The relationship between the dollar’s exchange rate and oil prices
has been debated now for decades. Oil-exporting countries justified
their first round of price hikes to $10 per barrel in late
1973 by blaming global inflation and the falling dollar. Oilexporting
countries again blamed the weakening dollar for the
second major round of price increases in 1978. Eight years later,
the dollar’s resurging value was cited as a cause of the 1986
price decline. More recently, oil prices and the dollar’s exchange
rate have seemed to move as one.
However, the mechanism that links the movement of oil prices and the dollar has
never been satisfactorily explained. Indeed, a credible explanation may never be
found. Certainly no one to date has advanced a convincing theory for their coincident
movement.
Yet the relationship clearly exists, particularly since 2007, as can be seen from
Figure 1. This graph presents the spot price of “Dated Brent,” the world’s crude oil
benchmark, against the left vertical axis and the dollar’s exchange rate against the right.
To paraphrase Bob Dylan, “You do not need to be an economist to observe the linkage.”
Why does one observe this linkage and what does it portend for the future? One
way to answer the question would be to construct a detailed econometric causality
study. If such efforts were made, I am sure one group of brilliant econometricians
would find a causal linkage which showed that oil price movements were caused by
changes in the exchange rate while a second equally brilliant group would find the
reverse. I do not propose to conduct this kind of examination, although I was once a
practicing econometrician. Instead, I suggest that recent coincident movements of oil
prices and the dollar’s exchange rate reflect declining confidence in the Federal
Reserve’s ability to contain inflation. Furthermore, I show that the rise in oil prices
over the last six months—particularly the surge since January 22, 2008—shares many characteristics with the rise in silver prices that occurred
from early 1979 to January 1980. This leads to a very
frightening conclusion: oil prices could be pushed to $150
per barrel or higher before the end of 2008.
RECENT OIL PRICE CYCLES
Of late, crude oil prices have followed a relatively predictable
cycle over the course of a year. The pattern is similar
to the cycle observed in agricultural commodities.
Crude prices rise during the spring and summer as gasoline
prices exert an upward pull on prices for “light sweet
crudes” such as Brent and WTI. These two crudes share
two key characteristics. First, they are the benchmarks for
trading in futures markets. Second, they have unique chemical
characteristics that make them particularly attractive
to refiners at times of peak gasoline and diesel fuel consumption.
For this reason, prices can be expected to rise
in the spring and summer and then decline with the
approach of winter as motor fuel use drops. The price
decline generally lasts until mid-January.
The cyclical pattern can be observed from Figure 2.
This graph shows the daily spot prices for Brent crude
(“Dated Brent”) from January 2004 through February 29,
2008. Vertical lines mark the price peaks. Note that these
occurred in August 2005, August 2005, and August 2007 as
expected. The peak in 2004 occurred later, in
October.
The price decline from August 2006 to January
2007 was particularly noteworthy. During this
period, the emergence of Wall Street commodity
investors provided a strong incentive to build stocks
(see my piece, “How Wall Street Controls Oil,” TIE,
Winter 2007). The rise in stocks drove cash prices
from a peak of almost $80 per barrel in August 2006
to a low of $50 per barrel in January 2007.
A fifth price cycle began less than a year ago. At
the end of July 2007, prices began to fall as they had in past years.
The decline can be observed in Figure 2.
However, in 2007 the period of price decline lasted less than
a month rather than the usual five months. Oil prices began
to move higher in late August, peaking at $97 per barrel in
early January 2008. (WTI touched $100 at that time.)
The high prices, however, were unsupportable in
January and prices dropped by more than 10 percent. Prices
would likely have fallen much further through February.
However, events in financial markets on January 21, 2008,
brought the decline to a halt. Crude again surged, finishing
February above $100. As the year progresses, it will likely
rise much further.
CAUSES OF THE 2007/2008 SURGE TO $100 PER BARREL
Two factors explain the rise in oil prices to $100 per barrel
over the last seven months. These are a physical squeeze on
the available supply of light sweet crude and the ongoing
financial crisis, which has forced the Federal Reserve to
abandon, at least temporarily, its focus on price stability.
The squeeze on light sweet crude began in mid-August
2007, as did the first round of the current credit crisis. At
that time, the U.S. Department of Energy announced its
intention to resume filling the Strategic Petroleum Reserve
and then began to remove light sweet crude from the market.
DOE’s action created consternation in crude markets
and sent light sweet crude prices spiraling upward. The
price increase would not have occurred had DOE decided
to put only sour crude in the Strategic Petroleum Reserve.
Markets were vulnerable to DOE’s actions because
sweet crude supplies are limited and because sweet crudes
are the critical ingredient for production of ultra-low-sulfur
diesel fuel, the product refiners now must supply to consumers
in the United States, Europe, and Japan.1 Refiners
can produce the low-sulfur diesel products more easily with
sweet crudes. DOE’s curious decision to remove even modest
amounts of these crudes from the market contributed
to a sizable price increase.2
The global financial crisis that began in August provides
the second explanation for the oil price rise. The
Federal Reserve has cut the prime lending rate repeatedly since August 19, 2007,
in a valiant effort to improve the
financial situation of key lending organizations. The two
largest reductions occurred in January 2008. Almost every
reader will agree that the actions were essential. Even so,
they carried a very large cost: in the process of cutting rates,
the Federal Reserve appears, in the view of many, to have
given up its battle against inflation. This capitulation has
fueled the oil price rise. Traders and investors noted the
Fed’s surrender and rushed to invest in oil. At the same time,
those who own oil have concluded they are better off removing
the commodity from markets. The upward crude price
spiral is the result.
CONSEQUENCES
OF CAPITULATION
The Fed’s interest rate cuts have raised widespread concerns
regarding the return of stagflation or worse. In late February,
for example, CalPERS, the manager of the retirement fund
for employees of the State of California, announced it was
reducing the share of its portfolio allocated to fixed-income
securities while boosting the amount allocated to
commodities sixteen-fold to $7 billion. Other pension
fund managers acted similarly in late 2007,
while still others have announced their intention to
boost commodity investments in 2008.
Oil futures are one outlet for these funds. Under
the allocation models used by CalPERS and other
investors, half of the cash assigned to commodities
will be “invested” in crude. The flow of cash must,
absent a compensating increase in the supply of
futures, lift oil prices. In 2008, this flow of funds has
contributed to the oil price rise.
