China-US tariffs seen to be negative for palm oil

This article first appeared in The Edge Financial Daily, on April 6, 2018.
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Plantation sector
Maintain neutral:
China announced that it will levy 25% duties on 106 US products including soybeans, a move that came less than 24 hours after the US unveiled a list of Chinese imports that it aims to target as part of a crackdown on what US President Donald Trump deems as unfair trade practices. The effective start date of the new duties is unknown for now. China is the largest importer of US soybeans. In 2017, US accounted for 34.4% of China’s soybean imports, and China, on the other hand, accounted for 57.6% of US soybean exports.

We believe the latest development is negative for palm oil (at least in the near term). The tariff imposition on soybeans will likely result in China switching its soybean import destination from the US to other major soybean producing countries (such as Brazil and Argentina) given the country’s dependence on soybean meal (a product of soybean crushing) as feed for its swine industry. This may result in the US dumping its soybeans in other markets, which will in turn exert pricing pressure on other vegetable oils including palm oil. Furthermore, palm oil is entering a seasonally higher production cycle. Given the negative correlation between the palm oil price and supply (in the absence of strong demand catalysts), we believe the latest development will exert more pressure on palm oil prices.

We maintain our forecast for the 2018 to 2019 average crude palm oil (CPO) price assumption at RM2,500 per tonne for now, pending more clarity on the development.

We maintain our “neutral” stance on the sector, due to a lack of strong demand catalysts for palm oil. While La Nina and the government’s recent move to suspend CPO export taxes will lend support to near-term CPO prices, these are just short-term catalysts. — Hong Leong Investment Bank Research, April 5