China announced that it will levy 25% duties on 106 US products including soybeans. The latest development is negative for palm oil (at least in the near term), as the tariff imposition will likely result in US dumping its soybeans in other markets, which will in turn exert pricing pressure on other vegetable oils including palm oil. Maintain 2018-2019 average CPO price assumption of RM2,500/tonne and Neutral stance on the sector for now.

NEWSBREAK

China announced that it will levy 25% duties on 106 US products including soybeans, a move that came less than 24 hours after US unveiled a list of Chinese imports that it aims to target as part of a crackdown on what President Trump deems as unfair trade practices. The effective start date on the new duties is unknown for now.

China – the largest importer of US soybeans. In 2017, US accounted for 34.4% of China’s soybean imports (see Figure #1), and China, on the other hand, accounted for 57.6% of US soybean exports (see Figure #2).

HLIB’s VIEW

We are negative on the latest development at least in the near term. 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 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 the feeds for its swine industry. This may result in 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 to seasonally higher production cycle. Given the negative correlation between palm oil price and supply (in the absence of strong demand catalyst), we believe the latest development will exert more pressure on palm oil prices.

Forecast. We maintain our 2018-2019 average CPO price assumption of RM2,500/tonne for now, pending more clarity on the development.

Maintain NEUTRAL. Maintain Neutral stance on the sector, due to the lack of strong demand catalyst 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

Source: Hong Leong Investment Bank Research - 5 Apr 2018