Commodities Sector Research Report

by OCBC Investment Research (3 Sep)

OUTPERFORMING the broad market: Commodities performed well in Q2 2008. Corporate earnings for Q2 2008 were relatively mixed. Compared with last year, fewer companies reported earnings growth, and in general, many succumbed to inflationary cost pressures and saw margins being compressed as a result.

Amid an increasingly challenging operating environment, the commodities sector continued to perform and even surpassed expectations. For instance, Noble Group Holdings impressed with a 191 per cent y-o-y surge in H1 2008 net profit, Olam International posted a 54 per cent growth in FY2008 earnings, while Straits Asia Resources (SAR) dazzled with H1 2008 earnings soaring 263 per cent y-o-y. We believe that the commodities sector will continue to outperform the broad market in H2 2008.

Mid-long term growth intact: Despite recent swings in commodity prices, the medium- to long-term growth profile for commodities remains intact. According to Noble, volumes remain robust despite fluctuations in spot market prices, which it is hedged against.

It remains confident that demand for commodities will grow. Similarly, SAR has been riding on record high coal prices and is enjoying upward price revisions for its new contracts, owing to global demand-supply imbalances. It has raised its average selling price for 2009 delivery by 47 per cent to US$104 per tonne (versus US$70.5 per tonne in 2009).

Global demand for energy has been estimated to grow by more than half over the next 25 years, according to the International Energy Agency, and this will continue to put upward pressure on energy prices.

Hurricane Gustav to boost oil prices? Adding to the tight demand-supply landscape, oil prices could spike should Hurricane Gustav result in production disruptions in the US. According to news reports, at least nine refineries, with together account for 12.5 per cent of US refining capacity, have been closed in anticipation of the hurricane.

Depending on the extent of damage, supply shortages could drive oil prices up, with spill-over effects flowing to coal and energy prices.

Top picks - Noble and Straits Asia Resources: Under our coverage of commodity-linked stocks, we continue to favour Noble and SAR. Catalysts for the stocks include:


- for Noble, the upcoming listing of its subsidiary, Donaldson Coal, on the Australian Stock Exchange in Q4 2008, which will enhance its cash position; and


- for SAR, the acquisition of coal interests in Madagascar and Brunei, which will increase its reserves substantially and let it evolve into a global coal player.

-Research Report by OCBC Investment Research (3 Sep)