The price rise has been heightened by the
absence of a supply boost to match the increased
demand for futures from CalPERS and other
investors. In fact, producers have lost their appetite
for selling forward as prices have risen. A view made
popular thirty years ago—“oil in the ground is worth
more than money in the bank”—might well be making
a comeback.
CONFUSION IN PHYSICAL MARKETS
As oil prices have increased, many in the oil industry have
asserted that “fundamentals” are not to blame. Marathon
Oil’s CEO, Clarence Cazalot, for example, had this to say in
a talk given at the end of February: “Higher prices are not
simply the result of greater demand.” He pointed out that
Marathon was being offered plenty of oil and then concluded,
“If we bought and sold crude oil purely on principles
of supply and demand, there’s no question in my mind the
price would be lower than where it is today.”3
Cazalot went on to explain that part of the price rise
could be attributed to futures traders and the apparent “instability
in the world.” Cazalot’s remarks echoed those made
twenty-eight years ago by Walter Hoving, who was then
president of Tiffany & Co. At the time, Tiffany’s and other
major jewelry manufacturers were being buffeted by a tenfold
increase in silver prices even as more and more supply
was being created. Hoving and Tiffany’s were, of course,
the victims of the aggressive silver buying of the Hunt brothers
and other speculators.
In 2008 (as in 1980), physical commodity markets are
being roiled by traders and investors looking for protection against inflation.
Some of these traders are speculators or
hedge fund managers. Other investors, though, are pension
funds such as CalPERS. The buying done by these institutions
tends to raise prices.
Price increases could become especially large if the
entities that traditionally sell oil futures contracts back away
from the market. In such circumstances, continued efforts
by financial institutions to acquire claims on oil could cause
very large increases in oil prices, just as the aggressive buying
of silver futures contracts in late 1979 and early 1980
caused the tenfold increase in silver prices. As this article
went to press, the prospect of an oil price increase like the
one experienced by silver twenty-eight years ago appeared
very possible.
The risk of another large jump in oil prices comes from
the bilateral nature of futures markets and the oil market’s
uncompetitive structure. In commodity futures markets,
there must be a seller for every buyer. New buyers cannot
acquire claims on oil if new sellers are not willing to sell or
if those holding existing claims are not willing to relinquish
them.
In the oil market today, producers and traders seem
unwilling to initiate new short positions. The constraint
can be observed in open interest. Figure 3
traces open interest in the three principal crude oil
futures contracts from January 2000 through the end
of February 2008. Open interest peaked in November
2007 at 2.8 million contracts and has declined since.
At the beginning of March 2008, only 2.5 million
contracts were open.4
The consequence of increasing demand combined
with the diminishing supply of any commodity
is well known, and oil is no exception. Prices rise.
In this situation, the upward limit on oil futures prices
occurs when buyers step away from the market.
Conditions in the physical market for many
commodities would, however, break the upward
price movement. In the case of silver, for example,
the tenfold increase in prices brought forth a large
supply increase from mines and attics. In fact, one
of the real surprising discoveries in 1979 was the
large potential supply of silver that came from ordinary
individuals who saw a chance to cash in by selling
heirlooms. So great was the supply increase that
the cost of refining silver rose from seven cents per
ounce to five dollars per ounce in just six months.
The increase in the supply of silver did not, however,
break the upward movement in prices.
Speculators, especially the Hunts, kept buying. The
price increase was broken only by aggressive action
on the part of the Fed and the COMEX.
Oil will not benefit from such a supply increase.
Instead, oil-exporting countries seem content today to
produce enough to meet global demands at current
prices. Oil is sold FOB [or free on board, where the
buyer takes responsibility for shipping] on contracts
tied to the spot market. Thus, the receipts of oil
exporters will rise as prices are bid higher. As
Marathon’s Cazalot explains, more oil is available.
However, his company will not buy more at these
prices. Furthermore, tightening credit conditions have
no doubt forced some independent refiners to purchase
less. If refiners buy less, OPEC members willrespond by producing less.
Consumers cannot count
on help from the cartel.
THE LINK TO THE DOLLAR
With this background, it is fair to conclude that the
link between the falling dollar and rising oil prices
was created by the same force: the Federal Reserve’s
failure to control inflation expectations. The Fed’s
unilateral cuts in interest rates have caused investors
to move away from the dollar and acquire claims on
assets that offer protection against inflation. Thus it
is not surprising to see oil prices rise as the dollar
falls. What is surprising, however, is to find the dollar
moving in lockstep with oil prices as can be
observed in Figure 1.
The close linkage shown in Figure 1 is a recent
phenomenon. Over the last ten years the movements
in the dollar and the euro have tended to be in the
same direction, but not as closely tied. The looser
linkage can be observed in Figure 4. There, monthly
averages of the price of dated Brent are compared
with monthly averages for the dollar. One may
observe the dollar and the price of oil have generally moved
in the same direction but with significant deviations. More
deviations should be expected in the future.
LOOKING FORWARD
It is not possible to look at the recent oil price rise and the
dollar’s fall in value with equanimity. By the end of the
spring, the United States may be forced to end its “benign
neglect” of the dollar. In the past, the Federal Reserve and
Treasury have been expected to act in concert to address
such problems, with an increase in interest rates making a
major contribution.
In 2008, the precarious state of many financial institutions
may force the Fed to leave interest rates unchanged.
This does not imply, though, the Fed or other central banks
are powerless. Instead, they may need to look to alternative
measures. Given the disconnect between financial and physical
commodity markets noted above, one measure banks
could use would be moral suasion, which is what they did
during the silver crisis. In 1980 the Federal Reserve
instructed banks to apply special restraint to financing speculative
holdings of commodities or precious metals. Banks
got the message and cut off those speculating in silver. In
2008, the Fed and the European Central Bank could instruct
commercial lenders to use caution in lending to hedge funds
and other institutions to the extent that borrowers used the
funds to speculate in commodities. Such a step would break
the oil price rise and quite possibly the link between the dollar’s
exchange rate and oil prices. ◆
NOTES
1. Environmental agencies across the globe have demanded that
refiners remove almost all sulfur from diesel fuel. The benefits of
this action are visible daily in most major cities where one no
longer smells the diesel exhaust from buses and trucks. These benefits
come at a significant cost, however.
2. I have argued in testimony to the U.S. Congress that the U.S.
Department of Energy does not need to add sweet crude oil to the
Strategic Petroleum Reserve because such crudes are not required
in a crisis. Instead, DOE could add crudes with heavier sulfur content.
