Analysts brush off impact of China power curbs on soft commodity players Wilmar, Golden Agri

CHINA's crackdown on power consumption has cast a pall of uncertainty over the commodities and materials sectors, and turned the spotlight on Singapore-listed companies such as Wilmar International and Golden Agri-Resources.

But analysts covering the sector do not see any cause for concern at the moment.

The primary cause of the power crackdown is China's carbon reduction initiative. Under this, the country has pledged to cut energy intensity by 3 per cent for 2021 to meet its climate goals.

Thus far, the country has fallen short. Morgan Stanley analysts in a report on Monday said energy intensity has dropped by only 2 per cent for the first half of 2021, and most provinces have lagged their respective annual targets.

They noted that China's carbon regulatory reset has collided with its industrial boom amid the pandemic.

"As it is, the capacity suspensions have weighed on the steel, aluminium and cement industries," said the analysts.

"Paper and glass could be the next industries to face supply disruptions. The continued upstream supply restrictions and power shortage could also weigh on infrastructure projects, eroding the effectiveness of countercyclical easing in Q4 2021."

As for the agricultural commodities industry, it was reported that several soya bean-crushing plants - particularly in Jiangsu and Tianjin provinces - were ordered to shut down as provincial governments curbed electricity supplies to the sector in a bid to meet the central government's energy-saving plan. Other agri commodities such as sugar, coffee and cocoa have not been affected as of now.

Andrei Agapi, associate pricing director for Asian agriculture at S&P Global Platts, told The Business Times that soya bean-crushing output for the two weeks ending Oct 7 is already expected to be "sharply reduced" as a result of power restrictions.

"Such a large-scale shutdown related to power and energy shortage is very rare for the Chinese soya bean crush industry," said Mr Agapi.

The big question is how long these curbs on electricity consumption will last.

Mr Agapi said the market remains concerned about continuous power rationing that might extend until after China's Golden Week holiday which stretches from Oct 1 to Oct 7.

"Usually, the fourth quarter is the peak energy-consuming season in China. Uncertainty over this issue may delay Chinese purchases further during the next few months," he said, adding that this could have an impact on the US' soya bean export programme which is already "below the pace needed" to hit the United States Department of Agriculture's goal.

Morgan Stanley analysts said China's policymakers may fine-tune the pace of power cuts in late October to head off the intensifying downward pressures on growth. Currently, the research house estimates that assuming the production cuts are kept at the current pace for the rest of the year, China's Q4 growth domestic product (GDP) growth could be dragged down by about one percentage point.

If the pace of production cuts are fine-tuned in late October, the growth impact for Q4 could be narrowed to 20-30 basis points, Morgan Stanley's analysts said.

So what could this mean for soft commodity prices? And, what impact could it have on Singapore-listed agri commodities stocks with exposure to China?

No doubt, power rationing in China could send a ripple of price volatility across the commodities sector.

However, DBS analyst William Simadiputra said underlying demand and supply dynamics are the more critical factors for commodities prices in the near term. And it is what investors should keep their eye on when navigating the sector.

Nirgunan Tiruchelvam, head of consumer equity research at Tellimer, said prices of agri commodities are unlikely to see much impact from "short-term stumbles" like China's power crackdown.

"Agriculture commodities have to do with people's consumption patterns, and the supply of these commodities. I don't see (the power crunch) impeding prices for now," he said, adding that there is no "systemic issue" in China at the moment.

In a statement to The Business Times, agri-business giant Wilmar International said the impact on its crushing operations in China has not been significant as the company has many inland crushing plants.

Wilmar, which is one of the world's largest palm oil processors with businesses in areas such as sugar milling and consumer food products, said that a few coastal cities have been more affected by the limitations on power supply.

"Recent demand has not been very strong, and most plants are not running at full capacity," added Wilmar.

DBS' Mr Simadiputra said the impact on Wilmar is "quite small" at this point. "Plants are still operating but with more prudent energy management instead of (a) total shutdown," he noted.

Meanwhile Richard Fung, director for investor relations at palm oil plantation owner Golden Agri, said the company divested its oilseeds crushing and refining facilities in Tianjin in 2018.

"Our remaining soya operation in Ningbo has negligible capacity relative to China's total market," said Mr Fung, adding that the company is monitoring the situation.