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Semiconductor Players Riding The Chip Upcycle

World semiconductor sales 2019 - 2021 (forecast)

The semiconductor upcycle is underway spurred by increasing demand for smartphones, PCs, game consoles and other devices as people around the world, forced to remain indoors as a result of the Covid pandemic, turned to technology for reasons such as remote working, remote learning, entertainment etc. After posting double digit growth of 6.8% growth in 2020, WSTS projects global semiconductor demand to accelerate in 2021, with global semiconductor sales growth of 10.9% for the year.

World semiconductor sales 2019 - 2021 (forecast)

The CEO of the world’s largest foundry – Taiwan Semiconductor Manufacturing Company (TSMC) – said in a letter to customers that its fabs are running at 100% capacity over the past year, but demand still exceeds supply. U.S. chip giant Qualcomm reported a 52% jump in revenues on an annualized basis for the quarter ended March 2021 driven by strong smartphone sales. Meanwhile the gradual increase of electric vehicle production (which had been curbed at the start of the pandemic) triggered an ongoing chip shortage resulting in a number of automotive companies being forced to temporarily suspend production.

Longer term, emerging technologies such as 5G, IoT, AI, Industry 4.0 are expected to drive increasing quantities of semiconductors presenting a long term structural uptrend for the semiconductor industry, presenting growth opportunities for players along the entire value chain from design to fabrication. 

Against this backdrop, some notable chip players to watch include Taiwan’s MediaTek, Dutch lithography giant ASML, and Singaporean precision tools player Micromechanics, and Singaporean test solutions provider AEM Holdings.  

MediaTek (聯發科)

Taiwanese chip supplier MediaTek overtook U.S. chip giant Qualcomm to emerge as the world’s largest mobile chip supplier in 2020, driven by the U.S. government’s sanctions on Chinese smartphone company Huawei which turned to MediaTek chips to power its smartphones. Meanwhile, Chinese smartphone manufacturers Xiaomi, Vivo, and Oppo, also turned to MediaTek in an effort to diversify their supply chains to avoid becoming the next Huawei. The supply chain reshuffle saw MediaTek emerging as the number one spot mobile chip supplier in China while Qualcomm settled for second place. Data from CINNO Research revealed that Qualcomm’s shipments in China shrank 48.1% year-on-year, while its market share dropped to 25.4% in 2020 compared with 37.9% in 2019. 

MediaTek’s rise to pole position in China, the world’s biggest smartphone market appears to have helped it capture the number one spot worldwide as well. According to data from consultancy firm Omdia, MediaTek commanded a 27% market share of the global smartphone chipset market in 2020,  while Qualcomm held 25%. MediaTek’s worldwide shipments rose 48% YoY in 2020, compared with an 18% decline for Qualcomm’s Snapdragon.

Chipset series 2020 2019 Market share (2020) YoY 
MediaTek 352 238 27% 48%
Snapdragon 319 386 25% -18%
Apple 204 195 16% 5%
Kirin 147 177 11% -17%
Exynos 115 177 9% -35%
Unknown 100 146 8% -32%
Exynos or Snapdragon 36 55 3% -35%
UNISOC 23 12 2% -89%
Armada 0 0 0% -100%

Grand Total

Data: Omdia

1,295 1,387 100% -7%

MediaTek’s stellar market performance showed up its financials as well; revenues rose to a record high of TWD 322 billion in 2020 for the financial year ended December 2020, representing a YoY growth of 30.8%, while operating income shot up to TWD 43.2 million, a 91.5% growth YoY. By contrast Qualcomm (whose financial year ends September 2020) saw revenues contract 4.8% YoY.  The momentum carried on to 2021 with the Taiwanese player reporting a 77.5% YoY increase in first quarter 2021 revenues (which reached TWD 108 billion) and net profits of TWD 25.77 billion, up 347% YoY. MediaTek expects revenues to grow 40% this year and expects the momentum to remain strong going into 2022.

Micromechanics

Singapore-listed Micromechanics makes high precision tools and parts used in process critical applications for wafer fabrication and assembly. Apart from its portfolio of proprietary consumable tools , the company also offers contract manufacturing services of high precision parts to OEMs in the semiconductor, aerospace, laser, and medical industries. Its diverse customer base includes IDMs, wafer fabrication equipment manufacturers, and semiconductor assembly and test service providers in more than 10 countries around the world.

Amid the current geopolitical turmoil, Micromechanics stands out as one of the few Southeast Asian players with a broad production range, scale, and geographical presence. And that unique positioning amid growing chip demand, along with prudent financial management is reflected in its financials; Micromechanics posted record revenues of SGD 36.9 million (up 16.9% YoY) and record net profits of SGD 9.1 million (up 31% YoY), pushing ROE to 32% for the first half of 2021, an exceptional performance for a company with zero borrowings.

To further strengthen its market positioning amid a rapidly changing chip market, Micromechanics is working towards becoming a “Next Generation Supplier” which sees the company investing in developing its product portfolio to serve chip manufacturers’ needs at 10nm and below. In fact, Micromechanics’s R&D team in Singapore has already produced several proprietary materials that are essential for 10nm and below device geometries.  