In the future, refiners will probably be able to use such crudes
to make ultra-low-sulfur diesel, especially if use were cut during the
crisis. However, environmental authorities could also ease environmental
regulations temporarily, thereby making the need for
low-sulfur crude unnecessary.
3. Katherine Fraser, “Marathon’s Cazalot Says Oil Price Spikes
Make No Sense,” Platts Global Alert, February 28, 2008.
4. The three major contracts are the NYMEX light sweet crude
contract, the IPE Brent crude contract, and the ICE light sweet
crude contract.
Thursday, June 5, 2008
Singapore Petroleum Company Limited
Singapore Petroleum Company Limited announced that the Company and its partners have begun drilling
the Ham Rong- 1X exploration well on 2 June 2008. Ham Rong is being drilled to test the hydrocarbon
potential of the pre-tertiary fractured and karstified carbonate basement as well as the Miocene channelised
clastics reservoir. The well is anticipated to reach a true vertical depth of 4050 meters. Drilling is expected to
take approximately 57 days to complete.
the Ham Rong- 1X exploration well on 2 June 2008. Ham Rong is being drilled to test the hydrocarbon
potential of the pre-tertiary fractured and karstified carbonate basement as well as the Miocene channelised
clastics reservoir. The well is anticipated to reach a true vertical depth of 4050 meters. Drilling is expected to
take approximately 57 days to complete.
Mercator Lines (Singapore) Limited
Mercator Lines (Singapore) Limited announced that it has renegotiated its existing COA (Contract of
Affreightment) with Tata Power on new terms. Mercator had entered into a COA with Tata Power in October
2006 for transportation of approximately 1.9 million tons coal annually from Indonesia to India for a period of 4
years, Tata further had an option to increase the quantity and extend the contract period by 2 years. Based on
TATA’s growing demand for imported coal they have decided to renegotiate the existing contract on the basis
of new cargo quantity and freight rates. It has now further increased the quantity to a total of about 3.2 million
tons. Taking the option quantity of the first contract into consideration the new contract reflects an increase of
about 33% in quantity which will require about one and a half more additional vessels to service the contract.
The incremental business of the additional vessels is estimated at a Time Charter Equivalent (TCE) rate of
USD 54,000 per day for 4 years, taking the average vessel earning under this contract to a TCE rate of USD
33,000 per day from USD 24,000 previously. The total value of this 4 year contract, starting June 2008, based
on the new quantity and incremental rate is estimated to be US$ 320 Million .
Affreightment) with Tata Power on new terms. Mercator had entered into a COA with Tata Power in October
2006 for transportation of approximately 1.9 million tons coal annually from Indonesia to India for a period of 4
years, Tata further had an option to increase the quantity and extend the contract period by 2 years. Based on
TATA’s growing demand for imported coal they have decided to renegotiate the existing contract on the basis
of new cargo quantity and freight rates. It has now further increased the quantity to a total of about 3.2 million
tons. Taking the option quantity of the first contract into consideration the new contract reflects an increase of
about 33% in quantity which will require about one and a half more additional vessels to service the contract.
The incremental business of the additional vessels is estimated at a Time Charter Equivalent (TCE) rate of
USD 54,000 per day for 4 years, taking the average vessel earning under this contract to a TCE rate of USD
33,000 per day from USD 24,000 previously. The total value of this 4 year contract, starting June 2008, based
on the new quantity and incremental rate is estimated to be US$ 320 Million .
Genting International Plc
Genting International Plc (GIL SP): The company said its wholly
owned U.K. subsidiary has agreed to ally with the NEC Group to build a
90 million pound ($175.8 million) leisure and entertainment complex,
which will include a casino, a spa and a hotel, in Birmingham, England.
Shares of Genting International, owner of the biggest U.K. casino
operator, dropped 1.5 Singapore cents, or 2.4 percent, to 62 cents.
owned U.K. subsidiary has agreed to ally with the NEC Group to build a
90 million pound ($175.8 million) leisure and entertainment complex,
which will include a casino, a spa and a hotel, in Birmingham, England.
Shares of Genting International, owner of the biggest U.K. casino
operator, dropped 1.5 Singapore cents, or 2.4 percent, to 62 cents.
Keppel Land Ltd
Keppel Land Ltd. (KPLD SP): Singapore's third-largest developer
said its commercial properties in Vietnam are fully leased and the
company sees ``little impact'' from accelerating inflation in the
country. Keppel Land fell 4 cents, or 0.8 percent, to S$5.16.
said its commercial properties in Vietnam are fully leased and the
company sees ``little impact'' from accelerating inflation in the
country. Keppel Land fell 4 cents, or 0.8 percent, to S$5.16.
Olam International Ltd
Olam International Ltd. (OLAM SP): The Singapore-based supplier of
commodities said it plans to raise as much as $400 million selling
convertible bonds. The company, which hired JPMorgan Chase & Co. and
Macquarie Group Ltd. to manage the sale, plans to allow investors to
convert the five-year bonds into shares at between 30 percent and 40
percent above S$2.9588. Olam rose 7 cents, or 2.4 percent, to S$2.98
when trading was halted before the announcement.
commodities said it plans to raise as much as $400 million selling
convertible bonds. The company, which hired JPMorgan Chase & Co. and
Macquarie Group Ltd. to manage the sale, plans to allow investors to
convert the five-year bonds into shares at between 30 percent and 40
percent above S$2.9588. Olam rose 7 cents, or 2.4 percent, to S$2.98
when trading was halted before the announcement.
STX Pan Ocean Ltd. (STX SP): Lehman Brothers Holdings Inc.
STX Pan Ocean Ltd. (STX SP): Lehman Brothers Holdings Inc.
downgraded its view on the Asian bulk shipping sector to ``3- negative''
from ``1-positive'' as the oversupply of vessels in
2009 may be worse than expected. Lehman cut its rating on STX Pan Ocean,
South Korea's largest operator of vessels that transport coal, iron ore
and other commodities, to ``underweight'' from ``equalweight'' and
lowered the target price by 23 percent to S$3.10 from S$4.00. STX rose 6
cents, or 1.7 percent, to S$3.67.
downgraded its view on the Asian bulk shipping sector to ``3- negative''
from ``1-positive'' as the oversupply of vessels in
2009 may be worse than expected. Lehman cut its rating on STX Pan Ocean,
South Korea's largest operator of vessels that transport coal, iron ore
and other commodities, to ``underweight'' from ``equalweight'' and
lowered the target price by 23 percent to S$3.10 from S$4.00. STX rose 6
cents, or 1.7 percent, to S$3.67.
