Trade War
US Tariffs
Impact To Plantation Stocks
WILMAR INTERNATIONAL LIMITED
F34.SI
BUMITAMA AGRI LTD.
P8Z.SI
FIRST RESOURCES LIMITED
EB5.SI
GOLDEN AGRI-RESOURCES LTD
E5H.SI
Plantation – Singapore - Consequences If China Restricts Soybean Imports From The US
- We believe the risk of China restricting soybean imports in retaliation to the US tariffs is low as both countries will suffer from this decision. If the restriction materialises, there will be insufficient supply of soybean from Brazil and Argentina to cover the shortfall.
- Moreover, it will increase soybean and soymeal prices in China, leading to inflation.
- Wilmar will be the beneficiary in the immediate term as it has locked in soybean supplies earlier at lower prices.
- Maintain MARKET WEIGHT.
WHAT’S NEW
Trade war begins…
- According to Financial Times, the White House is expected to announce a plan to apply tariffs on imports from China worth US$60b. At the same time, the US is expected to impose restrictions on investment from China and possibly even new limits on visas for Chinese nationals.
… in retaliation against US tariffs.
- Based on an article by The Star on 23 Mar 18, China unveiled plans to impose tariffs of up to US$3b on products such as dried fruit, wine and steel pipes and pork products and recycled aluminium. Also, China is looking to impose restrictions on its import of US soybeans.
- A trade war could have a negative effect on soybean trade and local US farmers.
ESSENTIALS
The risk of restricting soybean imports is low.
- We believe the risk of China restricting soybean imports in retaliation of the US tariffs is low as both countries will suffer from this decision. However, China could impose a tariff on soybean imports.
- Soybean is China’s second-largest import from the US, amounting to US$12b or 9.5% of its total imports.
US farmers would suffer a significant drop in soybean prices.
- US exported about 52% of its soybean production to China in 2016/17. If China restricts the import of soybean from the US, soybean prices in US could drop. US farmers could suffer significant drops in soybean prices, while South America (Brazil and Argentina) could enjoy higher prices when China imports from South America.
Not easy for China to replace all of its soybean supply from the US.
- China imported about 33m tonnes of soybean (or 34.4% of China total soybean import) from the US in 2017. If the restriction of soybean imports from the US takes place, it will be difficult for China to find an immediate replacement market. China could source additional supply from Brazil, with Brazil already being the largest soybean exporter for China (53.3% of China total soybean import).
- Meanwhile, the majority of Brazil’s soybean production is exported to China (about 55% of total soybean production in 2016/17), while the 2017/18F inventory of 28m tonnes in Brazil is not sufficient to cover the shortfall of supply if China restricts soybean imports from US.
Worst-case scenario.
- If the restriction on soybean imports from the US materialises, China will need to source soybean from Brazil and Argentina at higher costs due to insufficient supply in the market. Reciprocal to this, we believe China's domestic soybean meal prices will surge as well to reflect the temporary tightness of soybean meal supply due to the soybean shortage.
Short-term impact – Soybean crushers would benefit.
- In the immediate term, Wilmar International (Wilmar/BUY/Target: S$4.10) should benefit from the recent increase in both soybean and soybean meal prices as its soybean supplies were largely locked in earlier when soybean prices were still low.
Medium-term impact – Potential impact on soybean crushers’ margins.
- We expect more volatile crushing margins during this "trade war" period. This could lead to higher costs for all the soybean crushers and crushing margins could be squeezed in the medium term. Wilmar, being the second largest soybean crusher (after COFCO) in China, will need to manage its soybean purchases to maintain a good crushing margin.
Longer-term impact – Increase in domestic inflationary pressure if costs are passed down.
- Soybean meal is mainly used as animal feed for hogs. China’s swine consumption grew at a 10-year CAGR of 2.5% for the period 2007-17 on the back of population growth. If soybean meal demand remains strong, soybean crushers could pass down the increase in soybean purchases costs to consumer.
- The increase in soybean and soybean meal prices will lead to an increase in animal feed prices which eventually will lead to higher meat prices if costs are passed down.
China soybean meal prices move in tandem with US, Brazil and Argentina soybean prices.
- China soybean meal prices increased 13% from the low in Apr 17, in-line with the rise of US, Brazil and Argentina soybean prices. However, China soybean oil prices moved up at a lower quantum of 7% since Apr 17 which could have been due to ample supply of soyoil in the Chinese market.
ACTION
Maintain MARKET WEIGHT.
- We maintain our view of significant CPO price weakness going into 2018 as palm oil is likely to be in oversupply by mid-18. The “trade war” could lead to high volatility in soybean and soymeal prices.
- We might see higher soybean and soymeal prices in Brazil and Argentina. However, we reckon that soyoil prices might not move up by much due to the current ample supply in the market. Thus, this could cap palm oil prices.
- We have HOLD calls on First Resources and Golden Agri Resources as we reckon that the higher production and earnings expected for 2H17 have been priced in.
Reiterate BUY on Wilmar and maintain SOTP-based target price of S$4.10.
- As mentioned above, if the restriction on soybean imports from the US materialises, it will be positive to Wilmar’s earnings in the short-term, but its mid-long term soybean crushing margin outlook is subject to management’s purchasing strategy.
- Factoring out the import restriction, 2018 is expected to be another good year for Wilmar with net profit expected to grow 21% y-o-y on the back of continuing growth from oilseeds & grains, JVs and other associates, as well as recovery in the other two segments (tropical oils & sugar).
- Capacity expansion in China will be the key earnings driver moving forward. Its China listing plan is on track. Once more details on its China operations are made available in the listing process, investors might see greater value in Wilmar.
Maintain HOLD and target price of S$0.31 for GGR.
- We reckon that Golden Agri Resources (GGR) is unlikely to benefit from the “trade war” as running a soybean crushing business amid such business conditions will be challenging for a small player like GGR.
SECTOR CATALYSTS
- Worse-than-expected labour shortage affect harvesting activity.
ASSUMPTION CHANGES
- Maintain average CPO price assumptions of RM2,400/tonne and RM2,500/tonne for 2018 and 2019 respectively.
RISKS
- Backtracking of biodiesel mandates in Indonesia and Malaysia.
Leow Huey Chuen
UOB Kay Hian
|
Ooi Mong Huey
UOB Kay Hian
|
http://research.uobkayhian.com/
2018-03-26
UOB Kay Hian
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