ASML

Dutch lithography giant ASML dominates the global lithography market with a market share of more than 80% in the mature DUV market and a market share of 100% in EUV – the next generation lithography technology that is seeing rising penetration as more chip makers move to leading edge process technologies driven by anticipated demand growth for advanced chips such as those used in 5G smartphones and other high-performance devices such as those with AI capabilities. About 80% of TSMC’s USD 28 billion capex allocated for this year will be spent on the company’s most advanced chip making  processes – 7nm, 5nm, and 3nm. Meanwhile Samsung is racing to catch up to TSMC in terms of leading edge manufacturing process capacity; TSMC claims to have more than 50% of the world’s EUV base and 60% of the world’s cumulative EUV wafer production. With 5G increasingly gathering pace, Samsung has ramped up orders of ASML’s EUV machines placing a multi-billion dollar order of 20 machines when Samsung vice-chairman Lee flew to ASML’s headquarters last year to press the Dutch giant for early delivery of the machines. DRAM giant SK Hynix plans to use EUV in volume production in the coming years having signed a five-year contract worth USD 4.3 billion with ASML for the supply of EUV systems. SK Hynix’s DRAM rival Micron Technologies aims to use EUV a few years ahead.  

Given that ASML currently has a production and installation capacity of about 50+ machines annually, the company appears to be sitting pretty with demand potentially outstripping supply in the coming years as demand for advanced chips continues its upward march. The impact on ASML’s financials are significant; revenues jumped 18% YoY to nearly EUR 14 billion for the financial year ended December 2020, while net profits rose 37% YoY to 3.5 billion, helping push up the company’s return on equity (ROE) to 25.6%. 

Rising EUV sales also boosted profitability with gross margins rising from 44.6% in 2019 to 48.6% in 2020. Rising gross margins helped push up net profit margins as well which rose to 25.4% in 2020 from nearly 22% a year earlier. As sales of EUV sales continue to trend upwards in the coming years, there is potential for continued margin improvement. 

Meanwhile the potential for top-line growth is significant as well. ASML shipped 31 EUV machines last year (generating  EUR 4.5 billion) and Cowen expects ASML’s EUV shipments to rise to 40 units in 2021, 53 in 2022, and 56 in 2023. Not only does this drive EUV revenues, but DUV revenues are should benefit too as every order for an EUV system drives demand for DUV systems as well. Indeed ASML’s DUV business (a market that ASML dominates with a market share of more than 80%) is large and going strong; ASML generated EUR 5.38 billion in revenues from its DUV business (accounting for 52% of 2020 revenues) which included 68 immersion systems – the most advanced DUV machines – which accounted for EUR 4 billion in revenue alone in 2020.

ASML net system sales per technology - 2018 - 2020

A growing installed base of EUV machines could further add to top line growth in the form of service revenue which rose to EUR 3.6 billion in 2020, up from EUR 2.8 billion in 2019, a 28% increase YoY. 

AEM Holdings Ltd

Semiconductor and electronics packaging and test services company AEM Holdings is headquartered in Singapore but has a global presence with offices and manufacturing plants located in Asia, Europe, and America. Riding on strong demand for IC testing, AEM Holdings generated record revenues of SGD 519 million (up 60% YoY) and net profits of SGD 97.6 million (up 84.9% YoY) which translated into a whopping 46% return on equity (up from 39% in 2019) for the financial year ended December 2020. 

The company isn’t resting on its laurels however; with an eye on future growth, AEM Holdings has been making strategic acquisitions to expand its technical capabilities and product solutions in an effort to better serve existing customers, capture new customers, as well as penetrate into new markets such as China. In 2020, the company scooped up two companies, with more acquisitions expected going forward as the company leverages its balance sheet (AEM Holdings sits on a cash pile of about SGD 134 million while total long term liabilities stood at just 13.3 million as at December 2020, equivalent to less than 7% of equity) to make strategic acquisitions aimed at strengthening its capabilities and market positioning.

In early 2020, AEM Holdings acquired Mu-TEST, a French semiconductor test solutions provider for EUR 7.5 million (about SGD 11.3 million). Following on that in mid 2020, the company acquired California-based DB Design Group, a world-renowned supplier of automation fixtures, device kits and other test-related products. The purchase price of USD 3.3 million (about SGD 4.5 million) is comfortably affordable for AEM Holdings and could potentially drive top line growth as the acquisition expands AEM Holding’s Serviceable Available Market to include the automation fixture and device kit markets. 

“We are now able to offer almost 24-hour R&D services to our customers leveraging our US and Asia based teams, as well as rapid prototyping and supply chain resiliency via high mix production run support in the US.” – Loke Wai San, Executive Chairman AEM Holdings

The momentum continued in 2021 with the company acquiring Lattice Innovation, an American company offering design, simulation, and process services in the thermal control space. The acquisition is expected to further strengthen AEM’s semiconductor test solutions. AEM also announced the acquisition of majority stakes in CEI Limited and ATECO Inc this year. Apart from the potential strengthening of market positioning, these acquisitions also help reduce AEM’s customer concentration risk (Intel which has been AEM’s biggest customer for years, accounted for 95% of AEM’s revenues in 2020). 