Wednesday, June 4, 2008
Commodity Crash Near 100% Certainty - CLSA
Commodity Crash Near 100% Certainty – GET VERY VERY LONG CHINA + PAN-ASIA MANUFACTURING/TECH SHARES- “From Stagflation to Disinflation in a Week”
Last Week’s Street Brawl – Jets vs Sharks
‘Inflate or die’ is crushing the ‘End of the Worlders’…some global stock picks & ruminations
Commodity Crash Near 100% Certainty – GET VERY VERY LONG CHINA + PAN-ASIA MANUFACTURING/TECH SHARES
Summary: A near perfect storm of a rolling commodity market, hoarding suppliers, slowing demand, and rapacious US regulators with a slew of proposed regulation who will stop at nothing to end the commodity “speculation” which has stopped traditional hedgers in those commodities from being able to hedge their positions. In formal chart terms, the global commodity complex bubble officially popped last week. This bubble had been steadily inflating since 2002 (since the last peak in the USD) and finally popped from Tuesday to Friday with oil (CL1) attempting a last run at 132 on Thursday evening (HK time) and then coming off to close at 127. This is a monumental WATERSHED occurrence and marks a major shift in market mentality from inflationary/stagflationary to a period of disinflation at the margin for the foreseeable future. My best hunch is we get a 3-6 month period of correcting commodity markets which will be very very very bullish for global non-commodity related equities. While this occurs, global GDP #s will be upgraded by economists while much weaker commodity prices will dampen rate hike expectations until latter 2H08 or even early 2009. THE MOST IMPORTANT THING TO APPRECIATE HERE IS THAT CHINA HAS THE MOST TO GAIN IN ASIA FROM A COMMODITY CRASH. China has Asia’s biggest inflation problem (outside of Vietnam, which is also a LONG here too), is still the world’s manufacturer (albeit a bit less cost competitive than they were a few years ago) and its equity market has underperformed the region since October. HSCEI is -33% from end-Oct, HSI -22%, HSCCI -25%, and SHCOMP -43%.
Top longs: GET VERY LONG downstream oil players including refiners (rapidly widening crack spreads) and Petrochina (857 HK), Sinopec (386 HK), Sinopec Shang Pet (338 HK), LONG SK Energy (096770 KS), S-Oil (010950 KS), (LONG AIRLINES: Cathay (293 HK), Air China (753 HK), China Eastern (670 HK), China Southern (1055 HK), HK Exchange (388 HK)….THE MOST LEVERED STOCK INTO RECOVERING CHINESE CAPITAL MARKETS + REVIVED IPO PIPELINE, IPPs WILL SEE A HUGE SHORT SQUEEZE - LONG (Datang – 991 HK, Huaneng - 902 HK, Huadian - 1071 HK), MANY SHORTS IN EXPRESSWAYS – LONG Shenzhen Expressway (548 HK), Jiangsu Expressway (177 HK), Zhejiang Expressway (576 HK), and Beijing Capital Airport (694 HK). Also get LONG CHINESE BANKS AND INSURERS (CCB-939 HK, China Life-2628 HK, Bank of China-3988 HK, ICBC-1398 HK) as falling commodities means it is much more likely that we will see austerity measures being relaxed in early 2H08. CHINESE PROPERTY NAMES (AND BANKS) THE BEST PLAY ON AUSTERITY RELAXATION: COLI (688 HK) the biggest but already +40% from lows, SHKP (16 HK) is only +16% from its lows (5% discount to NAV) and -28% from highs due to their family issues – I’m a buyer here…..and of course I am a buyer of Midland (1200 HK) which will challenge its previous HK$!5 high (+96%) in the next 12-months. Go LONG the steel and cement names: Angang New Steel (347 HK), Maanshan (323 HK), and Anhui Conch (914 HK). CCC (1800 HK) goes from being a margin squeeze concern to a LONG again. Of course, the China consumption story remains very bullish and should be accumulated: Paul McKenzie says his favorite PA pick would be Stella (1836 HK), HK$1.4bn mcap largest non-athletic footwar manufacturer in the world and said to have and excellent retail rollout planned with prospects for a massive stock-rerating. Expect consumption plays to re-rate to 30x+ P/Es again. I noticed that China Mengniu (2319 HK) did not sell off at all last week on the price fix story, LONG this stock, LONG MOST REGIONAL MANUFACTURERS (ie. all the auto stocks-esp Japanese autos, including US & European autos too) ARE LONGS, ESPECIALLY THE TECH SECTOR WHICH PARTICULARLY BENEFITS FROM A DISINFLATIONARY ENVIRONMENT.
Top shorts: SHORT upstream oil (CNOOC- 883 HK, 135 HK, STO AU, WPL AU, BP/ LN, XON US, CVX US, COP US). SHORT ALMOST ALL UPSTREAM COMMODITY PLAYS: short Shenhua (1088 HK)…its already down -39% so not a screaming short, SHORT China Coal (1898 HK) and Yanzhou Coal (1171 HK), short Chalco (2600 HK), SHORT CPO PLAYS: Golden Agri (GGR SP) since its impossible to short Malaysia (IOI/KLK) or Indonesia. Japan, Korea, and Thailand gain from falling oil prices (they are the biggest Asian importers as % GDP) but Thailand, Malaysia, and Indo will get hit by falling soft commodities. DTAC SP is a short as they are expanding upcountry and rice prices are collapsing.
Short upstream oil, short all commodity upsteam plays, CPO, short Indo, Thailand, Malaysia
From stagflation to disinflation in a week: As I’ve been saying since going to the US in April, it was becoming apparent that the commodity complex was turning into a bubble. In exhibit 1 below, since 4Q07 inflation expectations (the white line) has been holding steady, while the Fed Funds and USD fell. Meanwhile, the CRY index did another 20% move. The initial pullback in the CRY should be 354-370 (-12% to 16%) from current 422 where the -50-62% fib retracement support should be. HOWEVER, AND THIS IS A BIG HOWEVER I don’t think we hold there. If anything we fly straight through due to all the new regulation the US politicians are preparing (see the NY Times & Bloomberg articles on the topic from this weekend attached). So, if I am correct then the CRY retraces -50-62% of its move since 2001 and my CRY targets become 282-312 or -26% to -33%. If we get several new draconian regulations, then we could get over shoot to the 185-284 trading range of 1982-2002. I don’t think we go there because real rates are still negative in the US, China, HK, Singapore, and low everywhere else. Still very growth and asset price supportive. The USD is solid and has made its lows for this cycle. As Gartman says in his Friday note, the Fed St. Louis adjusted monetary base is barely growing 1% yoy. SO, NOT ONLY IS STAGFLATION A MODERN MYTH, BUT THE OTHER FLIPSIDE MYTH IS THAT THE US IS NOT PRINTING MONEY LIKE THERE’S NO TOMORROW. DE-LEVERAGING IS USD BULLISH (ie. reducing shorts on the USD).
