With increased margins pressures exerted by the global inventory build-up of agricultural commodities, India Ratings today maintained its negative outlook for the Indian edible oil and cotton sectors for 2013.
The outlook for the edible oils and cotton sectors could be revised to stable in the event of a revival of global consumption demand would reduce the current global inventory glut causing the prices of such agricultural commodities to recover. However, this is unlikely to happen in the next 12 months.
According to the report, favourable weather conditions caused palm oil production to significantly outstrip muted global demand in the 2011-2012 palm season (November-October). As a result, inventory surged, with the current global stock as a proportion of usage estimated to be at a six-year high. Meanwhile global palm oil prices have fallen in the range of 25%-28% ($ terms) over the last 12 months. And Indian prices mirrored a similar trend with a lag.
The existing palm oil refiners are likely to focus more on trading operations at the expense of refining operations. But an increase in focus on palm oil trading, which is a low-margin business, may result in margin pressures.
India Ratings expects domestic cotton prices to stabilise at the current low levels or decline by 5-10 %.The current global cotton inventory is at a multi-decade high, with stocks to usage ratio estimated to be at 71% (source: USDA). China’s role in this will be crucial as around 50% of this global inventory is in China. The way the Chinese policy makers decide to handle the close to 9mt cotton inventory is the single largest event risk in the world cotton market.
The credit profile of major cotton traders would be driven by their ability to handle inventory. To the extent traders keep their inventory days low by entering into back-to-back contracts with producers and consumers, they would remain less affected by any significant downside in cotton prices. However, margin pressures are likely to continue for such players.