AEM Holdings is a crucial partner of global semiconductor giant Intel, supplying it next generation test handlers. Intel’s recently announced IDM 2.0 strategy, which sees Intel expanding its chip manufacturing capacity, is expected to be a positive for AEM Holdings as expanding chip capacity from its sole major customer should result in greater demand for AEM’s semiconductor testing solutions as well.  While AEM’s heavy dependence on one major customer for bulk of its revenues presents a customer concentration risk, there is little reason to expect Intel to switch to an alternative test vendor given AEM’s competitive advantage as a longstanding partner and cost competitive supplier for Intel;  AEM and Intel have worked together for years to design, and manufacture test handlers which are well customized for Intel’s needs and according to analyst estimates from Singaporean financial services giant DBS, Intel incurs a 10% manufacturing cost when using AEM’s solutions versus 20% during traditional testing.

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World Wheat Trade, Supply, And Demand Outlook

Column chart showing world, flour, and products, export share by country. Russia's share of world wheat, flour, and products exports grew from 7.7% in calendar year 2012/13 to 18% in calendar year 2019/20 while The European Union's 15.5% in calendar year 2012/13 to 20% in calendar year 2019/20, the United States' share dropped from 18.8% in calendar year 2012/13 to 13.8% in calendar year 2019/20, Ukraine's share grew from 4.9% in calendar year 2012/13 to 11.1% in calendar year 2019/20, Canada's share dropped slightly from 12.6% in calendar year 2012/13 to 12.2% in calendar year 2019/20, and Australia's share dropped from 14.4% in calendar year 2012/13 to 5.3% in calendar year 2019/20.

Wheat flour saw a spike in demand early this year in the United States, as a Coronavirus baking boom and widespread stay at home orders triggered demand from retail consumers for family flour (used for home baking),and wheat-based prepared and processed food stuffs such as pasta, breads, and wheat-based snack products. America’s number one flour brand – King Arthur Flour – saw flour sales spike 2,000% in March alone, and U.S. wheat flour production during the first three months of calendar year 2020 increased more than 4% according to data from the United States Department of Agriculture.

Demand

China is the world’s largest consumer of wheat, followed by the European Union and India.

Bar chart showing world wheat consumption by country calendar year 2019/20. At 126 million metric tons, China was the biggest consumer of wheat followed by the European Union at 122 million metric tons, India at 96.11 million metric tons, Russia at 40 million metric tons, the United States at 29.82 million metric tons, Pakistan at 25.4 million metric tons, Egypt at 20.6 million metric tons, Turkey at 19.9 million metric tons, Iran at 16.6 million metric tons, Brazil at 12.1 million metric tons, Algeria at 10.85 million metric tons, Morocco at 10.8 million metric tons, Indonesia at 10.5 million metric tons, Canada at 10.4 million metric tons, Uzbekistan at 9.5 million metric tons, and Ukraine at 9.1 million metric tons. All other countries consumed 173 million metric tons.

The world’s three largest wheat consumers are also the world’s leading wheat producers.

Bar chart showing world wheat production by country during calendar year 2019/20.At 154.94 million metric tons, the European Union was the world’s largest wheat producer followed by China at 133.59 million metric tons, India at 103.6 million metric tons, Russia at 73.61 million metric tons, United States at 52.26 million metric tons, Canada at 32.35 million metric tons, Ukraine at 29.17 million metric tons, Pakistan at 24.3 million metric tons, and Argentina at 19.74 million metric tons.

Although domestic wheat production satisfies the vast majority of all three countries’ wheat consumption requirements, for China and the European Union, domestic demand is outstripped by supply and hence both countries appear in the ranks of the world’s biggest wheat importers. China accounts for 2.8% of global wheat imports and the European Union accounts for 2.6% as of calendar year 2019/20 according to data from the United States Department of Agriculture.

Bar chart showing world wheat, flour, and products Imports by country during calendar 2019/20. At 13.3 million metric tonnes Egypt emerged as the world's biggest importer, followed by Turkey at 10.95 million metric tonnes, Indonesia at 10.8 million metric tonnes, Philippines at 7.2 million metric tonnes, Brazil at 7.18 million metric tonnes, Algeria at 6.8 million metric tonnes, Bangladesh at 6.7 million metric tonnes, Japan at 5.68 million metric tonnes, China at 5.38 million metric tonnes, Mexico at 5.2 million metric tonnes, Nigeria at 5.2 million metric tonnes, and European Union at 4.9 million metric tonnes.

China

China’s wheat consumption has been generally flat over the past several years with wheat consumption hovering around 125 million metric tons to 112 million metric tons during calendar years 2012/13 to 2019/20 according to data from the United States Department of Agriculture. 90% of China’s wheat demand is met from domestic production and about 10% is met through imports. China has a 95% self-sufficiency target for key staples rice, wheat and corn consumption and allows a certain amount of imports through a tariff rate quota (TRQ) system. China sets annual corn quotas at 7.2 million ton every year, wheat quotas at 9.64 million tons, and rice at 5.32 million tons.

