Soybean Crushers Under Hammer Despite High China Imports

(Wall Street Journal) – Commodity houses are reporting bleak results for their soybean businesses in China despite rocketing imports, but some believe a turnaround may be just over the horizon.

Purchases by the world’s largest importer of the commodity rose 41% in the first four months of the year, but demand inside China for byproducts like soymeal used as animal feed or oil for cooking hasn’t kept pace. This has taken a toll on international trading companies who process the beans into these products.

The disparity in supply and demand has hit revenues of companies like Wilmar International and Noble Group who dominate soybean processing in China. Their crush margins, which reflect the difference between the cost of the beans and the market price for soybean oil and soymeal, have moved sharply into negative territory.

Also distorting market fundamentals and making it tough for trading houses to gauge real demand levels for feed and oil has been the use of soybeans and other commodities in China as collateral for loans—a practice driven by high interest rates and tight credit conditions.

Kuok Khoon Hong, chairman and chief executive of Singapore-listed Wilmar, said crush margins in China in the first quarter were probably the worst he had ever seen. This contributed to the company’s net profit being down 50% from a year ago, he said. Wilmar is the largest soybean crusher in China by capacity.

Chinese demand for soymeal animal feed has fallen in part due to a slump in pork prices, which has led to farmers culling their herds and some small producers going out of business. Also, an outbreak of avian flu has dampened demand for poultry feed.

China oilseed crushing margins in the first quarter of 2014 were negative, at minus $10 a metric ton, said analysts with CIMB Group, a banking and financial services company.

Mr. Kuok said margins were strong in the fourth quarter of 2013 because of reduced shipments from the U.S. and Brazil, which resulted in a shortage of soymeal in China. That prompted importers in China to boost deliveries.

Yusuf Alireza, chief executive of Noble Group, said the Hong Kong-based company’s oilseeds business took a hit from the deterioration in the Chinese soybean crushing environment. Margins hit historic lows, he said. The company issued its first quarter earnings Thursday.

A midsize crusher, Singapore-listed Golden Agri-Resources Ltd., said revenue from its oilseeds unit dropped 12% in the first quarter from a year ago because of a less favorable industry environment in China. Most of its other units posted positive growth.

“There are a lot of traders who will [import commodities] solely for financing purposes…they just want to make money,” said Ivan Szpakowski, a Shanghai-based analyst at Citigroup Inc.

Wilmar’s Mr. Kuok said he expects the use of soybeans for financing to wane as some of the smaller crushers in China are starting to face problems getting letters of credit due to the collapse in crushing margins.

“Hopefully they will import much less,” he said, adding that the practice will only stop “when the banking industry in China becomes more regularized.”

Despite the gloom about the difficult start to the year, some say prospects may improve.

In its first quarter results, Archer Daniels Midland Co. one of the top soybean traders, brushed aside concerns over China’s feed and livestock industry and said Chinese feed demand in the second half of the year looks solid.

Also, Bunge Ltd.’s chief executive Soren Schroder said he expects slowing shipments and recovering feed demand to lift prospects in the second quarter. His company swung to a loss in the first quarter in part because of China’s temporarily depressed crushing environment, he said.