China tariffs on US soybeans 'could be very friendly' to palm oil prices

20.04.2018

China’s imposition of tariffs on imports of US soybeans “could be very friendly” to prices of palm oil, plantations group Sipef said, flagging too other potential boosts to values from “external factors”.

The Belgian-based group termed the palm oil market for now “rather static”, balanced between “good solid demand” and “a strong production expectation”, as South East Asian output begins its seasonal upswing.

“However, there are still several external factors that can bring surprises to our market,” the bananas-to-tea producer said, flagging in particular the potential fallout should China realise a threat to implement a 25% tariff on imports of US soybeans, amid growing trade tensions between the countries.

“The impact of such a measure is manifold, but it could be very friendly to palm oil,” Sipef said.

Palm oil vs soyoil

China is a large importer of the vegetable oil, which is a common ingredient in cooking oil and foods, and in some countries widely used in making biodiesel too.

However, Chinese imports have fallen from highs earlier in the decade as the country’s growing need for soymeal for its, increasingly formalised, livestock industry has meant elevated soybean processing, which also produces as soyoil, a key rival to palm oil.

Chinese palm oil imports have fallen from a record 6.59m tonnes in 2102-13 to 4.88m tonnes last season, according to the US Department of Agriculture – a period during which China’s output of soyoil soared 36% to 17.0m tonnes.

The chances, and implications, of further Chinese levies on imports of US ags, particularly soybeans, remain a key market theme, although as Commerzbank noted “it is still not clear if and when the announced escalation levels will become reality”.

China itself is seeing “growing criticism of plans to impose additional duties on US imports”, notably from pig farmers fearing a soymeal squeeze will drive further growth in feed costs, with knock-on implications for consumer prices of pork.

“Hence, there has recently been growing optimism that the trade conflict could perhaps still be defused by negotiations,” the bank said.

‘Should be friendly’

Sipef listed too other political factors, such as Malaysia’s palm export tax holiday, the EU’s removal of anti-dumping duties on imports of Indonesian biodiesel, and India’s hike in palm import levies, which “will be impacting our markets.

Furthermore, volatility in energy markets, which on Thursday saw Brent crude prices hit their highest since late 2014, “and the possible rising biodiesel mandates, particularly in Indonesia, could create severe demand swings”.

Most of these external influences “should be friendly to our palm market”, Sipef said, although adding that “the uncertainty that surrounds it certainly does not help any commodity market, as there will be a ‘risk-off’ mentality”, undermining the willingness to buy.

Hedging strategy

Indeed, while flagging the potential for support to palm oil prices ahead, Sipef revealed that it had accelerated forward hedging of its own output, having sold 50% of its expected 2018 volumes already, at an average of $738 per tonne.

A year ago, it had sold 45% of its expected 2017 production, at $788 per tonne.

“The relatively stable palm oil prices over the past few months have enabled us to gradually place production volumes on the market and sell part of the second half of the year,” the group said.

In an indication of expectations of steady prices ahead, Sipef said that it expected to sell outstanding 2018 volumes “gradually… over the coming months at prices approaching those fetched by the volumes already sold”, unlike in 2017 when values were “considerably lower” in the second half.

Rubber price woes

However, the group was downbeat on prospects for rubber, for which it had slowed forward sales of its expected annual output to 24%, at $1,676 a tonne, from 42%, at $2,307 a tonne, a year ago.

“The persistent slump on the rubber markets will make it difficult for Sipef to achieve significantly better sales prices over the rest of the year”, it added.

While the rubber market “usually rallies during the wintering season”, when output drops, “this year there seems to be hardly any impact of the wintering, as physical demand is simply very slow.

“Therefore, it is difficult to expect any price rally in the near future.”
 
Sipef shares stood 1.2% lower at E59.10 in morning deals in Brussels.


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