Looking ahead, there is little room for China to grow domestic wheat production to replace imports. China’s wheat yields are among the highest in the world.

Bar chart showing wheat yields by country during calendar year 2019/20. At 6.4 metric tonnes per hectare Egypt has the highest wheat yields in the world, followed by Mexico at 5.56 metric tonnes per hectare, China at 5.42 metric tonnes per hectare, the European Union at 5.36 metric tonnes per hectare, Serbia at 4.92 metric tonnes per hectare, Uzbekistan at 4.29 metric tonnes per hectare, Ukraine at 3.73 metric tons per hectare, Uruguay at 3.68 metric tonnes per hectare, India at 3.37 metric tonnes per hectare, Canada at 3.26 metric tonnes per hectare, Argentina at 3.22 metric tonnes per hectare, United States at 3.2 metric tonnes per hectare.

And with China being home to about 19% of the world’s population, but having about 7% of the world’s arable land, China’s arable land availability is tight; China’s arable land per capita stood at 0.086 hectares per capita in 2016, compared with 0.118 hectares per capita in India, 0.223 hectares per capita in the European Union, and 0.471 hectares per capita in the United States, the same year according to data from the World Bank.

Bar chart showing arable land per capita for selected countries as a 2016. In 2016, arable land per capita reached 1.904 hectares per person in Australia, 0.853 hectares per person in Russia, 0.471 hectares per person in the United States, 0.2 to 3 hectares per person in the European Union, 0.118 hectares per person in India, and 0.086 hectares per person in China. Data from the World Bank.

This suggests that trade policy reasons aside, China will continue to appear in the ranks of the world’s largest wheat importers in the years ahead.

China-U.S. trade tensions saw China imposing a 25% retaliatory tariff on U.S. wheat which saw China-bound wheat exports dive 84% from 2017 figures. However, as part of the Phase 1 Trade deal negotiated between the two countries early this year, China reportedly may increase wheat imports from the U.S. The relief to U.S. wheat farmers may be short-lived however; with China-U.S. relations on showing limited improvement and becoming increasingly fragile, the trade deal may fall apart.

Egypt

Egypt is one of the few countries worldwide where wheat consumption has been consistently growing, albeit at a very slow rate. And with domestic production outstripped by domestic consumption, Egypt, the world’s largest wheat importer for several years, has been seeing its share of global wheat imports steadily grow from 5.7% in 2012/13 to 7% in 2019/20.

Column chart showing world wheat, flour, and products Imports by share for selected countries. Egypt's share of world wheat, flour, and products grew from 5.7% in calendar year 2012/13 to 7% in calendar year 2019/20 while Japan's share dropped from 4.5% in calendar year 2012/13 to 3% in calendar year 2019/20, Algeria's dropped from 4.4% in calendar year 2012/13 to 3.6% in calendar year 2019/20, Brazil's share dropped from 5.1% in calendar year 2012/13 to 3.8% in calendar year 2019/20, Indonesia's share grew from 4.9% in calendar year 2012/13 to 5.7% in calendar year 2019/20, Turkey's share grew from 2.2% in calendar year 2012/13 to 5.8% in calendar year 2019/20, Philippines' share grew from 2.5% in calendar year 2012/13 to 3.8% in calendar year 2019/20.

Although the Egyptian government has made efforts to make the country self-sufficient in wheat, plans have so far yielded little results. While Egypt’s wheat demand has grown from 18.7 million metric tons in 2012/13 to 20.6 million metric tons, representing a CAGR of 1.39%, the country’s production has grown from 8.5% million metric tons in 2012/13 to 8.77 million metric tons in 2019/20 representing a CAGR of 0.45%. The result has been a steady increase import’s share of Egypt’s wheat consumption which grew from 45% in 2012/13 to 64.6% in 2019/20 according to LD Investments analysis of figures from the United States Department of Agriculture.

Wheat production growth in Egypt will likely be driven from area gains rather than yields as Egypt already has the highest wheat yields in the world. Given that imports account for more than 60% of Egypt’s annual wheat consumption, in order to achieve self-sufficiency, Egypt will have to increase wheat acreage nearly two-fold, a highly unlikely possibility in the foreseeable future. And with Egypt’s population growing at 2.28% annually, ranking it 31st among 237 countries according to figures from the Central Intelligence Agency, Egypt appears to be a far way off from achieving wheat self-sufficiency and is therefore likely to continue being a major importer in the near future. 

Turkey

Turkey’s wheat consumption has grown from 17 million metric tons in 2012/13 to 19.9 million metric tons in 2019/20 partly the result of an influx of Syrian refugees who are highly dependent on staples such as bread. With domestic wheat production hovering between 16 million metric tons to 21 million metric tons during the period, Turkey has been nearly self-sufficient in wheat production in the past, but a surge in exports of Turkish-made pasta and flour has driven demand for wheat imports, which in turn has propelled Turkey to emerge as the world’s second-biggest importer of wheat accounting for 5.8% of global wheat imports. Over the past two decades, Turkey’s flour exports have doubled and pasta exports have jumped six-fold helping propel the country to become the world’s largest exporter of flour, semolina and the world’s second-largest exporter of pasta.

