Soy Crushing Capacity Up; Profits Down

According to a report in a financial newspaper, earnings per share by China Agri-Industries Holdings Co. for the first half of 2012 were down 68 percent from last year. This was the company's poorest earnings performance since 2008. The article attributes the relatively poor performance to excess capacity in soybean-crushing.

China Agri-Industries is the Hong Kong-listed parent company of COFCO, the state-owned giant involved in all types of grain, oils, pork and other agribusiness ventures. Its gross earnings were up a robust 24 percent this year, but earnings per share were HK$ 12.43, down from HK$ 39.68 in 2011.

The strong increase in gross income reflects a big expansion of oilseed-crushing capacity. The company added 2 million metric tons of capacity this year to reach a total of 10.38 mmt in the first half of 2012. Sales of vegetable oil were up more than 10 percent this year, reaching 1.38 mmt. Sales of rapeseed meal were up  63 percent, reaching 3.17 mmt.

The article notes that industry-wide soybean crushing capacity has risen dramatically from 80 mmt in 2008 to 100 mmt in 2012. Imports of soybeans rose 41 percent during 2008-11, from 37.4 mmt to 52 mmt. The article estimates that only about half of soybean crushing capacity is utilized.

Industry people estimate that vegetable oil consumption is rising about 5 percent annually, but supply has been growing 10 percent. Minor oils like corn and rice bran oil have been growing rapidly. The article doesn't mention the phenomenon of "gutter oil." The rapid growth in supply implies heated competition and downward pressure on vegetable oil prices.

The article comments that domestic (Chinese) and foreign markets have been in a downturn this year. Edible oil consumption is not robust, prices are soft (someone tell the National Development and Reform Commission), and companies face a lot of pressure.

A COFCO spokesman says the company faces a challenging business environment during the second half of the year that will lead to a shake-out of uncompetitive capacity in the industry. Profits should improve as the peak season for edible oil and soymeal consumption arrives.