New CFTC regulations – what’s coming up (…its WAY more than you previously thought): Please see attached in this e-mail/B’berg two articles – BOTH MUST-READS!!!! One is a collection of this weekend’s stories on upcoming CFTC regulations and ongoing investigations. Also, it doesn’t appear that these are ‘witch-hunts’ but legitimate investigations into ‘exploiting loopholes’, overstepping trading limits by going overseas to London, the Consumer-First Energy Act of 2008 proposal, increasing margin requirements, the Michael Masters testimony from last week, emending the ERISA Act, imposing taxes to the commodities market, rising incidences of inquiries into trading practises (ie. price gaps between futures and spot prices for cotton and oil). Oops…basically, the US government has no interest in allowing investors hold inventory and/or participating in the price rises of finite necessary resources. Its MUCH more effective to regulate the money out of commodities and back into equities where the capital creates jobs, reduces capital costs, adds to GDP, and BRINGS IN VOTES.
Much more new CFTC regulation than many realize…
Last Week’s Street Brawl – Jets vs Sharks
The way markets traded last week was like a full-on street brawl. The bulls were equally entrenched as the bears and an all-out scrap ensued. It got so nasty that I was getting hate-mail from both long-time friends & clients after my Sunday nite missive on Oil prices about to fall and time to get into the “short oil” trade. Guess when its your own money on the line its each man or woman to themselves. Going forward, its now time to get into the “short commodity” trade which is very equity supportive outside the upstream commodity complex.
‘Inflate or die’ is crushing the ‘End of the Worlders’ …some global stock picks & ruminations
My internal e-mail to CLSA Friday nite: its counterintuitive. USD has been in a 5.5yr bear market so u could argue that FX started pricing in US crisis 5.5yrs in advance. also, US/China/Sing real rates negative - very asset price supportive & right now the cheaping capital available to the most people in the history of the human race (since Bric really just happend). commods in a bubble which pop when USD starts strengthening (ie. now).
reason why equities are melting up is that they are an inflation hedge. global money has to get out of long end of curve and has been trying to hedge via commods, but commods too narrow a market so a bubble builds until Asia gov'ts threaten to take off oil subsidies (in FT last week). so much spec/investment money in commod futures that US congress is considering limiting access to just pros in that industry (still being considered). so u get the ethanol policies reversed and commod future access get done right when USD is reversing and commods crash.
that's good cos a tidal wave of money switching out of bonds his equities over the coming months into a slowing US economy (tho US + Europe slowing slower than the mtks expect).
read George Soros' "The Alchemy of Finance" and "Market Wizards" by Jack Schwager. also learn to read charts: John Murphy "Technical Analysis of Financial Markets" and "Intermarket Analyis: Profiting from Global Market Relationships". next week is going to be huge.
Oil: not only is it breaking down, the whole commodity complex is rolling over. Rice, which supposedly a few weeks ago was scarce, is COLLAPSING. The whole stagflation theory is a MODERN MYTH. Quickly being discredited as are most bubbles, thru run for the door selling with extreme prejudice.
Commodities: what I find interesting is that they are falling under their own weight. Without really much USD/DXY strength.
Gold: since there is a lot of gold bugs at CLSA my call for gold is its breaks 850, then breaks 800, and then next stop is 650. Do I have your attention yet. Parabolic commods was largely a USD phenomenon. Its over kids, else get squashed like a bug "cos the times they are and changing....". QED. T. Possible policies: Such scenarios could include (as suggest by TGL) mandating “for liquidation only” in futures, limits to access to the derivatives markets, new laws prohibiting new derivatives usage, the reversal of the (stupid) ethanol policies, etc. Such heavy policies would force global money to seek their inflation hedges outside of the commodities futures markets (already thinly traded versus FX, bonds, and equities). So, if you are rotating your portfolio out of bond markets and can’t hold cash because inflation is rising, YOUR ONLY CHOICE IS TO ROTATE INTO EQUITIES. GUESS WHAT? THE GLOBAL EQUITY MARKET MELT-UP CONTINUES!
Global stock picks & ruminations: I reiterate from my previous “short oil AI”: We recommend LONG downstream Japan oil names: 5019 JP, 5001 JP, short upstream 1605 JP, and 1662 JP, long airlines 9205 JP and 9202 JP, long DUG US (Ultrashort Oil & Gas ETF), regional/global airlines (293 HK, SIA SP, 670 HK, 1055 HK, 753 HK, 003490 KS – KOREAN AIR THE MOST UNHEDGED ON FUEL AND TRADES ON 0.8X PBV, THEY HAVE A LOT OF USD DEBT, OIL DOWN=KOREA DEFICIT IMPROVES, KRW UP=BETTER BALANCE SHEET, QAN AU, BAY LN, DAL US, LUV US, CAL US), regional/global auto plays – SEE THE ATTACHED FRONT PAGE BARRRON’S ARTICLE FROM JUNE 2 (TODAY) TITLED “BUY GM” - (BMW GR, MG/A CN, DAI GR, 7203 JP, 7267 JP, 7201 JP, 7261 JP, 7269 JP, 7272 JP, 000270 KS, 005380 KS…tho Korea names have run 30%+ past 3M, 1114 HK, 203 HK…China plays already benefit from subsidised oil), tire or rubber plays (ML FP, GT US, CTB US, 5105 JP, 000240 KS, 073240 KS, 5108 JP); in general go LONG futures in Japan / Korea / Thailand as they are the most energy dependent countries in Asia.
Global Implications of commodity crash: If this happens, then the ECB will be much more will to cut interest rates (since they have remained much more hawkish than the US). Depending on how fast this chain reaction occurs, I would start taking a look at some of the more toxic large cap global brand companies in Europe: yes, I swear to god its time to start kicking the tires on UBSN VX and RBS LN. UBS already put in its low at 21.52 on March 17th, RBS is quickly approaching theirs. AUD/USD are a short here and Oz now looks to be heading for a down credit cycle and rapidly accelerating likelihood of a property/asset quality crisis (see Daniel Tabbush’ Aussie banks sector note out this weekend).