Supply

Russia

Over the past two decades, Russia moved from being a net wheat importer to a net wheat exporter and the country accounted for about 18% of global wheat exports during the calendar year 2019/20, up from just 7.7% in 2012/13.

Column chart showing world, flour, and products, export share by country. Russia's share of world wheat, flour, and products exports grew from 7.7% in calendar year 2012/13 to 18% in calendar year 2019/20 while The European Union's 15.5% in calendar year 2012/13 to 20% in calendar year 2019/20, the United States' share dropped from 18.8% in calendar year 2012/13 to 13.8% in calendar year 2019/20, Ukraine's share grew from 4.9% in calendar year 2012/13 to 11.1% in calendar year 2019/20, Canada's share dropped slightly from 12.6% in calendar year 2012/13 to 12.2% in calendar year 2019/20, and Australia's share dropped from 14.4% in calendar year 2012/13 to 5.3% in calendar year 2019/20.

There is tremendous potential for continued production growth in Russia driven by area gains and yield improvements. At 2.39 metric tons per hectare, Russia’s wheat yields are just about half that of China. And the export market opportunity for Russian wheat is significant. Apart from being one of the biggest wheat suppliers to growth markets Turkey and Egypt, Russia is also well placed to increase its share of Chin’s wheat imports in the long term, following a path similar to Russian soybeans which have seen exports to China grow 51 times between 2013/14 to 2018/19; China is increasingly diversifying its wheat sources away from the United States in the face of growing China-U.S. tensions, and Russia could be a beneficiary of this move which suggests sunny days ahead for Russian wheat farmers and more business for Russian grain traders such as Russia’s state-owned United Grain Company (UGC) who is emerging as a formidable contender in global grain trade, which is currently dominated by international merchants such as Cargill Inc, ADM, Glencore, and Louis Dreyfus.

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World Soybean Trade: A Long Term View

Bar chart showing top five soybean imports by volume, 2018. China was the world’s largest soybean importer having imported 85.47 million metric tonnes in 2018, followed by the EU-27 + UK with imports of 17.29 million metric tonnes, Argentina with 6.78 million metric tonnes, Mexico with 5.15 million metric tonnes, and Egypt with 3.51 million metric tonnes. Data from UN Trade Data.

Demand

Over the past nearly two decades, global soybean demand has outpaced other crops such as corn, cotton, rice, and wheat. According to figures from U.S. Soy, soybean demand has grown 229% during the 1990/91 marketing year to 2017/18 compared to 123% for corn, and 34% for wheat. Growth has been driven by growing demand for protein, and vegetable oil consumption for food. Much of the growth was driven by China. Soybean world per capita consumption averaged 43 pounds in 1990 and by 2010 that had nearly doubled to 81 pounds according to figures from US Soy. China’s per capita soybean consumption grew from just 19 pounds in 1990 to 110 pounds by 2010. By comparison, soybean per capita consumption in the United States grew from 304 pounds in 1990 to 344 pounds in 2010.

The growth momentum appears set to continue. Over 80% of imported soybeans are processed into animal feed in China. This is consistent with the world average with about 85% of the world’s soybean crop is used as animal feed. China, the world’s largest importer according to UN trade data, imports soybeans for its meat, poultry, and dairy industry which has been booming as Chinese citizens increasingly add more protein to their diets as incomes rise and living standards increase. China is on track to overtake the U.S. to become the world’s largest dairy market according to Euromonitor International, and currently is the world’s largest egg consumer and producer, and the world’s largest meat importer.

Bar chart showing top five soybean imports by volume, 2018. China was the world’s largest soybean importer having imported 85.47 million metric tonnes in 2018, followed by the EU-27 + UK with imports of 17.29 million metric tonnes, Argentina with 6.78 million metric tonnes, Mexico with 5.15 million metric tonnes, and Egypt with 3.51 million metric tonnes. Data from UN Trade Data.

Protein intake among Chinese citizens has been steadily growing reaching 96.7 grams per capita per day during 2011-2013 and has reached levels comparable to developed neighbors such South Korea (96 grams per capita per day). However, it has yet to reach levels comparable to other developed nations such as the United States (108.7 grams per capita per day), and Germany (101.7 grams per capita per day) suggesting room for Chinese soybean demand to grow.

Column chart showing average protein supply (in grams per capita per day) (three year average) in China, South Korea, United States, and Germany. In 2008-2010, average protein supply was 91.7 in South Korea, 92.4 in China, 101.3 in Germany, 110.7 in the United States. In 2009-2011, average protein supply was 93 in South Korea, 93.7 in China, 102 in Germany, 109.3 in the United States. In 2010-2012, average protein supply was 94.3 in South Korea, 95.3 in China, 101.7 in Germany, 109 in the United States. In 2011-2013, average protein supply was 96 in South Korea, 96.7 in China, 101.7 in Germany, 108.7 in the United States. Data from the Food and Agriculture Organization of the United Nations.

