Commodity Trading Houses Report Fall in Earnings

on May 28, 2012

“Wilmar, the world’s largest processor of palm oil, reported a 34 percent drop in net income in the first quarter compared with the same period last year as its core oilseeds processing unit swung into a loss on overcapacity in China. Wilmar said the decline in net profit to $256m was ‘largely due to lower oilseeds and grains margins,’” the Financial Times said.

The publication also noted that Noble Group failed to perform on par analysts’ forecasts as well, thus disappointing its investors. The company announced a 46 percent drop in net income in the first quarter of 2012 compared with profits during the same period in 2011. In addition, Noble’s operating income between January and March was estimated at $47.3 million, which is 63 percent lower than income from same quarter of last year.

Shrinking processing margins in China, which has been a leader in processing of soyabeans for years, are largely to be blamed for the losses that the two commodity traders have been facing. In addition, the Financial Times asserted that the global agricultural industry has seen unusually large number of mergers and acquisitions of late. First, in March of this year Switzerland-based commodities producer and marketer Glencore bought Canadian grain trader Viterra for C$1.6 billion. With the acquisition, Glencore secured an influential presence in the crucial North American grain market.

Earlier this month, Japanese trading company Marubeni announced that it has entered advanced talks to buy US-based grain trader Gavilon, which is owned by hedge funds Ospraie Management and Soros Fund Management, and the private equity group General Atlantic. Gavilon was reportedly valued at $5 billion, including debt. The Financial Times explained that the consolidation is a result of traders’ appetite to profit from rising trade in food commodities due to strong demand in emerging countries such as China.

“We plan on playing a role in that consolidation process,” Yusuf Alireza, Noble’s new chief executive, told investors during a conference call, adding that the company was looking for opportunities.
The Financial Times also explained that the drop in processing margins has been exacerbated first by two primary factors. First, domestic Chinese processors such as China Agri-Industries Holdings have ramped up capacity; and second, prices for oilseeds, including soybeans, have spiked recently due to decreased global supplies.

Wilmar Chairman and Chief Executive Kuok Khoon Hong told the Financial Times that “oilseeds crushing margin in China is expected to remain challenging due to excess capacity.”
Noble Chairman Richard Elman expressed a more optimistic outlook. He told investors in a letter that he was anticipating “a much stronger agricultural performance” in the second half of the year.


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