Last Week’s Street Brawl – Jets vs Sharks
‘Inflate or die’ is crushing the ‘End of the Worlders’…some global stock picks & ruminations
Commodity Crash Near 100% Certainty – GET VERY VERY LONG CHINA + PAN-ASIA MANUFACTURING/TECH SHARES
Summary: A near perfect storm of a rolling commodity market, hoarding suppliers, slowing demand, and rapacious US regulators with a slew of proposed regulation who will stop at nothing to end the commodity “speculation” which has stopped traditional hedgers in those commodities from being able to hedge their positions. In formal chart terms, the global commodity complex bubble officially popped last week. This bubble had been steadily inflating since 2002 (since the last peak in the USD) and finally popped from Tuesday to Friday with oil (CL1) attempting a last run at 132 on Thursday evening (HK time) and then coming off to close at 127. This is a monumental WATERSHED occurrence and marks a major shift in market mentality from inflationary/stagflationary to a period of disinflation at the margin for the foreseeable future. My best hunch is we get a 3-6 month period of correcting commodity markets which will be very very very bullish for global non-commodity related equities. While this occurs, global GDP #s will be upgraded by economists while much weaker commodity prices will dampen rate hike expectations until latter 2H08 or even early 2009. THE MOST IMPORTANT THING TO APPRECIATE HERE IS THAT CHINA HAS THE MOST TO GAIN IN ASIA FROM A COMMODITY CRASH. China has Asia’s biggest inflation problem (outside of Vietnam, which is also a LONG here too), is still the world’s manufacturer (albeit a bit less cost competitive than they were a few years ago) and its equity market has underperformed the region since October. HSCEI is -33% from end-Oct, HSI -22%, HSCCI -25%, and SHCOMP -43%.
Top longs: GET VERY LONG downstream oil players including refiners (rapidly widening crack spreads) and Petrochina (857 HK), Sinopec (386 HK), Sinopec Shang Pet (338 HK), LONG SK Energy (096770 KS), S-Oil (010950 KS), (LONG AIRLINES: Cathay (293 HK), Air China (753 HK), China Eastern (670 HK), China Southern (1055 HK), HK Exchange (388 HK)….THE MOST LEVERED STOCK INTO RECOVERING CHINESE CAPITAL MARKETS + REVIVED IPO PIPELINE, IPPs WILL SEE A HUGE SHORT SQUEEZE - LONG (Datang – 991 HK, Huaneng - 902 HK, Huadian - 1071 HK), MANY SHORTS IN EXPRESSWAYS – LONG Shenzhen Expressway (548 HK), Jiangsu Expressway (177 HK), Zhejiang Expressway (576 HK), and Beijing Capital Airport (694 HK). Also get LONG CHINESE BANKS AND INSURERS (CCB-939 HK, China Life-2628 HK, Bank of China-3988 HK, ICBC-1398 HK) as falling commodities means it is much more likely that we will see austerity measures being relaxed in early 2H08. CHINESE PROPERTY NAMES (AND BANKS) THE BEST PLAY ON AUSTERITY RELAXATION: COLI (688 HK) the biggest but already +40% from lows, SHKP (16 HK) is only +16% from its lows (5% discount to NAV) and -28% from highs due to their family issues – I’m a buyer here…..and of course I am a buyer of Midland (1200 HK) which will challenge its previous HK$!5 high (+96%) in the next 12-months. Go LONG the steel and cement names: Angang New Steel (347 HK), Maanshan (323 HK), and Anhui Conch (914 HK). CCC (1800 HK) goes from being a margin squeeze concern to a LONG again. Of course, the China consumption story remains very bullish and should be accumulated: Paul McKenzie says his favorite PA pick would be Stella (1836 HK), HK$1.4bn mcap largest non-athletic footwar manufacturer in the world and said to have and excellent retail rollout planned with prospects for a massive stock-rerating. Expect consumption plays to re-rate to 30x+ P/Es again. I noticed that China Mengniu (2319 HK) did not sell off at all last week on the price fix story, LONG this stock, LONG MOST REGIONAL MANUFACTURERS (ie. all the auto stocks-esp Japanese autos, including US & European autos too) ARE LONGS, ESPECIALLY THE TECH SECTOR WHICH PARTICULARLY BENEFITS FROM A DISINFLATIONARY ENVIRONMENT.
Top shorts: SHORT upstream oil (CNOOC- 883 HK, 135 HK, STO AU, WPL AU, BP/ LN, XON US, CVX US, COP US). SHORT ALMOST ALL UPSTREAM COMMODITY PLAYS: short Shenhua (1088 HK)…its already down -39% so not a screaming short, SHORT China Coal (1898 HK) and Yanzhou Coal (1171 HK), short Chalco (2600 HK), SHORT CPO PLAYS: Golden Agri (GGR SP) since its impossible to short Malaysia (IOI/KLK) or Indonesia. Japan, Korea, and Thailand gain from falling oil prices (they are the biggest Asian importers as % GDP) but Thailand, Malaysia, and Indo will get hit by falling soft commodities. DTAC SP is a short as they are expanding upcountry and rice prices are collapsing.
Short upstream oil, short all commodity upsteam plays, CPO, short Indo, Thailand, Malaysia
From stagflation to disinflation in a week: As I’ve been saying since going to the US in April, it was becoming apparent that the commodity complex was turning into a bubble. In exhibit 1 below, since 4Q07 inflation expectations (the white line) has been holding steady, while the Fed Funds and USD fell. Meanwhile, the CRY index did another 20% move. The initial pullback in the CRY should be 354-370 (-12% to 16%) from current 422 where the -50-62% fib retracement support should be. HOWEVER, AND THIS IS A BIG HOWEVER I don’t think we hold there. If anything we fly straight through due to all the new regulation the US politicians are preparing (see the NY Times & Bloomberg articles on the topic from this weekend attached). So, if I am correct then the CRY retraces -50-62% of its move since 2001 and my CRY targets become 282-312 or -26% to -33%. If we get several new draconian regulations, then we could get over shoot to the 185-284 trading range of 1982-2002. I don’t think we go there because real rates are still negative in the US, China, HK, Singapore, and low everywhere else. Still very growth and asset price supportive. The USD is solid and has made its lows for this cycle. As Gartman says in his Friday note, the Fed St. Louis adjusted monetary base is barely growing 1% yoy. SO, NOT ONLY IS STAGFLATION A MODERN MYTH, BUT THE OTHER FLIPSIDE MYTH IS THAT THE US IS NOT PRINTING MONEY LIKE THERE’S NO TOMORROW. DE-LEVERAGING IS USD BULLISH (ie. reducing shorts on the USD).