This is particularly true for animal protein which at 38 g/capita/day (3-year average) in China has not yet reached the levels of neighbors Japan (48 g/capita/day), and South Korea (46 g/capita/day), as well as developed nations such as the United States (69 g/capita/day), and Germany (61 g/capita/day).

At 45.7 kilograms per capita, China’s meat consumption per capita is higher than the world average of 34 kilograms per capita but has room to catch up with Asian countries such as Malaysia and Vietnam which have meat consumption per capita of 60.3 and 50.5 kilograms per person respectively.

Bar chart showing meat consumption per capita (beef and veal, pork meat, poultry meat, and sheep meat) for selected countries in 2019 (kilograms per capita). In 2019, meat consumption per capita stood at 34 kilograms per person worldwide, 100.8 kilograms per person in the United States, 89.7 kilograms per person in Australia, 62.6 kilograms per person in Russia, 60.3 kilograms per person in Malaysia, 50.5 kilograms per person in Vietnam, 45.7 kilograms per person in China, and 3.6 kilograms per person in India. Data from OECD Data and LD Investments analysis.

Chinese meat demand has pushed up meat imports over the past few years and China is the world’s largest meat importer. China’s growing appetite for imported meat should help drive EU soybean demand. As the world’s largest meat exporter, the EU has been a major beneficiary of China’s growing meat consumption which in turn helped push EU soybean imports; the EU is the world’s second largest soybean importer and the world’s largest importer of soybean meal which is used mainly as animal feed. With China driving global meat demand, soybean demand from the EU, the world’s second biggest importer, is poised to grow as well.

India also presents a tremendous growth driver. Incomes and living standards have been rising and India’s average protein supply is on a firm uptrend but is still about half of China’s suggesting ample room for growth.

Column chart showing the average protein supply in grams, per capita, per day on a 3-year average in China and India. During 2005-2007, average protein supply was 55 grams per capita per day in India, and 87.4 grams per capita per day in China. During 2006-2008, average protein supply was 56.7 grams per capita per day in India, and 89.1 grams per capita per day in China. During 2007 – 2009, average protein supply was 57.3 grams per capita per day in India and 90.8 grams per capita in China. During 2008 – 2010, average protein supply was 58 grams per capita per day in India, and 92.4 grams per capita per day in China. During 2009-2011, average protein supply was 58.7 grams per capita per day in India, and 93.7 grams per capita per day in China. During 2010-2012 average protein supply reached 59.3 grams per capita per day in India and 95.3 grams per capita per day in China. During 2011-2013 average protein supply reached 59.7 grams per capita per day in India, and 96.7 grams per capita per day in China.

A comparison between the meat markets in India and China are somewhat of an apples to oranges comparison; India is the world’s largest vegetarian market with more than 390 million vegetarians according to figures from Euromonitor International, India may not reach the ranks of other countries such as China and Australia in terms of meat consumption per capita in the near term. Vegetarians in countries such as India often abstain from consuming meat citing religious reasons (such as the moral concept of non-violence against all life forms) and thus meat affordability is not a concern. Hence, regardless of income growth and rising wealth, it is unlikely their diets will change to include any meat at all.

Bar chart showing the top five vegetarian markets in the world by vegetarian population. India was the biggest with a vegetarian population of 390 million followed by Indonesia with 66.9 million vegetarians, Nigeria with 58.1 million vegetarians, China with 51.9 million vegetarians, and Pakistan with 33.2 million vegetarians.

However there is tremendous room for meat consumption growth among the non-vegetarian population. Vegetarians make up 30% of India’s population which leaves a meat consuming population equal to about two-thirds of India’s one billion plus population.

Bar chart showing vegetarians as a percentage of the population for selected countries. With vegetarians accounting for 29.8% of the country’s population, India’s vegetarian population had the highest percentage, followed by Indonesia where vegetarians accounted for 25.4% of the country’s population, and Pakistan at 16.8%. China’s vegetarian population made up just 3.8% of the country’ s total population.

In fact, according to the results of a survey conducted by Indian Market research Bureau (IMRB), 73% of urban rich Indians are protein deficient, with 93% of them unaware about their daily protein requirements. With nearly 80% of Indian households expected to rise to middle income status by 2030, up from 50% today, the U.S. Soybean Export Council sees India as a prime export market in the future.

Supply

The top five largest soybean producers are the United States, Brazil, Argentina, China, and India.

