Earlier this week US President Donald Trump announced plans to impose 10 percent import tariffs on USD $200 billion worth of Chinese export products by 30 August 2018, thus further escalating the trade war between the USA and China. While earlier US tariffs focused mostly on industrial goods, the new list of proposed import tariffs includes various commodities (metals, energy and agriculture) as well as consumer products. As a result most commodity prices were in red territory on Wednesday (11/07).
Commodity prices are heading downward as markets are concerned that the trade war will curtail global economic growth, thus resulting in lower demand for commodities. Also the strengthening US dollar puts pressure on commodity prices.
Especially metal prices - such as aluminum, copper, zinc, and lead - have been hit hard this week (and this year). But also agricultural commodities took a hit, including soybeans and cotton prices. China has already shown lower demand for US soybeans. Considering the soybean supply is abundant, it pushes soybean prices down and this also has an effect on other vegetable oils, including crude palm oil (CPO), one of Indonesia's key foreign exchange earners.
Mukti Sardjono, Executive Director of the Indonesian Palm Oil Producers Association (Gapki), said the supply of soybeans, rapeseed, sunflower oil, and CPO is abundant in the producing countries. In combination with concerns about declining demand amid rising trade tensions, it led to the sliding volume of palm oil exports (including biodiesel and oleo-chemicals) from Indonesia in May 2018. Exports slid by 3 percent month-on-month (m/m) to 2.33 million tons. Exports of CPO fell 4 percent (m/m) to 2.14 million tons.
Therefore, Gapki urges the Indonesian government to encourage more domestic consumption of palm oil (particularly by blending it in biodiesel) in an effort to combat sliding prices. Secondly, Gapki also would like to see more CPO exports to Africa because this continent contains great potential for palm oil. Therefore the institution advises the Indonesian government to provide fiscal incentives such as reducing export tariffs to Africa.
Over the next month the CPO price will face serious difficulties to rise as CPO reserves in Indonesia and Malaysia - the world's two biggest CPO suppliers - remain high. Whether Indonesian CPO exporters can raise exports to China (as China is likely to import less soybeans from the USA) remains to be seen.