New CFTC regulations – what’s coming up (…its WAY more than you previously thought): Please see attached in this e-mail/B’berg two articles – BOTH MUST-READS!!!! One is a collection of this weekend’s stories on upcoming CFTC regulations and ongoing investigations. Also, it doesn’t appear that these are ‘witch-hunts’ but legitimate investigations into ‘exploiting loopholes’, overstepping trading limits by going overseas to London, the Consumer-First Energy Act of 2008 proposal, increasing margin requirements, the Michael Masters testimony from last week, emending the ERISA Act, imposing taxes to the commodities market, rising incidences of inquiries into trading practises (ie. price gaps between futures and spot prices for cotton and oil). Oops…basically, the US government has no interest in allowing investors hold inventory and/or participating in the price rises of finite necessary resources. Its MUCH more effective to regulate the money out of commodities and back into equities where the capital creates jobs, reduces capital costs, adds to GDP, and BRINGS IN VOTES.
Much more new CFTC regulation than many realize…
Last Week’s Street Brawl – Jets vs Sharks
The way markets traded last week was like a full-on street brawl. The bulls were equally entrenched as the bears and an all-out scrap ensued. It got so nasty that I was getting hate-mail from both long-time friends & clients after my Sunday nite missive on Oil prices about to fall and time to get into the “short oil” trade. Guess when its your own money on the line its each man or woman to themselves. Going forward, its now time to get into the “short commodity” trade which is very equity supportive outside the upstream commodity complex.
‘Inflate or die’ is crushing the ‘End of the Worlders’ …some global stock picks & ruminations
My internal e-mail to CLSA Friday nite: its counterintuitive. USD has been in a 5.5yr bear market so u could argue that FX started pricing in US crisis 5.5yrs in advance. also, US/China/Sing real rates negative - very asset price supportive & right now the cheaping capital available to the most people in the history of the human race (since Bric really just happend). commods in a bubble which pop when USD starts strengthening (ie. now).
reason why equities are melting up is that they are an inflation hedge. global money has to get out of long end of curve and has been trying to hedge via commods, but commods too narrow a market so a bubble builds until Asia gov'ts threaten to take off oil subsidies (in FT last week). so much spec/investment money in commod futures that US congress is considering limiting access to just pros in that industry (still being considered). so u get the ethanol policies reversed and commod future access get done right when USD is reversing and commods crash.
that's good cos a tidal wave of money switching out of bonds his equities over the coming months into a slowing US economy (tho US + Europe slowing slower than the mtks expect).
read George Soros' "The Alchemy of Finance" and "Market Wizards" by Jack Schwager. also learn to read charts: John Murphy "Technical Analysis of Financial Markets" and "Intermarket Analyis: Profiting from Global Market Relationships". next week is going to be huge.
Oil: not only is it breaking down, the whole commodity complex is rolling over. Rice, which supposedly a few weeks ago was scarce, is COLLAPSING. The whole stagflation theory is a MODERN MYTH. Quickly being discredited as are most bubbles, thru run for the door selling with extreme prejudice.
Commodities: what I find interesting is that they are falling under their own weight. Without really much USD/DXY strength.
Gold: since there is a lot of gold bugs at CLSA my call for gold is its breaks 850, then breaks 800, and then next stop is 650. Do I have your attention yet. Parabolic commods was largely a USD phenomenon. Its over kids, else get squashed like a bug "cos the times they are and changing....". QED. T. Possible policies: Such scenarios could include (as suggest by TGL) mandating “for liquidation only” in futures, limits to access to the derivatives markets, new laws prohibiting new derivatives usage, the reversal of the (stupid) ethanol policies, etc. Such heavy policies would force global money to seek their inflation hedges outside of the commodities futures markets (already thinly traded versus FX, bonds, and equities). So, if you are rotating your portfolio out of bond markets and can’t hold cash because inflation is rising, YOUR ONLY CHOICE IS TO ROTATE INTO EQUITIES. GUESS WHAT? THE GLOBAL EQUITY MARKET MELT-UP CONTINUES!
Global stock picks & ruminations: I reiterate from my previous “short oil AI”: We recommend LONG downstream Japan oil names: 5019 JP, 5001 JP, short upstream 1605 JP, and 1662 JP, long airlines 9205 JP and 9202 JP, long DUG US (Ultrashort Oil & Gas ETF), regional/global airlines (293 HK, SIA SP, 670 HK, 1055 HK, 753 HK, 003490 KS – KOREAN AIR THE MOST UNHEDGED ON FUEL AND TRADES ON 0.8X PBV, THEY HAVE A LOT OF USD DEBT, OIL DOWN=KOREA DEFICIT IMPROVES, KRW UP=BETTER BALANCE SHEET, QAN AU, BAY LN, DAL US, LUV US, CAL US), regional/global auto plays – SEE THE ATTACHED FRONT PAGE BARRRON’S ARTICLE FROM JUNE 2 (TODAY) TITLED “BUY GM” - (BMW GR, MG/A CN, DAI GR, 7203 JP, 7267 JP, 7201 JP, 7261 JP, 7269 JP, 7272 JP, 000270 KS, 005380 KS…tho Korea names have run 30%+ past 3M, 1114 HK, 203 HK…China plays already benefit from subsidised oil), tire or rubber plays (ML FP, GT US, CTB US, 5105 JP, 000240 KS, 073240 KS, 5108 JP); in general go LONG futures in Japan / Korea / Thailand as they are the most energy dependent countries in Asia.
Global Implications of commodity crash: If this happens, then the ECB will be much more will to cut interest rates (since they have remained much more hawkish than the US). Depending on how fast this chain reaction occurs, I would start taking a look at some of the more toxic large cap global brand companies in Europe: yes, I swear to god its time to start kicking the tires on UBSN VX and RBS LN. UBS already put in its low at 21.52 on March 17th, RBS is quickly approaching theirs. AUD/USD are a short here and Oz now looks to be heading for a down credit cycle and rapidly accelerating likelihood of a property/asset quality crisis (see Daniel Tabbush’ Aussie banks sector note out this weekend).
