February 24, 2006

 

Grain companies place their bets on rising soy demand in China

 

 

International grain traders are falling over each other in a scramble to buy China's soy crushers, hoping to cash in on China's seemingly insatiable appetite for soy products.

 

International companies account for one-third of the total processing capacity but in fact possess more than half the processing capacity in operation, according to Cheng Guoqiang, a researcher with the State Council Development and Research Center.

 

Archer Daniels Midland Co. (ADM), one of the leading foreign agricultural companies in China, already controls 13 factories with a combined yearly processing capacity of 15 million tonnes.

 

The LouisDreyfus Group is negotiating a US$15 million soybean factory investment in Liaoning province.

 

Cargill Inc. intends to expand its capactity to 2.5 million tonnes with plans to build a new plant in eastern Jiangsu province and a buy-over in southern China's Guangdong province.

 

Noble Group Ltd. jumped into the bandwagon in February by announcing its purchase of a soybean crushing and refining plant in Guangxi.

 

Bunge Ltd., having bought a controlling interest in a soybean plant in Rizhao, Shandong province in July, announced plans to buy a second plant in Nanjing, Jiangsu province by June this year.

 

Chinese crushers became attractive targets for takeovers after suffering massive losses in 2004 when the soybeans they contracted for at peak prices suffered huge price drops by the time deliveries were taken.

 

Many chose to default on contracts. Consequently, they were either denied further imports or became too debt laden to continue operations.

 

Crushers near major ports were primary targets for international traders, and some analysts believe that some takeovers were by debt-for-share swaps.

 

However, local analysts believe the soybean processing industry is facing serious over-capacity. China's total soybean-processing capacity has reached 75 million tonnes a year, while only 30 million tonnes are in operation, the result of over-investment in 2000 when attractive returns lured investors.

 

Then again, there remains much room for expansion. Production lines in operation have yet to meet market demand, mainly due to management issues. Also, most international companies entered the local market through mergers and acquisitions, so in fact actual processing capacity has not increased much.

 

Meanwhile, higher meat consumption in China would mean increased demand for soymeal used for animal feed, Cheng said.

 

China's National Grains & Oils Information Center estimates put total consumption for soybeans from Oct 2005 to Sep 2006 at 42.32 million tonnes, of which 32.5 million tonnes will be destined for crushing.

 

Big international companies are unlikely to be buffeted by policy changes but rather, will face continued growth in the soybean market. However, smaller local plants currently scattered in rural areas will have to consolidate into large processors congregating along coastal areas, Cheng said.