SINGAPORE (June 21): Despite the US and China having agreed to back down from imposing tariffs in May, the Trump administration has gone ahead to slap a 25% tariff on up to US$50 billion ($68 billion) of Chinese products.

In retaliation, China last Friday to respond with a 25% tariff on US$34 billion of US goods which includes soybean.

Since the announcement, US soybean, soybean meal and soybean oil prices have declined by 4.6%, 3.4% and 4.3% respectively from the prices recorded on June 14. Soybean futures also plunged to their lowest in more than nine years to US$8.415/bushel on June 19, according to Reuters.

In tandem, crude palm oil (CPO) prices declined further to a new low of US$577/tonne (RM2,307/tonne), plunging 23% from the peak of US$754/tonne (RM3,348/tonne) in Feb 17 and falling 2.0% ytd.

In a Thursday report on the plantation sector, lead analyst Leow Huey Chuen says the further drop in CPO prices could be due to concerns on weak exports. According to Societe Generale de Surveillance, Malaysia’s palm oil exports fell 10% m-o-m to 498,270 tonnes in June 1-15, and palm oil exports to China and the EU were down the most at 39% m-o-m and 37% m-o-m respectively for the period.

Last year, China imported about 33 million tonnes of soybean -- or 34.4% of its total soybean import -- from the US. If the import tariff on soybean imports from the US materialises, China will need to buy costlier soybean from Brazil and Argentina due to insufficient supply in the market.

Leow says China's domestic soybean meal prices and soy oil prices will increase as well to reflect the temporary tightness in soybean meal and soy oil supply due to the soybean shortage. The increase in soy oil prices could lead to demand switching to palm oil from soy oil as both oils are close substitutes.

In addition, further weakening in CPO prices has resulted in a CPO-gasoil price differential (PO-GO spread) of –US$72/tonne currently versus +US$274/tonne on Jan 20 16. This means cheaper CPO prices have made the biodiesel programme more financially viable.

Indonesia’s domestic biodiesel blending has high chances of exceeding its initial target of 3.6 million kl as discretionary blending is also picking up now that palm biodiesel is cheaper. Biodiesel exports from Malaysia and Indonesia are also gaining momentum and, based on channel checks, there are biodiesel shipments going into China’s market as well.

In conclusion, Leow says impact on Wilmar’s soybean crushing operation in China is difficult to quantify, with the timing of purchase of raw materials and sales of end products being crucial factors. However, if the timing is right, Wilmar could benefit from the sudden rise in soymeal prices in China now, adds Leow.

“The higher biodiesel demand and potential switch from soyoil to palm oil in China could be positive to CPO prices in the longer term. Maintain ‘market weight’,” says Leow.

As at 12.27pm, shares in Wilmar are down 7 cents at $3.05.