August 15, 2012

 

Wilmar cautions over Chinese oilseed crushing margins

 

 

As it unveiled a 70% decline in earnings, to the lowest in five years, Wilmar International followed rival Noble in warning over Chinese oilseed crushing margins and warned of a "challenging" environment.

 

The rice-to-oleochemicals giant, the world's largest palm oil processor, said earnings for the April-June quarter fell to US$117.1 million, the lowest since the same quarter of 2007, reflecting setbacks ranging from the late Australian sugar milling season to weaker biodiesel prices.

 

However, the group highlighted the slump to a loss of US$40 million at its oilseeds and grains division, from a pre-tax profit of US$129.4 million a year before, reflecting a "continued difficult operating environment" in China, where Wilmar is the biggest foreign operator.

 

The impact of "extremely poor"-- indeed "negative" - crush margins was "exacerbated by losses from the depreciation of renminbi against US dollar", further raising raw material prices at its Chinese operations.

 

The comments follow a caution on Monday (Aug 13) by sugar-to-coal trader Noble Group, also listed in Singapore, over "poor crush conditions" in China which contributed to a 69% slump in the group's farm-sector profits during the quarter.

 

Noble and Wilmar, with Olam International, represent the "Now" group of Asian agricultural trading houses which have been seen as challengers to the dominance of the "ABCD" group of Western giants, comprising Archer Daniels Midland, which is a major shareholder in Wilmar, Bunge, Cargill and Louis Dreyfus.

 

Kuok Khoon Hong, the Wilmar chief executive, cautioned over prospects for its oilseeds operations in China, a huge market for processing, but one in which capacity has outstripped demand, and where processors are also subject to government restrictions on product prices.

 

"In the near term, the operating environment remains challenging, particularly in China, due to excess capacity in oilseeds crushing," he said.

 

Ironically, the comments came hours after US farm officials said that Chinese soy importers were placed for a "handsome profit" from timely purchases of supplies.

 

Wilmar also highlighted in its declining performance "lower plantation profits", down 45% to US$79.2 million pre-tax, "reflecting lower prices, a drop in production yield and higher production cost".

 

The decline in prices was "in line with the market trend," with palm oil values weakening over the quarter and continuing to decline, reaching a nine-month low in Kuala Lumpur, undermined by concerns of swelling inventories.

 

The Australia-focused sugar division expanded its underlying pre-tax loss by 41% to US$50.2 million, reflecting the wet weather in the country's east coast cane-producing regions which "delayed the crushing season and resulted in lower sugar production".

 

However, Kuok, rated by Forbes as seventh on the Singapore rich list with a fortune of US$2.3 billion, said that Wilmar's "long-term prospects remain intact".

 

"We are well positioned to capture the growth in demand for agricultural commodities, especially in Asia and emerging markets like Africa," he said.

 

The results were released after the close of Singapore's stock market, where Wilmar shares closed up 1.8% at SGD3.39 (US$2.71), if still within sight of a three-year low of SGD3.18 (US$2.6) reached two weeks ago.

 

Noble shares soared 12.1% to SGD1.25 (US$1) on Tuesday (Aug 14) as investors reacted to the group's results which, while weak in agriculture, were stronger in its energy operation.