Demand And Supply of Lauric Oil free essay sample

What is lauric oil? And what are its applications? Lauric oil is the common name of coconut oil and palm kernel oil, both are derived from species of palms and are distinguished from other fats by their high content of lauric acid (44 to 52 percent) (Codex Stan, 2009). Because of the low molecular weight of their acids, these fats feature a very low degree of unsaturation and a relatively low melting point. These oils are highly resistant to oxidation. Coconut oil is obtained from coconut copra, which is dried coconut meat (Fife Bruce, 2005). Palm kernel oil is obtained from the kernel of the fruit. Both products are available in different grades (Peter KV Kurain, 2007). Crude Coconut Oil known as CNO is used in the manufacture of amines and industrial soaps. It typically has higher free fatty acid content than ordinary vegetable oils. Edible Coconut Oil has been refined, bleached and deodorized (RBD). It is an important feedstock for oleochemicals and a component for resins. Surfactants produced from coconut oil are used in soaps, detergents, shampoos and emulsifiers. In the edible field, it can be found in ice cream, ice cream coatings, popping oil and as spray oil. Hydrogenated Coconut Oil is used as a shortening, in coffee whitener, whipped dessert toppings and in confectionery products. (Mike Foale, 2003) Palm Kernel Oil known as PKO, its availability is more reliable than coconut oil because the biggest producing country Malaysia does not suffer from the droughts and typhoons which plague the Philippines and other coconut oil producing countries. The two oils can be used interchangeably, although PKO has a higher iodine value and higher content of unsaturated acids. Industrially, it is used mainly in soaps. Edible uses include margarine and confectionery products. Rajah Rasiah Azmi Shahrin, 2006) Both CNO and PKO are considered as commodities and it’s getting more and more important in the international market due to the widely usage for many applications both in edible and non-edible products (Thomas H. Applewhite, 1994). Page 3 2. FACTORS AFFECTING DEMAND 2. 1 Population and food demand It is becoming increasingly difficult to sati sfy the rising global demand for food in a sustainable manner. Main reason contributes to the uncertainty in our ability to meet the food demand is the world population growth. Each day 200,000 more people are added to the world food demand. The world’s human population has increased near fourfold in the past 100 years (Robert Engelman, 2011); it is projected to increase from 6. 7 billion at 2006 to 9. 2 billion by 2050, as shown in below Figure 2. 1. Every new people added each day, which will need lots resources, especially food and food related resources. Figure 2. 1 Global Population Estimates and Projections (Source: http://www. grida. no/graphic. aspx? f=series/rr-food-crisis/figure04. jpg) Page 4 2. 2 Crude oil and biodiesel High crude oil prices signal the world that substitute transportation fuels are needed, and for the time being, the primary source of substitute fuel is biodiesel, which a truly renewable resource and burns clean, keeps our skies and soil clean. Biodiesel is a kind of blended fuel made from animal fats, advanced non-food alternative crops and natural vegetable oils, which including lauric oil as one of the major resource. (Gerhard Knothe, 2005) Edible vegetable oil is expected to remain the major feedstock used to produce biodiesel as shown in below figure2. 2. Figure 2. Global Biodiesel Productions by Feedstock (Source: OECD FAO, http://www. oecd. org/document/9/0,3746,en_36774715_36775671_45438665_1_1,00. html) World biodiesel prices are expected to continue to rally in future. Over the Outlook period, biodiesel prices are expected to remain firm as policies promoting green fuel use are being implemented and crude oil prices are expected to remain strong. Global biodiesel producti on is projected to continue to expand rapidly over the next ten years. (Esmarie Swanepoel, 2007) Page 5 2. 3 Prices of palm and other vegetable oils As shown in below Figure 2. 3. Since 2007, a price band has appeared linking vegetable oil prices to petroleum prices, within a price band with vegetable oils at a premium. We see that a price band is in place, which only emerged in 2007. If prices of vegetable oils move too far above crude oil, a correction occurs to close the gap, and typically this correction occurs rapidly. We saw such a correction in 2008 and there was again a quick correction early this year. The sensitivity of biofuel demand to the gap between vegetable oil and crude oil prices is what has created this new link between vegetable oil and petroleum prices. As well as Luric shown in Figure 2. 4 which also does not escape from this price band, especially the price floor of CNO and PKO will set by the price of crude palm oil known as CPO. (James Fry, 2011) Figure 2. 3 Vegetable oil prices V. S Crude oil price (Source: Palm Oil Conference, http://www. lmc. co. uk/Report. aspx? id=4repID=4349flag=67073) Page 6 Figure 2. 4 PKO CPO prices V. S Crude oil price (Source: Palm Oil Conference, http://www. lmc. co. uk/Report. aspx? id=4repID=4349flag=67073) 2. 4 Important events of year 2011 2011 is a year of great economic uncertainty, a small country like Greece, maller than most provinces in China, creating economic instability in the whole of the Euro region. What is even more perplexing is the inability of other more rich Euro countries to resolve this problem which has been around for over a year. In another side if world, the world’s second largest economy – China, is losing momentum, the government reported inflation cooled t o 4. 2 per cent last month from 5. 5 per cent in October. New figures show Chinas industrial production slowed to its slowest pace in two years in November. Chinas economy has been slowing with growth expected to drop below nine per cent in 2012. GDP growth in the quarter that ended in September was 9. 1 per cent. The Macro economic situation in Euro – land, USA and in China is going to play a very important role in demand price behaviour over the next 12 months. (Dorab E Mistry, 2011) Page 7 3. FACTORS AFFECTING SUPPLY 3. 