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FT’s Kevin Brown echoes some of the points we made regarding crude palm oil and specifically the fundamentals underlying the case for a secular bull market ahead. That said, he writes, while margins are fat at the moment for producers like Siam Darby and Golden Agri-Resources–the world’s first and second biggest listed producers respectively–given spot prices, production costs may be set to soar in the coming years as an increasing lack of plantable land in both Malaysia and Indonesia is leading to another bout of African land and resource grab–“not suprising since the Asian industry got its start by importing plants from Africa back in the 1960s”–in which development costs will increase. Nevertheless expect Siam’s talks with Cameroon (a country that has explicitly made palm oil production and research an investment priority) to ultimately succeed, while Golden Agri, fresh off its Liberian-deal last fall, will likely continue expansion as [African] governments are “eager for export revenues and jobs for unemployed workers.” But how this all factors into equity risk premiums is another matter. Meanwhile, a piece today touches on the same, broad theme, as US buy-out giant Carlyle is set to launch a $750m Africa fund, though in fairness the group’s co-founder and managing director (and former Jimmy Carter-adviser) David Rubenstein has been an African-bull for some time now. “The majority of Americans don’t pay enough attention to Africa,” one source close to Carlyle said. “It has been China that has been the catalyst for economic activity in Africa.” Rubenstein, by the way, is still long-term positive on his firm’s MENA investments, including presumably last year’s foray into Saudi Arabia.
Robust consumption (global demand has doubled over the past decade) for crude palm oil and its underlying derivative products such as cooking oil, cosmetics, toiletries, and industrial cleaning agents (i.e. all fairly demand sticky goods) led by China and India (5%/annum growth over the past four years, propelled of late by government restocking in the face of inflation-induced reserve releases, in the former and 16% y/y in the past five years for the latter, augmented partially by a lagging domestic peanut oil sector) coupled with La Nina-related, mediocre crop yields in Argentina (the third largest exporter of soybeans and the top exporter of soybean oil) and El-Nino related low yields in Malaysia (which, coupled with Indonesia, supplies roughly 90% of global palm oil production) may help sustain futures prices in the short-term. Analysts point to Singapore-listed Golden Agri-Resources, for one, as a firm that will likely continue to benefit. Barclays projected “global stocks could fall to around 4.5 weeks of consumption–the lowest level in over 30 years” and will rebound only to the degree that governments in Malaysia and Indonesia resist meddling with price controls and export restrictions (to assuage the retail sector they already control prices and subsidize VAT) and weather patterns comply (historically, “yields [should] improve in the second half of 2011 as El Nino’s lagged impact wears off and drier weather allows harvesting and transportation to return to normal operations”). To that end, ECM Libra, an investment bank, notes that an examination of atmospheric indicators such as the Southern Oscillation Index (SOI) and its inverse relationship with the monthly change in Malaysian palm oil production is positive in terms of the probability of near-term yields mean-reverting (“January saw the SOI index trending down to 19.9 from a high of 27.1; to note, the 27.1 reading was the highest La Nina reading since 1973). That said, as with many food commodities a bona fide secular bull market (as in price inflation) in palm oil may be in the making due to notable structural restraints (in addition to the aforementioned Asian demand dynamic): Malaysia’s future yield prospects relative to current ones look dim, while environmental concerns–namely a two-year moratorium on deforestation based in part on Indonesia’s bilateral treaty with Norway–may interminably hamper Indonesian output (though per Greenpeace said edict in reality has far more bark than bite).
The plight and root cause of surging physical rubber prices in Thailand (the world’s largest producer with 31% of global natural rubber output), Malaysia and Indonesia, as well as rubber futures across various exchanges, somewhat echo that of the cocoa industry in the Ivory Coast: persistent underinvestment in the past and thus a continual dependence on aging infrastructure (i.e., rubber-yielding trees planted in the 1980s and thus just beginning to enter the stage of declining yields, per Macquarie, an investment bank) and a stable-to-shrinking supply of agricultural land–is finally translating into increased volatility in quality and yield. Coupled with ever-changing weather patterns and voracious demand from emerging markets for tires, condoms and gloves–led by China, whose tire consumption according to the FT grew 57% y-o-y for 1H2010 per Pirelli–and prices are likely to stay trending upward. The cash price in Thailand gained 1.6 percent to 130 baht ($4.40) per kilogram this week, just shy of the record 130.55 baht on April 27th. Yet “prices may surge above 150 baht by the end of this year as demand remains robust while supply is limited,” said Supachai Phosu, the country’s deputy minister of agriculture and cooperatives. Chinese demand, by the way, is likely to increase its upward rate of acceleration, if for other reason than the continuation of a government subsidy for fuel-efficient cars and also the enduring prospect of further surprise rate hikes underpinning current consumption.
Malaysia’s IPO market remains robust amidst a general global slowdown in public floats that pundits attribute to sentiment stemming from the European credit crisis. While the proposed offering of Malaysia Marine Heavy Engineering, announced last week, will raise over 1 billion ringgit ($309.6 million) and is expected between the third and fourth quarter of this year, the planned listing of Malaysian property developer Sunway City Bhd’s real estate investment trust (REIT) will raise about 1.5 billion ringgit ($459 million), more than was expected in the beginning of this year, sources with direct knowledge of the deal told Reuters on Monday. Moreover, local investment banks are eagerly eyeing the impending float of state-owned gas and oil company Petronas’ petrochemicals unit, which some analysts wager may garner a P/E multiple of FY09 earnings in the high teens for a total valuation of roughly 5 billion ringgit ($1.548 billion). That said, it is still unclear as to precisely what form said IPO structure will take. Petronas’ petrochemicals business, for instance, entails 19 total companies ranging from olefins and polyolefins to fertilizers, industrial and specialty chemicals.
