UOB KayHian: Don’t get over-bearish on palm oil despite US trade war’s hit to soybeans

Malaysia one-ringgit noteMalaysia one-ringgit note

The U.S.-China trade war has pressured U.S. soybean prices, with knock-on effects dragging crude palm oil prices to a more than two year low, but China’s soybean tariffs could be positive for palm oil longer term, UOB KayHian said in a note last week.

“If the import tariff on soybean imports from the U.S. 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,” UOB KayHian said. “The increase in soyoil prices could lead to demand switching to palm oil from soyoil as both oils are close substitutes.”

China’s decision to retaliate for U.S. tariffs by imposing a 25 percent tariff on soybeans sent U.S. soybean, soybean meal and soybean oil prices falling, with soybean futures at more than nine year lows, the note said. Crude palm oil prices (CPO) have fallen as low as US$577 a tonne, or 2,307 ringgit a tonne, off a peak of US$754 in February 2017, it noted, adding that could be partly due to concerns on weak exports.

Additionally, UOB KayHian pointed to potential demand for CPO for bio-diesel, noting that the weaker CPO prices have resulted in wider “PO-GO” spreads, or the spread between palm oil and gasoil.

“This has made the biodiesel programme more financially/commercially viable,” the brokerage said. “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.”

But UOB KayHian said it was sticking with a Marketweight call on Singapore’s plantation sector.

“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 year-on-year as CPO prices weaken year-on-year,” it said.