Silver lining in tariffs for plantation companies
US-China trade tensions are clouding the outlook for crude palm oil (CPO) prices, but local planters may have a slight advantage over regional rivals due to a smaller tariff burden on palm oil exports to the United States, analysts say.
Last week, US President Donald Trump announced a sweeping 10% baseline tariff on all imports into the country, with additional duties ranging from 11% to 50% targeting 57 countries that run trade surpluses with the United States.
Starting April 9, Malaysia, the world’s second-largest producer of palm oil, will face a 24% tariff on its palm oil exports, while Indonesia, the world’s largest palm oil producer, will face a steeper 32% rate.
“The eight percentage point tariff differential between Malaysia and Indonesia may allow Malaysian palm oil producers to gain market share in the United States at the expense of their Indonesian counterparts,” CIMB Research said in a report.
The research house said Malaysia shipped around 191,000 tonnes of palm oil to the United States last year — equivalent to 1.1% of Malaysia’s total exports and approximately 10% of US palm oil imports.
However, the research house said the United States still sources around 85% of its palm oil from Indonesia.
It said the United States, a relatively small player in the global palm oil market, consumes just 1.9 million tonnes out of 78 million tonnes worldwide or about 2.4% of total consumption.
However, because the tariffs will make palm oil more expensive for US buyers, CIMB Research said American manufacturers and consumers are likely to switch to cheaper alternatives like soybean oil, which will benefit US soybean farmers.
“For US buyers unable to easily replace palm oil in their product formulations, the higher input costs could lead to either increased consumer prices or margin compression for producers,” it added.
Meanwhile, CIMB Research noted that palm oil prices may also face downward pressure from the knock-on effects of China’s retaliation.
On April 4, Beijing announced an additional 34% tariff on all US goods entering China, effectively raising the tariff on US soybeans to 44% starting April 10 – nearly double the peak rate of 25% seen in a 2018 trade war during Trump’s first presidency.
CIMB Research said the tariff increase will significantly impact US soybean farmers, as China accounted for approximately 52% of US soybean exports last.
While this may open the door for Brazil and Argentina to supply more soybeans to China, the research house cautioned that logistical and supply constraints could prevent China from immediately replacing the full volume of lost US supply.
“If this happens, China’s domestic soy crushing activity may decline in the short term.”
“Palm oil could indirectly benefit if China reduces its soybean crushing activity due to the high tariffs and seeks palm oil as a replacement for the resulting shortfall in domestic soybean oil supply. However, we expect this substitution effect to be limited, given the broader drag on global growth from rising inflationary pressures and trade uncertainties,” the research house said.
CIMB Research pointed to a similar dynamic during the 2018 to 2019 trade war, when a 25% tariff caused China’s imports of US soybeans to drop by about 49% (a decline of over 16 million tonnes) in 2018.
In the same year, China’s palm oil imports rose by 231,000 tonnes to 5.4 million tonnes and surged further to a record 7.6 million tonnes in 2019.
Overall, however, CIMB Research remains negative on near-term CPO prices due to the global economic drag from the US tariffs and weak crude oil prices.
The research house said it was keeping its average CPO price forecast for this year at RM4,200 per tonne.
It said that for every RM100 per tonne drop in CPO price assumptions, its earnings forecasts for plantation companies under its coverage would be lowered by between 3% and 7%.
Despite the risks, CIMB Research maintained its “overweight” call on the plantation sector “for now, as direct exposure to US tariffs remains limited for Malaysian palm oil”.
“However, we caution that the indirect impact from weaker crude oil prices – particularly on biodiesel-linked demand – could become more significant if the US-China trade conflict escalates further,” it added.
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