Bar chart showing the leading countries in soybean production worldwide. During calendar year 2018-2019, the United States was the leading soybean producer in the world, producing 120.52 million metric tons, followed by Brazil with 119 million metric tons, Argentina with 55.3 million metric tons, China 15.97 million metric tons, India with 10.93 million metric tons, Paraguay with 8.85 million metric tons, Canada with 7.27 million metric tons, Ukraine with 4.83 million metric tons, and Russia with 4.03 million metric tonnes. According to preliminary figures for calendar year 2019-2020, Brazil was the leading soybean producer worldwide with 126 million metric tons, followed by the United States with 96.68 million metric tons, Argentina with 50 million metric tons, China with 18.1 million metric tons, Paraguay with 9.9 million metric tons, India with 9.3 million metric tons, Canada with 6 million metric tons, Russia with 4.36 million metric tons, and Ukraine with 4.05 million metric tons. Data from the United States Department of Agriculture Foreign Agricultural Service.

China, the world’s largest soybean importer and consumer is likely to remain a major import market in the years ahead. Domestic soybean production meets just about 20% of China’s domestic demand of about 100 million metric tons, and while there is potential for the country to increase domestic output by improving yields (particularly with the government reportedly making efforts to boost soybean production), this is unlikely to satisfy demand so the country will continue to depend heavily on imports going forward.

Even if China doubles its soybean production by doubling its yields to match the United States (China’s average soybean yield on the same area of land is about 40% that of the U.S. according to Heilongjiang Academy of Agricultural Sciences), China could potentially increase its production by about 15 million metric tons, which is not even one-fifth of China’s estimated 84 million metric ton soybean import volume during marketing year 2019/2020 according to data from the USDA.

India, the world’s fifth largest soybean producer, has been a consistent net exporter of soybeans but its net exports have been shaky as domestic production is outpaced by domestic demand.

Line chart showing India's net soybean exports from 2012-2018. India's soybean net exports were 45,413 metric tons in 2012, 100,908 metric tons in 2013, 195,003 metric tons in 2014, 197,340 metric tons in 2015, 84,557 metric tons in 2016, 219,425 metric tons in 2017, and 37,857 metric tons in 2018.

India became a net importer this year having imported some 114,000 metric tons from October 2019 to February 2020 according to USDA data. As incomes grow and protein intake increases, the country may well end up becoming a consistent net importer, unless they dramatically increase soybean yields; India’s average soybean yields on the same area of land is just 25% that of the U.S. according to data from the USDA.

Bar chart showing soybean yields in metric tons per hectare, for selected soybean producing countries, and world average. During crop year 2018/19, average soybean yields was 2.88 metric tons per hectare worldwide, 3.31 metric tons per hectare in Brazil, 3.4 metric tons per hectare in the United States,3.33 metric tons per hectare in Argentina, 2.39 metric tons per hectare in Paraguay, 2.86 metric tons per hectare in Canada, 1.9 metric tons per hectare in China, 2.91 metric tons per hectare in the European Union, 1.47 metric tons per hectare in Russia, and 0.96 metric tons per hectare in India. According to preliminary figures for calendar year 2019/20, average soybean yields was 2.75 metric tons per hectare worldwide, 3.41 metric tons per hectare in Brazil, 3.19 metric tons per hectare in the United States, 2.94 metric tons per hectare in Argentina, 2.8 metric tons per hectare in Paraguay, 2.61 metric tons per hectare in Canada, 1.95 metric tons per hectare in China, 2.87 metric tons per hectare in the European Union, 1.57 metric tons per hectare in Russia, and 0.78 metric tonnes per hectare in India.

That would leave current soybean export leaders Brazil, and the United States to continue dominating the soybean export market in the years ahead.

Bar chart showing the top five soybean exporting countries in the world in 2019. Brazil was the largest exporter with US$ 34.2 billion followed by the United States with US$ 16.7 billion, Paraguay with US$ 2.4 billion, Canada with US$ 1.7 billion, and Ukraine with US$ 0.8 billion.

The fragility of the U.S.-China relationship suggests Brazil is in a better position to capitalize on China’s soybean demand in the long term, presenting opportunities for Brazilian soybean suppliers. As of August 2020, Brazil accounted for 72% of China’s soybean imports so far this year, while imports from the U.S. accounted for just 21% which is an improvement from last year’s 15% but considerably lower than the 43% share pre-trade war. The long term impact of losing China as an export market for U.S. soybeans was abundantly clear when prior to the Phase 1 trade deal, the USDA’s long term projections for soybean planting in the U.S. expected only marginal increases and was not expected to recover to pre-trade war levels.

Line chart showing long-term projections for soybean planted acreage in the United States by the United States Department of Agriculture. The United States department of Agriculture projects soybean planted acreage in the United States at 90.1 million acres in 2017, 89.1 million acres in 2018, 82.5 million acres in 2019, 82.5 million acres in 2020, 83 million acres in 2021, 83.5 million acres in 2022, 84 million acres in 2023, 84.5 million acres in 2024, 85 million acres in 2025, 85 million acres in 2026, 85.5 million acres in 2027, and 85.5 million acres in 2028.

Agribusiness players ADM, Bunge, Cargill, which buy crops from farmers, then transport, store and/or process the crops and sell the processed crops to food, feed, and energy buyers all have operations in Brazil and should benefit from improved South American export volumes as Chinese soybean imports grow along with rising protein demand.

