Soft Commodities - OCBC Investment 2018-06-27: Contending With Greater Forces

WILMAR INTERNATIONAL LIMITED SGX:F34

Soft Commodities - Contending With Greater Forces

With 6 Jul nearing the corner (when China plans to impose 25% tariffs on US goods including soybeans), US soybean futures recently fell to a low of about US$842/bushel. At the current level of US$894/bushel (close on 22 Jun), prices are down about 15% from a month ago, and are likely to remain volatile.
Wilmar International imports soybeans from the key producers and sells key products in China. The group makes from the spread between soybeans and its products such as soyoil and soymeal, and hence crushing margins affect earnings. If soybean prices were to rise in China, prices of soybean meal (currently used mainly as animal feedstock) and soybean oil are likely to rise too. Substitutes of soy meal such as corn meal will see higher demand; Wilmar trades in this too, but to a lesser extent.
Crude palm oil and rapeseed oil are substitutes of soy oil and the group has a greater exposure to these. We would also monitor the utilisation levels of the group’s crushing plants in China, which remained high (more than 80%) as of a month ago. According to management, even though performance of its oilseed crushing business will not be affected in the short term, a prolonged standoff between China and the US would impact the utilisation of its crushing plants.

China, the world’s largest soybean buyer, can afford to implement tariffs this summer, as they have Brazil’s record harvest to help supply their needs. Brazilians gather in their soybean crops from Feb through May while US soybeans are harvested from late Sep through Nov. After Aug/Sep, when Brazilian harvests are mostly exported, international buyers most likely have to turn to more US supplies.
Wilmar is currently already sourcing soybeans from South America including Brazil and Argentina in the face of the tariffs.

As mentioned in our earlier report (see report Soft Commodities - Diversities Is Virtue dated 8 Mar 2018), CPO prices are expected to remain lacklustre, and at RM2,283/MT (22 Jun close), the commodity is trading at its lowest since Mar 2016.
Meanwhile, Wilmar remains our preferred pick in the sector with its more diversified operations.
Companies in which Mr. Kuok Khoon Hong, is deemed interested in, have continued to purchase Wilmar shares – a total of about 8.8m shares at a weighted average of S$3.10/share since late Feb.

Low Pei Han OCBC Investment | https://www.iocbc.com/ 2018-06-27

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