Wilmar International - DBS Research 2017-04-11: Spot crush margins in China turn negative

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Wilmar International - Spot crush margins in China turn negative

News of negative soybean crush margins in China vs. stable in Argentina.
Losses in crush margins reportedly driven by drop in soybean oil prices.
Movements in spot crush margins are not a direct reflection of Wilmar’s results.

No change to forecasts, maintain HOLD and S$3.90 TP pending management guidance.

A news article in Reuters today pointed to negative soybean processing margins in China currently – prompted by precipitous declines in soybean oil prices. According to the article, the drop in soybean oil prices was mainly driven by:
1. higher vegetable oil imports
2. regular auctions of state rapeseed oil reserves
3. unwinding of speculative long positions in edible oil futures on the Dalian exchange
The news article also noted that the current weakness in China’s soybean crush margins would adversely affect imports of palm oil into China; as the anticipated jump in soybean imports between April and June would likewise see very big crushing volumes.
Adding to the negative sentiment was talk of potential release of old-crop soybean reserves. In the article, the Chinese government was reported to be considering releasing 4.5m MT of soybeans by 2018.
Separately, according to USDA (United States Department of Agriculture) report published in March 2017, the Chinese government had sold 1.88m MT out of estimated 6.4m MT of rapeseed reserves from October 2016 to the end of February 2017. USDA expected total vegetable oil stocks to fall to 3.5m MT by end of 2017/18 marketing year (ending September).

Based on crush margin data (source: Shanghai JC Intelligence Co.) compiled by Bloomberg, soybean crush margins in China have indeed declined steeply year-to-date.
As of yesterday, the crush margin was reported to be negative CNY220/MT or approximately US$31.9/MT loss. This was a reversal from CNY93.6/MT profit or about US$13.6/MT at the end of February 2017.
In comparison, the estimated soybean crush margins in Argentina continued to remain stable at US$25.3/MT currently, from US$23.0/MT at the end of February 2017. This suggests the weakness in domestic selling prices/feedstock costs in China was indeed isolated.
Based on our observations on the data, the weak crush margins in China was indeed influenced by declines in both China’s soybean oil prices (-9% since end February 2017 in USD terms) and soybean meal prices (-4% since end February 2017 in USD terms).
Adding to the weakness in end product prices, China’s soybean prices (USD terms) had eased only by 1% over the same period.
China’s palm oil imports of 339,653 MT in February 2017 (latest data) had also declined steely from 535,028 MT in January 2017 – but this was principally due to seasonality following Chinese New Year demand.

Historically, spot margin calculations had no direct correlation with Wilmar’s Oilseeds & Grains pretax margins; and have at times moved in opposite directions because:
1. Unlike spot prices, Wilmar’s feedstock costs and end product selling prices are secured months ahead through back-to-back hedging
2. Wilmar may opt to increase or reduce its crushing volumes relative to other industry players, depending on anticipated profitability levels
3. Wilmar’s Oilseeds & Grains pretax also contain contributions from Consumer Pack segment, which typically does not move in tandem with crush margins.
In our view, the negative crush margins are a disincentive for Chinese soybean processors, and may prompt some to reduce crush volumes to reduce losses. However, to maintain price stability, any intended release of soybean reserves should eventually help processors by lowering feedstock costs (i.e. soybeans).
According to USDA, palm oil imports into China will remain stable at 5m MT in current marketing year ending September (unchanged y-o-y); while Oil World expects China’s palm oil imports to reach 5.2m MT (from 4.8m MT in the previous marketing year).
We currently forecast Wilmar’s Oilseed & Grains pretax margin to average 1.9% this year - from 1.4% last year (including steep losses in 2Q16).
Pending management guidance, we maintain our forecasts, S$3.90 TP and HOLD rating on the counter.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-04-11

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.900 Same 3.900