The Rising Cost of Energy And Impact on Cotton Supply Chain

Transcription

1 The Rising Cost of Energy And Impact on Cotton Supply Chain ICAC November 2008 OLAM International Ltd Singapore

2 Scope of Energy Study Analyze cost of energy in cotton supply chain to deliver lint to mill customer. 1. Direct Cost Energy, in the form of Diesel, Electricity or natural gas used for transportation and running machines. 2. Indirect Cost Energy required to produce Fertilizers or Pesticides used for cotton farming. 3. Embedded Cost- Energy required to produce Farm Equipment, Ginning machines etc. (Scope of this presentation covers only Direct/Indirect Use) Energy cost structure regions covered Africa China India USA Strategies for optimizing costs/usage and hence improve competitiveness An overview of crude oil global price development Olam International Ltd 2

3 Cotton Supply Chain Land Preparation Input Distribution Planting Crop Protection Harvesting Cotton Plantation Farm to Gin Ginning Storage at Gin Ginning Gin to Port Loading on vessel Voyage Port to Mill Logistics Single most important factor in energy cost : crude prices Olam International Ltd 3

4 CRUDE VS COTTON SINCE JAN 1, 2001 (2 nd month) Cotton right axis ; Crude oil left axis

5 THIS WAS THE COVER STORY IN MAR-1999

6 Four distinct oil trends in last 16 years Collapse Bull Run Range Bearish A p r-9 2 O ct-9 2 A p r-9 3 O ct-9 3 A p r-9 4 O ct-9 4 A p r-9 5 O ct-9 5 A p r-9 6 O ct-9 6 A p r-9 7 O ct-9 7 A p r-9 8 O ct-9 8 A p r-9 9 O ct-9 9 A p r-0 0 O ct-0 0 A p r-0 1 O ct-0 1 A p r-0 2 O ct-0 2 A p r-0 3 O ct-0 3 A p r-0 4 O ct-0 4 A p r-0 5 O ct-0 5 A p r-0 6 O ct-0 6 A p r-0 7 O ct-0 7 A p r-0 8 O ct-0 8 Olam International Ltd 6

7 Crude Oil rally + = MACRO FACTORS China demand per capita income $5000, a point of inflexion Strong Indian consumption Robust world economy Bio-fuels not cost effective PLUS An unprecedented amount of speculative money 40% increase due to speculation HUGE RALLY Crude Oil Nov -01 M ar-02 J ul-02 Nov -02 M ar-03 J ul-03 Nov -03 M ar-04 J ul-04 Nov -04 M ar-05 J ul-05 Nov -05 M ar-06 J ul-06 Nov -06 M ar-07 J ul-07 Nov -07 M ar-08 Olam International Ltd 7

8 Market Reversal Crude Oil D a t e 0 3 / 0 8 / / 0 5 / / 0 1 / / 2 8 / / 2 7 / / 2 4 / / 2 0 / / 1 8 / / 1 5 / / 1 1 / / 1 0 / / 0 7 / / 0 3 / / 0 2 / / 2 9 / / 2 6 / / 2 5 / / 2 1 / / 1 8 / / 1 6 / / 1 2 / 0 8 Credit market bubble burst Crashes -Stock /Commodities/Real Estate market Demand destruction The exit of speculative money to safer havens has been a key factor Oil at $150 / barrel is a thing of the past Immediate fundamentals are weak But, longer term macro fundamentals still quite strong, and we would expect oil to trade in a $50-$80 range for the next 18 months. Olam International Ltd 8

9 Increase in Fuel prices from, % ag e in crease 80% 70% 60% 50% 40% 30% 20% 10% 0% Africa USA India China Country Diesel Olam International Ltd 9

10 Increase in Electricity Prices from % age increase 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Africa USA India China Country Electricity Olam International Ltd 10

11 Bunker Cost Share in Operating Cost Bunker Cost as % of Ship Operating Cost 40% 35% 30% 25% 20% 15% 10% 5% 0% Olam International Ltd 11

12 Baltic Dry Index Since 2000 Olam International Ltd 12

13 Energy Cost (USD/Ton) to Plant, Gin and Ship Cotton $ $ $ Cotton Plantation Indirect Cost Direct Cost USD/Ton $ $ Comments US has the highest cost due to high usage of fertilizers and mechanization.. $ $ $ $70.98 $58.12 $65.00 $ $50.00 $50.00 $- Africa USA India China $ Cotton Ginning USD/Ton Comments $30.30 $25.00 $18.38 $20.44 Africa USA India China Environmental regulation and pollution control in USA leads to higher consumption of energy. Usage of electricity vs. diesel electricity cheaper by 20% - 30%. Availability of electricity in Africa is critical to minimize energy cost. Olam International Ltd 13

14 Energy Cost (USD/Ton) to Plant, Gin and Ship Cotton $ $52.68 Cotton Logistics Ocean Shipment Inland Logistics USD/Ton $44.64 $ Comments - Distance cotton travels inland in Africa and USA in the range of 1500 Kms while few hundred Kms for India and China. Voyage time for India to china is only 12 days, therefore lower fuel cost. Africa has the highest inland and ocean shipment energy cost due to huge distance/voyage time. Higher energy cost would lead to higher freights and making African cotton more expensive. - Africa USA India China Total Energy Cost USD/Ton Key Points Energy consumption highest in USA, followed by Africa/India $ Africa cost structure is high $ $ $ Africa USA India China Olam International Ltd 14

15 Energy Cost Share From Farm to the Mill Plantation $ 60 to $190 Ginning $13 to $30 % Energy Share in Supply Chain 30 to 65% 6 to 20% Logistics $45 to $ to 55% Bulk of the energy cost is in Logistics (avg 40%) and 45% average in cotton plantation. Total Energy Cost: $100 to $290 Per Ton or Average 200 USD/Ton (9.1 USC/LB) Or 15% of global cotton price Olam International Ltd 15 assuming cotton is at USC 60/LB

16 Energy cost : can the chain absorb it? Cotton 15 % of lint price at US C 60/lb In Finished Textiles the energy cost would be 10% of retail price.( $ 10 Shirt the energy share is $ 1) A 30 % increase in energy prices would increase energy cost in cotton by 3c/lb which is 5% of cotton sales price. It is imperative to maintain energy efficiency in supply chain for achieving cost competitiveness. Cotton uses less energy compared to wheat/corn and is likely to be affected less in case of major price surge in energy Olam International Ltd 16

17 ENERGY - AREAS OF IMPROVEMENT Theme Energy Conservation and efficiency regardless of price Yield Improvements Africa/India will have big impact Identify BMP ( Best Management Practices) for farming /ginning /logistics and establish framework for knowledge transfer Energy cost database and sharing of same. Farming/Logistics Soil testing for efficient fertilizer usage No of trips made to farm increase efficiency Maintenance and performance of efficiency data Africa substitute diesel with low cost electricity or alternate? Wind etc Alternate rail road structures on similar lines such as CIS/Ausralia Ginning Energy efficiency practices in Australia and US on drying and cleaning increase motor efficiency speed/capacity Roller vs Saw Ginning Olam International Ltd 17

18 Thank You Olam International Ltd 18