Wilmar - RHB Invest 2018-04-06: China Imposes 25% Tariff On US Soybeans

Wilmar - RHB Invest 2018-04-06: China Imposes 25% Tariff On US Soybeans WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar - China Imposes 25% Tariff On US Soybeans

  • China has retaliated against the US imposing tariffs on its exports, by imposing a 25% tariff on soybeans imported from the US. China is the world’s largest soybean importer, while Wilmar is the second-largest soybean crusher in China. If the tariff takes effect, we think the long-term impact on Wilmar would be negative-to-neutral. 
  • Currently, there is strong demand for soybean meal from the livestock industry, but there is no certainty on whether Wilmar would be able to pass on any additional cost to customers. 
  • Meanwhile, China’s vice finance minister, Mr Zhu Guangyao, has emphasised that there is room for negotiation by both parties. 
  • Right now, it is unclear when the tariffs would take effect. This could eventually be negotiated down, as this tariff risks both the livelihood of US soybean farmers and China pig farmers. It would also potentially drive up food prices for China, the world’s largest consumer of pork. 
  • We maintain our BUY call and Target Price of SGD3.45 (12% upside) on Wilmar, as the group may see some short-term upside with the decline in soybean future prices, following this news.



Trade war is likely to be negative for Wilmar. 

  • Today, China further responded to the US imposing tariffs on China imports, by imposing a new set of tariffs on another 106 products from the US – including soybeans. According to Oil World, China buys 96.5m tonnes of soybean a year, accounting for 63% of the world’s demand. Of this, about 40% comes from the US and 60% comes from South America. 
  • Wilmar is the second-largest oilseeds crusher in China. The 25% tariff would certainly increase the input costs for oilseeds crushers.
  • Theoretically, China could seek alternative suppliers from Brazil and Argentina, or import more of other oilseeds. However, we believe this move would have a knock-on effect, raising South American soybean prices as well as the prices of other oilseeds. 
  • Furthermore, the protein content of sunflower seed (240-440g/kg) and rapeseed (310-370g/kg) is much less than that of soybean (440-550g/kg) – which indicates that they are not efficient substitutes for the latter crop.


No trade war, please… 

  • China is the world’s largest producer and consumer of pork. Currently, there is strong demand for soybean in China, coming from the livestock industry. Soybean, when crushed, produces soybean meal as its main ingredient (80%), with soybean oil as a byproduct (18%). Soybean meal is the key protein source used in China’s livestock feed. We think it is almost impossible to entirely replace the imports from the US with other crops.
  • We note that China closed its doors to Vietnamese pork in 4Q16. The first set of tariffs that China imposed on imports (which its government announced on Monday) covered 128 products, including a 25% tariff on pork imported from the US. 
  • Given that the average Chinese consumes 88.7lbs of pork (carcass weight) pa, the tariff on US imported soybeans would not only hurt US soy farmers and Chinese pork producers, it would also raise pork (a staple food) prices in China. In addition, China is still a net importer of vegetable oils. It still needs soybean for its oil.
  • As such, it is hard to say how long China would be able to implement these tariffs for. In his statement, Mr Zhu emphasised that there is room for both parties to negotiate down the tariffs, as it would negatively impact the livelihoods of farmers and increase the prices of staple foods in China.


A calculated risk? 

  • Following the news of the soybean tariff, Wilmar’s share price declined by 3% to a fairly attractive level. Soybean prices also fell by 4%. It remains unclear when the tariffs would be effected. 
  • We maintain our BUY call and Target Price of SGD3.45 on Wilmar, as the group could benefit from the short-term decline in soybean prices following this news.




Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-06
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.450 Same 3.450



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