• There were four significant developments in the plantation sector in the past weekend. First, EU negotiators have agreed to phase out the use of palm oil in transport fuels by year 2030F. Second, China has confirmed that it would be imposing tariffs of 25% on various US products including soybeans. Third, India has raised the import duties on soybean oil and sunflower oil products. Fourth, weather agencies in the USA are predicting a return of El Nino.

• Reuters reported that the details on EU’s curbs on palm oil have yet to be agreed. However, a EU lawmaker said that the use of palm oil would be capped at 2019’s levels until year 2023 and reduced to zero by year 2030F.

• Previously, EU proposed to phase out palm oil in the transport sector by year 2020F. In spite of the extension to year 2030F, this development is still negative for palm oil as it would hit demand. We believe that Malaysia and Indonesia would retaliate against EU’s proposal.

• It is estimated that close to half of the palm oil imports in EU are used to produce biodiesel. We also estimate that palm oil is the feedstock used in a quarter of the biodiesel produced in EU. We believe that EU uses mainly rapeseed to produce biodiesel. According to Oil World, EU produced 12.9mil tonnes of biodiesel in 2017 vs. 12.61mil tonnes in 2016.

• In 2017, Indonesia exported five million tonnes of palm products to the EU while Malaysia exported about two million tonnes. EU accounted for 12% of Malaysia’s export volumes and 16.2% of Indonesia’s export volumes in 2017. Companies with operations in the EU include Sime Darby Plantation and Kuala Lumpur Kepong (KLK). Sime Darby Plantation’s Unimills has refining capacity of 450,000 tonnes per year in Rotterdam. KLK has an estimated oleochemical production capacity of 900,000 tonnes per year in EU.

• US soybean prices dropped on news of China’s import tariffs. Price of soybean for July delivery fell by 2% last Friday while price of soybean oil declined by 2.1%. China’s import tariffs on US soybean is negative for global trade. We believe that CPO would only be a marginal beneficiary of the tariffs as it can only replace the oil component of soybean and not the meal. CPO is not widely used as feedmeal in China as it lacks certain nutrients. We believe that CPO would follow the downward trend in US soybean prices and not the prices in South America. Brazil and Argentina are expected to benefit from China’s import tariffs on US soybeans. At current prices, the discount between US soybean oil and CPO is 9.9% or US$64/tonne vs. the six-year average of 15% (US$155/tonne).

• Third, India’s hike in import duties on soybean and sunflower products would narrow the tax differential with palm oil. This would help support India’s demand for palm oil. The import duty on crude soybean oil has been raised from 30% to 35% while the import duty on refined soybean oil has been increased from 35% to 45%. In comparison, the import duties are 44% on crude palm oil and 54% on refined palm oil. India’s exports of Malaysia’s palm oil surged by 46% YoY in 5M2018 in spite of the hike in import duties on palm products early this year. India is the largest buyer of Malaysia’s palm oil, accounting for 12.2% of exports in 2017.

• Fourth, the Climate Prediction Center of the USA has predicted a 50% possibility of El Nino returning in the winter of 2018F/2018F. This implies an El Nino in 4Q2018 or 1Q2019. The center said that conditions are neutral from September to November 2018. As at 5 June, Australia’s Bureau of Meteorology said that conditions are neutral – neither El Nino or La Nina. The bureau would issue the next update on 19 June 2018.

• We believe that it is difficult to predict weather. Weather agencies predicted El Nino back in 2013 and 2014 but it only materialised in 2015. Currently, plantation companies have not indicated signs of dryness or drought in their oil palm estates yet.

Source: AmInvest Research - 18 Jun 2018