Plantation – Singapore - UOB Kay Hian 2018-06-21: Do Not Get Over-bearish On Palm Oil

Plantation – Singapore - UOB Kay Hian 2018-06-21: Do Not Get Over-bearish On Palm Oil Plantation Stocks Crude Palm Oil US-China Trade War WILMAR INTERNATIONAL LIMITED SGX:F34 BUMITAMA AGRI LTD. SGX:P8Z FIRST RESOURCES LIMITED SGX:EB5 GOLDEN AGRI-RESOURCES LTD SGX:E5H

Plantation – Singapore - Do Not Get Over-bearish On Palm Oil

  • The return of the US-China trade war has put pressure on US soybean, soybean meal and soyoil prices. The weakness of soyoil prices and weak export demand have dragged CPO prices down to a 2.5-year low. Thus, the weakening of CPO prices has led to the widening of PO-GO spread, and discretionary biodiesel demand is likely to increase.
  • 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.


US-China trade war sends CPO prices to 2.5-year low

  • Crude palm oil (CPO) prices have 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. The further drop in CPO prices could be due to concerns on weak exports. 
  • According to Societe Generale de Survillance, Malaysia’s palm oil exports fell 10% m-o-m to 498,270 tonnes in 1-15 June, 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.

Return of US-China trade war dents soybean prices and drags down palm oil prices

  • Despite the US and China having agreed to back down from imposing tariffs in May, the US has gone ahead to announce a 25% tariff on up to US$50b of Chinese products, prompting Chinese President Xi Jinping's administration to respond with a 25% tariff on US$34b of US goods (which includes soybean) last Friday. 
  • 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 14 Jun 18. Soybean futures plunged to their lowest in more than nine years to US$8.415/bushel on 19 Jun 18, according to Reuters.

China’s imposition of import tariff on soybean imports could be positive to palm oil

  • China imported about 33m tonnes of soybean (or 34.4% of China’s total soybean import) from the US in 2017. If the import tariff 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. Hence, we believe China's domestic soybean meal prices and soyoil prices will increase as well to reflect the temporary tightness in soybean meal and soyoil supply due to the soybean shortage. 
  • The increase in soyoil prices could lead to demand switching to palm oil from soyoil as both oils are close substitutes.

PO-GO spread widens – Will lead to higher biodiesel demand

  • The further weakening in CPO prices has resulted in a CPO-gasoil price differential (PO-GO spread) of -US$72/tonne (CPO cheaper) currently vs +US$274/tonne on 20 Jan 16. This has made the biodiesel programme more financially/commercially viable. 
  • Indonesia’s domestic biodiesel blending has high chances of exceeding its initial target of 3.6m 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.

Impact on Wilmar International (Rating: BUY / Target Price: S$3.90) 

  • The 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. If the timing is right, Wilmar could benefit from the sudden rise in soymeal prices in China now.
  • We have done three scenario studies on 2019F earnings, with impact on net profit possibly ranging from -3% to -7% assuming 10% crushing volume decline or/and PBT margin being lowered by 10%.


Soyoil inventory in China still high

  • According to Cofeed, China soyoil inventory was 1.35m tonnes as of 8 Jun 18 (+1.1% wow), which is higher than the five-year average. As such, inventory level could cap soyoil prices.
  • Meanwhile, China’s palm oil inventory was 697,790 tonnes as of 8 Jun 18, which is 1.2% lower wow. Current inventory level is 4.6% higher than 667,200 tonnes as at end-Dec 17.
  • We do not expect a significant increase in palm oil imports from China as current palm oil inventory level reflects 1.4-1.5 months of consumption.

Do not expect a surge in soybean meal prices if import tariffs are imposed

  • Soybean meal is mainly used as feed for hogs. China’s swine consumption grew at a 10-year CAGR of 2.5% in 2007-17 on population growth. According to USDA, China’s swine production is expected to increase marginally by 0.2% y-o-y to 54.8m tonnes in 2018. 
  • As soybean meal demand is not expected to grow significantly on this marginal increase in swine production, soybean meal prices are thus unlikely to surge should the import tariff be imposed.



  • CPO’s price outlook is not as bearish as it was earlier this year, but we reckon this is still not a good time to enter due to potential further downside in share prices in view of potentially weak earnings y-o-y as CPO prices weaken y-o-y.


Downside risk not as high as that in early-18

  • Dumai/Belawan CPO prices have declined from the high of US$754/tonne (RM3,348/tonne) in Feb 17 to US$577/tonne (RM2,307/tonne,-23%). With weakening CPO prices, high crude oil prices and the expected increase in biodiesel demand, we expect downside risk for CPO prices to be lower than that earlier this year. Dumai/Belawan CPO price ytd averages US$618/tonne (RM2,430/tonne).
  • We maintain our CPO price assumptions at RM2,400/tonne (or US$615/tonne at exchange rate of RM3.90/US$) and RM2,500/tonne.


  • Higher-than-expected Indonesia biodiesel demand.
  • Worse-than-expected labour shortage.


  • Backtracking of biodiesel mandates in Indonesia and Malaysia.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-21
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