Commodities Sector - OCBC Investment 2015-12-07: Still no light ahead

GOLDEN AGRI-RESOURCES LTD E5H.SI NOBLE GROUP LIMITED N21.SI OLAM INTERNATIONAL LIMITED O32.SI WILMAR INTERNATIONAL LIMITED F34.SI

Commodities Sector - Still no light ahead

 China’s slower growth = slower demand
 Unlikely to see any catalysts
 Maintain UNDERWEIGHT

The commodities sector just could not catch a break, with energy prices leading the rout with a fall of nearly 60% since the start of 2015. And with the sharp slowdown in China’s industrial production and infrastructure expansion, industrial metals were also very badly hit.
On average, the commodities stocks under coverage crashed over 26% YTD to 4 Dec, versus the STI’s 15.3% decline.

In our previous strategy report, we highlighted that China could see more muted demand for commodities, especially for energy and hard metals; this as industrial production continues to plummet along with the slowdown of the economy.
And with economic growth expected to remain around the sub-6% levels in the next two years, the prospects for a meaningful pick up in commodity prices have all but been pushed back to at least 2018.

And it is not just China – the slowing economic malady is spreading around the globe, hitting first the commodities exporting countries, China’s trading partners and even the developed economies.
And given this sluggish demand outlook, coupled with ample supply, the latest World Bank’s Oct 2015 Commodity Markets Outlook report believes that the current El Nino episode, while likely to be one of the strongest in history, is unlikely to cause a spike in global agricultural prices.

Given the persistently muted outlook for the overall commodity sector, especially for crude oil, we continue to be UNDERWEIGHT the sector, as positive catalysts are likely to remain few and far between in the near to medium term.

For 2015, we had downgraded our sector rating to UNDERWEIGHT; and true enough, most of the commodities stocks under coverage underperformed both the Bloomberg Commodity Index (BCOM) and the STI.
Having said that, we note that valuations are not excessive; but should there be further deterioration in asset values, these companies could face impairments, especially for their biological assets.
Nevertheless, we have a BUY on Wilmar as its downstream business could benefit from lower input prices; we also believe that the market has yet to recognize its exposure in Africa, which could be the next driver for the commodities giant in the medium to long term.

Carey Wong CFA OCBC Securities | http://www.ocbcresearch.com/ 2015-12-07

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BUY Maintain BUY 3.27 same 3.27