Wilmar could benefit from soybean prices hit by trade tensions

Soybean prices have fallen 4.6% since the US and China resumed announcing tariffs.

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 China to respond with a 25% tariff on US$34b of US goods, which includes soybean.

UOB Kay Hian noted that as a result, 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 June 2018. Soybean futures plunged to their lowest in more than nine years to US$8.415/bushel on 19 June 2018.

“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,” commented UOBKH analyst Leow Huey Chuen. “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%,” he added.

Also read: How will Wilmar fare against hefty China soybean tariffs?

The analyst does 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% YoY to 54.8 million tonnes in 2018,” he said.

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, the analyst argued.

UOBKH noted that China’s imposition of an import tariff on soybean imports could be positive to palm oil. “China imported about 33 million 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,” Leow said.

Hence, China's domestic soybean meal prices and soyoil prices could 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,” the analyst added.