China has hit back at President Trump administration’s plan to impose tariffs on US$50bn in Chinese goods, retaliating with duties on American goods, which includes soybeans, airplanes, cars, whiskey and chemicals. The effective date is dependent on the actual implementation of the US’s own tariffs. China could potentially source soybeans from other producing countries like Brazil and Argentina or substitute soybean oil with palm oil. We believe this would be good for palm oil plantation companies as this could help to boost demand and CPO prices. Overall, we maintain our NEUTRAL plantation sector rating and our CPO ASP assumption of RM2,600/MT for 2018E. FGV is our top sector pick in the plantation sector.

China hits back with new tariffs on soybeans

China has announced a new wave of tariffs on American goods, in retaliation to the US tariffs, which include a 25% tariff on soybeans. The effective date of China’s tariff will coincide with the US’s own tariffs. Many US farmers rely on the sale of soybeans to China, hence we think this could have a significant impact on the US agriculture sector. China could potentially change and source more soybeans from other producing countries like Brazil and Argentina (refer to Fig 8); however, we opine that it will not be sufficient to make up for the supply from the US.

Palm Oil as Substitute of Soybean Oil

Given that CPO can be a substitute for soybean oil, we believe the Chinese tariffs on American soybeans can be good for the palm oilproducing countries, especially Indonesia and Malaysia as they account for about 84% of global palm oil supply. This could help to boost demand for our palm oil products and help to further lower stock levels. Malaysia’s palm oil inventory stood at 2.48m MT (+69.8% yoy) in February 2018.

Strong Demand Could Help to Boost CPO Prices

Should demand for palm oil products pick up after the 25% tariff on US soybeans, this could potentially boost CPO prices. While 3M-CPO futures were relatively unchanged at RM2,438/MT as at 4 April 2018, there is a possibility of a short-term rally should this event materialise. For now, we maintain our CPO ASP assumption for 2018-19E at RM2,600/MT- 2,500/MT. Sector-wise, we maintain our NEUTRAL rating.

Source: Affin Hwang Research - 5 Apr 2018