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Asia300

Singapore commodity groups reap gains from trade war

Wilmar and Olam worry about long-term negative side effects

Soybean prices dropped earlier this year as China slapped retaliatory tariffs on U.S. supplies.   © Reuters

SINGAPORE -- The U.S.-China trade war is boosting Singaporean companies that deal in agricultural commodities, but their own executives are wary of the longer-term impact of the dispute.

Wilmar International reaped the benefits of lower soybean prices in the April-June quarter. The company announced on Aug. 13 that its net profit for the term soared more than fivefold on the year, to $316 million. Its oilseeds and grains segment, which includes soybean processing, logged a 381% increase in pretax profit.

Soybean prices dropped as China imposed retaliatory tariffs on American produce. The soybean futures price on the Chicago Board of Trade fell from above $10 per bushel in May to below $9, and has been moving around $8.50 in August.

This reduced materials costs for Wilmar, which handles soybean processing and refining as well as production and distribution of cooking oil and soybean meal for animal feed. China, the world's largest soybean market, is the top destination for Wilmar's consumer products.

A strong palm oil business also drove Wilmar's quarterly profit growth. Pretax profit from the tropical oils segment rose 165% on the year.

Olam International, meanwhile, saw its sales volume increase 52% to 13.6 million tons in the first half of 2018, compared to the same period last year. This was thanks to a significant increase in soybean shipments from Brazil to China, as an alternative supply route to the U.S.

"This is bad for everybody, for China, for the U.S., and for all the countries involved"

Olam CEO Sunny Verghese

Olam also increased almond shipments from Australia to China to the "highest levels" during the first half of the year, group CEO Sunny Verghese told reporters on Aug. 14.

Olam had been active in soybean sourcing from Brazil since before the China-U.S. trade war erupted, so it has "been able to capitalize on some opportunities" to increase the volume very quickly, President and Chief Financial Officer N. Muthukumar said at the news conference.

"We benefited," Verghese said. "Traders will see this volatility as an opportunity."

Olam's net profit for the April-June quarter, however, still fell 36% on the year to 94 million Singapore dollars ($68 million). The company explained that it had performed particularly well in the same period a year ago, and that its January-June performance this year was hurt by weak harvests of coffee and peanuts.

In any case, few expect the positive effects of the trade war to last. OCBC Research analyst Low Pei Han noted concerns that "the soybean price would go up due to a supply shortage in China." The fourth quarter will be "tough" for Wilmar, she added.

Wilmar's chairman and CEO, Kuok Khoon Hong, said in a news release that a "prolonged dispute between [China and the U.S.] will have a negative impact on crush margins [of soybeans] due to lower plant utilization." If supplies of American soybeans to China are cut off for a longer period, the company may have to slow down its soybean operations.

A spokesperson for Wilmar on Aug. 14 said operations so far "are not affected" by the trade war. But in May, CFO Ho Kiam Kong said the company had been importing from South America, including Brazil and Argentina, and that production volumes in those countries would have to be lifted to meet higher demand as tariffs are implemented.

Ho also said then that Wilmar would source more alternative oilseed products, such as canola, as substitutes for soybeans.

Commenting on the trade conflict, Olam's Verghese warned: "This is bad for everybody, for China, for the U.S., and for all the countries involved. This will be a headwind for moderating economic growth. It will be a tailwind for accelerating inflation."

Verghese stressed the need to "prepare for multiple scenarios," given the difficulty of predicting how things will play out.

Olam's chief operating officer, A. Shekhar, said the "trade war might give some opportunities." Nevertheless, he emphasized, "During this period, we will have to be sensible, participating in the opportunities and managing risks."

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