In 2019, Cargill was the largest soybean exporter in Brazil followed by Bunge, ADM, and Dreyfus.

Bar chart showing Brazil's top soybean and corn exporters in 2019. In 2019, Brazil's leading soybean exporters were Cargill, Bunge, ADM, Dreyfus, Amaggi, Gavilion, COFCO, Glencore, Coamo, and Engelhart respectively. In 2019, Brazil's top corn exporters were Cargill, Bunge, Amaggi, ADM, Dreyfus, Gavilion, COFCO, Glencore, Coamo, and Engelhart respectively

On the domestic front, Brazilian grain trader Agribrasil expects revenues to more than double this year to 1 billion reais from 390 million in 2019 thanks to China’s voracious appetite for commodities such as soybeans and corn.

In the short term however, China will likely continue buying U.S. soybeans not just as part of the Phase 1 trade deal secured in January this year which helped end a nearly two year trade war between the two nations, but also perhaps to buy time as the country makes the necessary investments to cost effectively diversify its soybean sources in the long term, since top supplier Brazil may be unable to keep up with Chinese soybean demand. The opportunity in Russia is particularly compelling. Already the world’s second-largest wheat exporter, Russia has been vying for a greater share of China’s wheat imports and it is not a far stretch to envision Russia expanding its soybean production to capture a bigger slice of China’s soybean imports. Russian soybean exports to China have grown 51 times from just 15,000 metric tons in 2013/14 to 763,000 metric tons in 2018/19. Although this is less than 1% of China’s approximately 100 million metric ton soybean consumption currently, the long term potential is significant considering China’s top soybean producing region – Heilongjiang – is just across the China-Russia border from Russia’s top soybean producing region – the Amur region, which if developed could offer China soybeans at very cost effective prices with the added advantage that Russian soybeans are non-GMO (compared with the United States where 94% of US soybean acreage comprises GMO soybeans as of 2018). The expected completion of two new bridges over the Amur River (known as the Heilongjiang river in China) which borders Russia and China should greatly facilitate soybean trade between the two countries. With calls from China to set up a ‘soybean industry alliance’ with strategic partner Russia, it is highly likely Russia will continue to take greater share of China’s soybean imports going forward.

All is not lost for U.S. soybeans however. The EU is gradually phasing out palm oil for its domestic biodiesel use, and U.S. soybeans could be a beneficiary of this move. Accounting for 20.03% of the EU’s biodiesel feedstock mix, the EU consumed 2,640 million liters of palm oil in 2019 for biodiesel production according to data from the USDA. Soybeans’ share has grown from 7.83% in 2013 to 8.35% in 2019. Assuming the EU turns to soybeans to fill the void left by palm oil, soybean use for EU feedstock production could double.

Column chart showing EU biodiesel production by feedstock. In 2019, rapeseed oil had the biggest share of the EU biodiesel feedstock mix with a share of 37.94%, followed by used cooking oil (20.86%), palm oil (20.03%), soybean oil (8.35%), animal fat (6.07%), sunflower oil (1.44%), and other oils such as pine/tall oil, fatty acids (5.31%). In 2017, rapeseed oil had the biggest share of the EU biodiesel feedstock mix with a share of 44.18%, followed by used cooking oil (19.42%), palm oil (18.58%), soybean oil (6.52%), animal fat (5.58%), other oils such as pine/tall oil, fatty acids (4.45%) and sunflower oil (1.26%). In 2015, rapeseed oil had the biggest share of the EU biodiesel feedstock mix with a share of 47.48%, followed by used cooking oil (17.80%), palm oil (17.36%), animal fat (7.64%), soybean oil (4.01%), other oils such as pine/tall oil, fatty acids (4.15%), and sunflower oil (1.56%). In 2013, rapeseed oil had the biggest share of the EU biodiesel feedstock mix with a share of 51.37%, followed by palm oil (21.05%), used cooking oil (10.35%), soybean oil (7.83%), animal fat (3.78%), other oils such as pine/tall oil, fatty acids (3.01%), and sunflower oil (2.61%).

The reality however is that American soybeans will be fighting against EU-grown rapeseed, soybean, and sunflower oil for a chance at replacing the void left by the palm oil subsequent to EU phasing it out as a feedstock which indicates the opportunity for American soybean farmers looking to cash in on the EU opportunity will be smaller.

Nevertheless, it should still cushion the blow for companies such as ADM for whom soybean trading accounts for 16% of revenue with most of their origination from North America. In its latest annual report, ADM’s Ag Services and Oilseeds operating unit saw profit drop 4% which the company attributed to weaker North American grain margins and volumes, in part due to changing weather conditions and the U.S.-China trade tensions. Within the Ag Services and Oilseeds unit, Ag Services (which includes results from its origination business which buys grains from farmers) recorded a 23% drop in operating profit, compared with a 45% increase a year earlier.

The company benefited from China’s increased soybean consumption before the trade war and if Brazil replaces the United States as China’s leading soybean supplier or takes an increasing share of Chinese soybean imports, the EU could help partially fill in the void for U.S. soybean producers and traders such as ADM.