The state’s divestiture of portions of Petronas is seen by observers as part of prime minister Najib Abdul Rajak’s “New Economic Model” (NEM), whereby the government hopes to transform Malaysia “from a middle-income to a high-income country by 2020.” Per a piece by Thomas Clouse in May’s Global Finance:
“The ambitious plan, known as the NEM, outlines a number of new policy recommendations to promote private investment, raise productivity, improve education and balance growth in order to lift the per-capita average income from $7,000 to $15,000 in the next 10 years.”
Specifically, the government hopes to reverse the downtrend in private investment as a percentage of GDP, which declined to less than one-third of its pre-1997 peak in the decade following the Asian crisis and still remains far below its potential. Per economist Dr. Yeah Kim Leng, for instance:
“Malaysia’s share of inward FDI into the Asean economies was unchanged at 12% for the two previous five-year periods of 1999-2003 and 2004-2008. By contrast, Singapore captured 58% in the first period and 45% in the more recent period. Thailand, meanwhile, garnered 20% and 17% for the respective two periods . . . This should be taken as a wake-up call for Malaysia that it needs to do more to attract foreign investors.”
Johan Tazrin Ngo, managing director and CIO of the Kuala Lumpur-based Amara Investment Management, spoke with Bloomberg yesterday about Malaysian equities and his outlook on Asian stocks in general. Malaysian stocks rose 51% in 2009, but actually lagged the MSCI ex-Japan Index, which soared 73%, which suggests it could make a good “laggard” play going forward. That said, Ngo reiterated that Malaysia’s performance above all is correlated with Asia in general, where further gains, he said, will be tied to continuation of the global synchronized recovery and positive earnings announcements going forward (Asia is still 30% below its October 2007 peaks). That said, being a low beta (.38) market Malaysia “will continue to underperform” in 2010. Asia’s continued ride up will not be all together smooth, Ngo pointed out, a la 2009, given the unwinding of stimulating, reflationary measures that will cause a mid-year correction. Templeton’s Mark Mobius, one for one, predicts a more imminent 20% correction for emerging indices–including Asia–, on the basis of IPO-related oversupply.
The Gulf Cooperation Council (GCC) will realize faster growth in the Islamic bonds (sukuk) market and “tap into the massive potential that the segment hold” by adopting regulations and measures such as credit ratings, say analysts. “Sukuk is important when it comes to overall financial market. The region, with its huge capital needs, but [only] a small debt market needs to look into opportunities,” said Kamal Mian, Head of Islamic Finance, Saudi Hollandi Bank. While the GCC holds a significant share of global sukuk market (estimated at $130 billion, Dh477bn) when it comes to volume, regulations and policy guidelines are relatively sparse, especially when compared to Malaysia, according to Moinuddin Malim, Head of Corporate and Investment Banking, Badr-Al-Islami, Mashreq. Malaysia, with its proper regulatory measures and incentives, has managed to create a success story of its sukuk market and “investors from various countries such as Korea and Japan too are going there to issue sukuks”.
“Rating for sukuks in Malaysia is mandatory. Besides, they have created a platform to quote sukuks on a daily basis so people would know the fair value of the instrument,” said Dr. Mohd Daud Bakar, Managing Director, Amanie Islamic Finance Learning Centre. “The government in Malaysia has also incentivised issuances when it comes to the taxation aspect of it,” he added. “From the day of issuance to redemption, everything is clear.” Analysts also point out that credit enhancement structures in bond market can be used for sukuks as well and should be studied.
Malaysian government bonds are continuing their six-month rally, pushing yields to record lows as both inflation and borrowing costs decrease in Southeast Asia’s third-largest economy. The bond rally will help limit the government’s borrowing costs as analysts forecast record debt sales will be needed to finance a budget deficit estimated at 4.8% of GDP, the widest since 2003. The nation’s 253 billion ringgit market for government bonds is the biggest in Southeast Asia. That said, grim news from Singapore–which predicted its deepest recession on record and is Malaysia’s biggest trading partner–has caused Malaysia’s ringgit to fall of late (though it rose 0.3% on Wednesday).
The price of palm oil, down 67 percent from its March record, is nearing the end of its decline, according to Goldman Sachs. However, despite decreasing supplies and the fact that, per one analyst, “edible oil demand has remained relatively resilient even during severe recessions,” Goldman cut its price forecast for palm oil for the next two years by between 41 percent and 50 percent, joining analysts at CLSA Asia Pacific-Markets and UBS AG.
Malaysia (home to growers such as IOI Corp., Sime Darby Bhd. and Kuala Lumpur Kepong Bhd.) and Indonesia are the world’s largest producers of palm oil, which is also their biggest agricultural export. The two are felling oil palms and planting younger saplings in order to cut output. Goldman noted that historically, the price of the edible oil has been mainly driven by supply. Replanting will thus help reduce output, while the yield from plantations is under “stress”.
Back on March 4th, palm oil reached a record 4,486 ringgit ($1,236) a metric ton in Malaysia. But CLSA analysts predict that it will probably only bring 1,000 ringgit a ton in 2009, and 1,250 ringgit in 2010.
JGW
Frontier Markets 