explain the dominant role of Palm Oil amongst the 17 major Oils and Fats produced in the world.

According to statistics prepared by Oil World, Palm Oil and Palm Kernel Oil, have contributed more
than 50 % of the Growth in Supply of all Oils & Fats in the last 5 years.

In other words, without the contribution from Palm and Palm Kernel, the growth in World Supply would
have been less than Half the growth in World Demand. I do not have to tell you what effect that would
have had on prices.

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Prognosis for Malaysian CPO for 2010
As I have said in a recent paper, there are 3 reasons why I believe Malaysia may produce less CPO
in 2010 than in 2009. The three reasons are - the end of the High Cycle and commencement of a new
Low Cycle for Palm trees, the onset of a new El Nino and the Replanting programme. If that were to
happen, it will be the first time in history that Malaysian CPO production will have declined for
2 years in a row.

Prognosis for Indonesian CPO for 2010

The developing El Nino also puts a question mark on the production prospects for Indonesia. So far,
almost all analysts have expected an increase of at least 2 million tonnes over 2009. In the light of what I
have just said, it seems that an increase of between 1 and 1.5 million tonnes looks more realistic.

Prospects for other oilseeds for 2010

Good news comes from soybeans. Plantings and production in South America appear to be on course. The
El Nino is likely to lead to sumptuous rainfall and if rust problems can be minimised, we are looking for
record crops in Argentina and in Brazil. However, as we all know, soybeans are a meal seed and not an oil
seed.

The prospects for sunflower seed production have somewhat deteriorated in recent weeks. Rapeseed
production seems to be coming up to expectation and is a little better than expected. We are not yet sure
what the Indian Rape-Mustard crop will be but unfortunately, the prognosis is not very good.

As you can see, the biggest new development I believe is in Palm and by extension in Palm
Kernel oil.

Demand Prospects for 2010

On the Demand side there does not appear to be any significant change to my earlier estimates. Higher
and stronger economic growth in the big population countries like China and India will expand food
demand and mandates will expand bio diesel demand. I am being conservative and keeping constant
my overall expansion of demand at 5.5 million tonnes.

I will now display firstly the Incremental S&Ds as seen before this paper.

Global Incremental Supply

000 tonnes Oct 08 to Sept 09 Oct 09 to Sept 10

Soya oil - 1500 + 1500
Rape oil + 1600 + 800
Sun oil + 2000 - 500
Gn oil - 200 - 200
Cotton oil - 200 - 200
Palm oil + 1500 + 2500
Lauric oils + 250 + 500
Total Increase + 3450 + 4450

At that stage, it looked as if Incremental Demand of 5.5 million tonnes would marginally outstrip
Incremental Supply of 4.5 million tonnes.

And now, after what I have said about lower Palm oil production in 2010, we can see a different picture
altogether.

If the Increase in Palm Oil production in 2010 is a mere 1.5 million tonnes and correspondingly Lauric oil
production is up only 300,000 tonnes; the total increase in supply is just 3.25 million tonnes.

Thus the new probable Global Incremental S&Ds can be seen as

000 tonnes Oct 08 to Sept 09 Oct 09 to Sept 10

Supply + 3,450 + 3,250

Demand + 4,500 + 5,500

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Based on these figures, the Incremental S&Ds for 2009-10 do not look comfortable. The conclusion to
be drawn from this Incremental S&D projection is that Prices must Rise so as to curtail Demand
and encourage higher oilseed plantings.

RSPO
The Round Table on Sustainable Palm Oil continues to make sound and steady progress. I am proud that
GODREJ was the first Indian company to join the RSPO and we have been followed by several others.

PRICE OUTLOOK
I am presuming that the U S Dollar will remain around current levels of 1.50 to the Euro. Dollar weakness
will lead to higher prices and vice versa. I am also presuming that Nymex Crude oil will trade around the
US$ 80 per barrel mark and in a range from US$ 70 to 90 over the next several months.

I do not expect the Indian Government to impose any import taxes or increase existing ones on vegetable
oil at least until April 2010.

Given these 3 presumptions and my Incremental S&Ds, I believe CPO prices must rise very soon. Between
now and the end of the first quarter of 2010, I expect CPO futures on the Bursa Malaysia to rise to a level
between 2800 and 3000 Ringgits. That would put RBD Olein at about US$ 900 FOB by the end of January
2010.

RBD Olein will still be the cheapest edible oil in the world. In relation to other food and fuel products, it
will be cheaper than most. When I entered this industry in 1977, RBD Olein was US $ 500 FOB while
Crude Oil was US$ 13 a barrel. RBD Olein has neither kept pace with inflation nor has it kept pace with
other natural resources. Is it not strange that the developed countries cry wolf and shed crocodile
tears when prices of agricultural commodities (which they do not produce) rise modestly?

I expect Palm oil prices to rise at the fastest pace in relation to all other vegetable oils. The rise in the
price of soya oil will be moderated by the prospect of higher supply coming in from South America after
April. However, that higher supply will be met by higher domestic bio diesel demand and hence soya oil
prices will also have to rise to about US$ 950 FOB Argentina.

The spread between Soya oil and Palm oil will undoubtedly narrow.
I expect Sunflower oil prices to command a considerable premium and to go as high as US$ 1200 in
Europe.
Rapeseed oil prices will be higher than Soya oil but perhaps not as high as Sunflower oil.

Finally, I expect Palm Kernel Oil and Coconut Oil to trade in rough parity with Palm Oil in the first half of
2010. This is because both are industrial raw materials and growth in these industries is likely to be
modest.

What can happen to negate these price forecasts?

The most important factor would be Contagion. If Stock Markets were to fall for any reason, they will
exert a bearish influence on our markets also. It is more than likely that we shall see a big correction in
markets at some stage between February and April of 2010. As traders we must be prepared for it.
Therefore, one sided long positions can be dangerous.

For 2010, the fundamentals are more bullish than in a long time. However fundamentals these days count
only about 33% towards price making. Other factors usually called Outside Markets have a preponderant
influence on price behaviour. Therefore the risk of contagion cannot be over-stated.

Conclusion
The outlook for 2010 is bullish even if Palm Oil production turns out to be half a million tonnes more than
my estimate. Let us not forget that the world needs more vegetable oil and we are not doing enough to
raise productivity.

My thanks once again to His Excellency The Minister Tan Sri Bernard Dompok for his leadership, to MPOB
and above all to MPOC and in particular to MPOC Mumbai led by Bhavna Shah for organising this Seminar.
I am also thankful to our Indian associations – SEA, COOIT, VMA and IVPA. I hope to meet many of
you at the next POC in Kuala Lumpur in March 2010, this time at the Shangri La.
I wish you all the very best of luck in your trading, with a caution not to be too one sided in your
positions.

Good Luck and God Bless

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