Keppel Corp - DBS Vickers
Keppel Corp announces another contract -
US$385m semisubmersible rig contract from
Brazilian driller
Just two days after announcing its last contract win, Keppel
Corp has secured another contract. The contract is valued at
US$385m and is a repeat order to build a semisubmersible
drilling rig for Brazilian driller, Queiroz Galvao Oleo e Gas
(QGOG). This price excludes the drilling and subsea
equipment which will be supplied by the customer, QGOG.
This rig will be built to the DSS 38 design jointly developed
by Keppel O&M's technology arm Deepwater Technology
Group and Marine Structures Consultants of The
Netherlands. It's design can operate in water depths of
9000ft and can meet the operational requirements in the
deepwater "Golden Triangle" region, comprising Brazil,
Africa and the Gulf of Mexico.
This latest rig, to be named Alpha Star, is a repeat order of
the first semisubmersible, Gold Star, which was awarded to
Keppel in August 2006. Gold Star will support Petrobras'
growth plans when delivered in 2H09, whilst Alpha Star may
be deployed in either offshore West Africa or South
America, when delivered in 2H2011.
With this, YTD wins will amount to S$2.8bn and account for
46% of our order win assumption of S$6bn. Order book
estimated to rise to S$13.9bn. No change to earnings
estimates as we have already assumed S$6bn of contract
wins for FY08.
We believe that contract flows over the last one week have
stemmed from Petrobras' requiring up to 12 drilling rigs
(could be a combination of jackups, semis and drill ships)
with delivery dates by mid 2012. Both yards are currently
able to deliver semis in both 2011 abd 2012 while for jackups,
delivery slots for delivery in 2010 are still available.
Maintain Hold, TP S$12.56.
US$385m semisubmersible rig contract from
Brazilian driller
Just two days after announcing its last contract win, Keppel
Corp has secured another contract. The contract is valued at
US$385m and is a repeat order to build a semisubmersible
drilling rig for Brazilian driller, Queiroz Galvao Oleo e Gas
(QGOG). This price excludes the drilling and subsea
equipment which will be supplied by the customer, QGOG.
This rig will be built to the DSS 38 design jointly developed
by Keppel O&M's technology arm Deepwater Technology
Group and Marine Structures Consultants of The
Netherlands. It's design can operate in water depths of
9000ft and can meet the operational requirements in the
deepwater "Golden Triangle" region, comprising Brazil,
Africa and the Gulf of Mexico.
This latest rig, to be named Alpha Star, is a repeat order of
the first semisubmersible, Gold Star, which was awarded to
Keppel in August 2006. Gold Star will support Petrobras'
growth plans when delivered in 2H09, whilst Alpha Star may
be deployed in either offshore West Africa or South
America, when delivered in 2H2011.
With this, YTD wins will amount to S$2.8bn and account for
46% of our order win assumption of S$6bn. Order book
estimated to rise to S$13.9bn. No change to earnings
estimates as we have already assumed S$6bn of contract
wins for FY08.
We believe that contract flows over the last one week have
stemmed from Petrobras' requiring up to 12 drilling rigs
(could be a combination of jackups, semis and drill ships)
with delivery dates by mid 2012. Both yards are currently
able to deliver semis in both 2011 abd 2012 while for jackups,
delivery slots for delivery in 2010 are still available.
Maintain Hold, TP S$12.56.
Wilmar International Limited - Outperformance overdone
UBS Investment Research
Downgrade from Buy to Neutral; fairly valued despite EPS upgrade
Wilmar International’s (Wilmar) share price has risen 52% from a low of S$3.60
on 18 March 2008, and we believe it is now fairly valued. This is despite raising
our EPS forecasts for 2008 from US$0.15 to US$0.19 and for 2009 from US$0.17
to US$0.21. Our forecasts are now 18-25% above consensus and our new EPS
estimates follow on from better-than-expected Q108 results reported on 13 May.
The sustainability of crushing and refining margins is uncertain
We think the unusually high processing margin in Q108 is unsustainable. Although
some of the margin expansion could be attributed to merger synergies and
increased economies of scale, a greater part was caused by stock-holding gains and
the foreign currency effect.
Long-term Chinese food demand investment case is intact
We think there is strong upside to Chinese edible oil and soybean demand. China’s
per capita consumption of edible oil and meal was 23kg/capita and 36kg/capita,
respectively, in 2007, 30-40% of developed countries’ consumption. Chinese
imports of palm oil and soybeans recorded a CAGR of 16% and 21%, respectively,
from 2002-07. Wilmar’s 20-25% market share of the Chinese soybean crushing
market and 40% share of palm oil refining capacity imply it is best positioned to
benefit.
Valuation: raise sum-of-the-parts-based price target from S$4.55 to S$5.90
Our sum-of-the-parts price target is derived using a DCF methodology, assuming a
WACC of 8.5%, long-term growth of 4% and a long-term CPO ASP of
US$900/tonne for plantations, and a WACC of 8.5% and long-term growth of 5%
for China. At our price target, Wilmar would trade at a 2009E PE of 21x.
Downgrade from Buy to Neutral; fairly valued despite EPS upgrade
Wilmar International’s (Wilmar) share price has risen 52% from a low of S$3.60
on 18 March 2008, and we believe it is now fairly valued. This is despite raising
our EPS forecasts for 2008 from US$0.15 to US$0.19 and for 2009 from US$0.17
to US$0.21. Our forecasts are now 18-25% above consensus and our new EPS
estimates follow on from better-than-expected Q108 results reported on 13 May.
The sustainability of crushing and refining margins is uncertain
We think the unusually high processing margin in Q108 is unsustainable. Although
some of the margin expansion could be attributed to merger synergies and
increased economies of scale, a greater part was caused by stock-holding gains and
the foreign currency effect.
Long-term Chinese food demand investment case is intact
We think there is strong upside to Chinese edible oil and soybean demand. China’s
per capita consumption of edible oil and meal was 23kg/capita and 36kg/capita,
respectively, in 2007, 30-40% of developed countries’ consumption. Chinese
imports of palm oil and soybeans recorded a CAGR of 16% and 21%, respectively,
from 2002-07. Wilmar’s 20-25% market share of the Chinese soybean crushing
market and 40% share of palm oil refining capacity imply it is best positioned to
benefit.
Valuation: raise sum-of-the-parts-based price target from S$4.55 to S$5.90
Our sum-of-the-parts price target is derived using a DCF methodology, assuming a
WACC of 8.5%, long-term growth of 4% and a long-term CPO ASP of
US$900/tonne for plantations, and a WACC of 8.5% and long-term growth of 5%
for China. At our price target, Wilmar would trade at a 2009E PE of 21x.
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