1 Climate According to the Asian and Pacific Coconut Community, coconut production has been affected globally by climate changes during the last two years. As a result, the production in all major coconut producing countries like Philippines, Indonesia and Sri Lanka has been reeling. Sri Lankan production has recorded a 15 year low of 2. 33 Billion nuts in 2010 as against the annual average production of 2. 7 Billion nuts. The rise in domestic price has compelled the Sri Lankan Government to ban export of coconut and felling of coconut palms, and even arranging imports of nuts (K. Satheesh Babu, 2010). The recovery in copra production in Philippines has been postponed recently. Over the years, due t o the major climate events such as typhoon and flood, Philippines and India have given us a classic example on how to allow an agricultural crop to decline and to keep declining. Datum showed that CNO production in 2011 declined by about 300,000 tones. On the other hand, Palm Kernel oil production was up by at least 700,000 tones, in parallel with the surge in CPO production. Hence overall, lauric oil production expands by about 400,000 tones. (Dorab, 2011) 3. 2 Incremental Supply forecast for 2011 – 2012 As shown in below Figure 3. 1 3. 2, Global coconut oil is dominated by Indonesia, Philippines and India; Global palm oil production is dominated by Indonesia and Malaysia. But as mentioned earlier, both Philippines and India are suffering production plunge due to climate issues, lack of appropriate reactions and facing strong domestic demand. Hence, possible significant incremental FOR Lauric oil will only from Indonesia which the dominated producing country for both CNO and PKO. Both Coconut oil and Palm oil production is very land-intensive and growth projections for Indonesia will require the conversion of millions of hectares of forest into plantations in the years to come (Vinay Chand, 2011). For 2012, CNO is expected to recover but that recovery appears to be postponed and insignificant as of current indications. On the other hand, PKO production rose about 700,000 tonnes in 2011, but next year, in 2012, it will rise by much less (Dorab, 2011). Page 8 Country Indonesia Philippines India Sri Lanka Brazil Thailand Viet Nam Mexico Papua New Guinea United Republic of Tanzania Coconut Production (MT) 2009 21,565,700 15,667,600 10,148,000 2,099,000 1,973,370 1,380,980 1,128,500 1,004,710 930,000 577,099 Figure 3. 1 World Top Ten Countries by Coconut Production (Source: FAO 2009, http://www. mapsofworld. com/world-top-ten/world-map-coconut-production-countries. html) Figure 3. 2 World Palm Oil Productions (Source: Oil World, GAPKI, http://arieyoedo. blogspot. com/2011/05/approach-and-strategy-for-developing. tml) Page 9 3. 3 New policy highlights The news on the recovery in CNO production is getting more doubtful with each passing day. Export availability of CNO and PKO from Indonesia will be constrained as a result of the new Export Tax Regime. It seems that those who have to consume CNO or PKO are in a hard time for 2012 (Dorab, 2011). 4. ANALYSIS 4. 1 USD per MT Past record for Lauric oil prices Figure 4. 1 CNO PKO prices reco rd from Year 2001 – 2011 (Source: Datum extracted from Weekly Bulletin of United Coconut Associations of the Philippines) Page 10 Figure 4. 2 CNO PKO prices record for 2011 (Source: Datum extracted from Weekly Bulletin of United Coconut Associations of the Philippines) Note the erratic price fluctuations from 2007 onwards, shows Lauric oil prices reacting both to the demand increases and major world incidents as a mixed pattern, for example, demand growth of biodiesel starting from 2006 triggered prices double in 2007 and 2008, economic crisis in 2nd half of 2008 had brought the prices down to the floor level of USD 600 – 700/MT. After crisis, the Lauric oil demand from China and demand for biodiesel were still strong and kept increasing over the year, this brought the prices up to the historical height as USD 2320/MT, which almost triple of the year 2007 prices. As mentioned earlier, due the uncertainties of the Macro economic situation happened in Euro –land and USA early this year, as well as the pessimistic sentiment for China economy, the prices has adjusted to form the new floor price, USD 1,000 – 1,100/MT in Oct, 2011. Without further plunge, the flood in Thailand, monsoon in Indonesia and typhoon in Philippines had seriously affecting the current and future supply which is bringing the prices up again (UCAP Weekly Bulletin, 2011). Page 11 4. 2 Demand and supply analysis As learnt in the text book and illustrated in below Figure 4. 3, the law of demand and law of supply showed us that assume all other things being equal, the higher the price of a product, the lower the demand. The higher the price of a good, the greater is the quantity supplied (David Begg Damian Ward, 2009). Figure 4. 3 Demand and Supply Curve (Source: http://news. charlesayoub. com/article/1653/Supply%20and%20demand) Based on the past price record and all above mentioned affecting factors, the likelihood of demand and supply for Lauric oil in 2012 might be shown as an increase in both demand and supply, but more evidences showed that supply will only increase in minor amount or even remain unchanged. The effects are illustrated in below Figure 4. 4 4. 5. No matter which pattern will occur next year, Lauric oil prices increase will be inevitable if all other affecting or influencing factors remain unchanged. Page 12 Figure 4. 4 Effects of an increase in demand and supply remain unchanged (Source: http://www. raybromley. com/notes/equilchange. html) Figure 4. 5 Effects of an increase in both demand and supply, but supply increases less than demand (Source: http://www. raybromley. com/notes/equilchange. html) Page 13 5. CONCLUSION The market for Lauric oil is unusual, because in the short term that both demand and supply are inelastic. In other words, a relatively large change in price only has a small impact on demand, where small changes to the supply or demand curve cause large changes to the price (David, 2009). In a nutshell, next one year will be a tug of war between bullish fundamentals and a somewhat uncertain macroeconomic situation; besides all affecting and influencing factors mentioned earlier, we have to watch the US Dollar also. A rally in the US Dollar will stabilize prices and put a ceiling on them. Any weakness in the US Dollar will result in higher prices.