Palm oil may benefit from US-China trade spat

27.03.2018

The ongoing trade spat between China and the US could potentially benefit crude palm oil (CPO), analysts say, assuming that China imposes import tariffs on US soybeans, which will make US soybeans less competitive.

CIMB Investment Bank head of Malaysia research and regional head of agribusiness research Ivy Ng sees potential support in CPO prices if China decides to include US soybeans into the list of US products targeted for trade barriers. China has accounted for between 52% and 76% of US soybean exports over the last two years.

“Although US soybeans were not in the list of potential Chinese countermeasures, statements from Chinese officials suggested that US soybeans could become a target for trade barriers,” said Ng in a report yesterday.

“Should China impose tariffs on US soybeans, it will be negative for US soybean prices but potentially positive for CPO prices in the medium term,” she added.

But China’s move still spells uncertainties, another analyst told The Edge Financial Daily.

“Of course, demand for edible oil will be shifted to palm oil if China does that. The question is when,” the analyst said.

“There is also the inventory levels in China to take into consideration, and whether the demand is there,” the analyst added, referring to the high inventory level of edible oil there, including palm oil.

US President Donald Trump announced last Thursday that he would impose tariffs on US$50 billion (RM195 billion) worth of Chinese exports to the US. In a tit for tat, China quickly outlined new import taxes of its own on US products worth US$3 billion.

Presently, China has a higher preference towards soybeans — which it can process into soybean oil domestically — amid growing demand for animal feed ingredient soymeal, according to reports.

The Chinese government also expects to break its all-time high annual soybean import of 95.54 million tonnes this year, while the US department of agriculture forecasts China’s palm oil imports to decline to 4.8 million tonnes in the same period.

For Ng, the reinstatement of the export tax of 5% in April after a three-month suspension has a more immediate effect on CPO, which she said is likely to boost CPO exports from Malaysia during the last week of March. “This is because it will cost CPO exporters an additional RM123.7 per tonne in taxes to export CPO from Malaysia starting April,” she added.

“The reinstatement of the export tax could lead to lower CPO prices in Malaysia as traders are likely to pass on some of the additional taxes to farmers.

“This could also raise the share of processed palm oil exports from Malaysia at the expense of CPO exports in April. Indonesia is likely to see stronger demand for CPO in April,” she noted.

Nevertheless, for players at large, the impact of the tax suspension lift should have already been priced in, said Ng.

“There may be a little bit of adjustment [in share prices], but the government already indicated in January that the suspension is only until April,” she said. “It would be a surprise if the tax suspension is extended.”

An analyst at Affin Hwang Capital Research noted that apart from the lifting of the export tax suspension, there are also other factors that will influence CPO prices.

“Some of the concerns include CPO export growth, the inventory rising again if exports and consumption are lower than production numbers, the results from the European Union whether to ban our palm oil from their biofuel programme, and the Indian tax programme on our palm oil products,” the analyst added.

The benchmark palm oil contract for June delivery on the Bursa Malaysia Derivatives Exchange rose 0.2% to close at RM2,434 per tonne yesterday.

Both Affin Hwang and CIMB are “neutral” on the plantation sector. Ng’s top “buy” call is on Genting Plantations Bhd with a target price (TP) of RM11.90, while Affin Hwang’s top plantation pick is Felda Global Ventures Holdings Bhd (FGV), with a TP of RM2.26.

“We believe [FGV’s] earnings will grow on the back of higher fresh fruit bunches and CPO production, as well as better contribution from the sugar business.

“We like FGV as we think management is focused on improving the core business, improving operational excellence and optimising financial and human capital,” Affin Hwang added.

FGV shares closed three sen or 1.75% higher at RM1.74 yesterday, giving it a market capitalisation of RM6.35 billion, while Genting Plantations’ stock settled unchanged at RM10.26, valuing it at RM8.24 billion.


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