Sunday, June 5, 2016

China Company Cements Eastern Europe Grain Sources

China's giant state-owned food company, COFCO, has begun a $75 million investment in a Ukrainian port facility to cement its growing share of grain trade in the Black Sea region. This follows COFCO's announcement earlier in May that it plans to import a minimum of 1-to-2 million tons of Russian wheat to China in coming years.

The facility in the southern Ukraine port of Nicolaev will reportedly have capacity to handle 2.5-million metric tons of grain annually, with 143,000 metric tons of storage. The Ukrainian port will be wholly owned and operated by COFCO for its exports of corn and other grains.

According to the description of the investment, this is part of COFCO's "13th five-year plan" strategy to achieve an "unmatched global layout" covering "the entire industry chain." COFCO's expansion is in concert with China's national "one-road, one-belt" strategy of projecting its influence in a string of countries from its border into Europe.

The investment strategy also dovetails with China's national strategies of gaining control over the whole supply chain for farm commodities--including trading, logistics, and processing--and diversifying sources of imports.

The Ukrainian investment "basically completes" COFCO's international acquisitions. On March 3, COFCO gained full ownership of Noble Agriculture and renamed it COFCO Noble Agriculture. With the acquisition of Noble Agriculture and Nidera, COFCO's international assets now comprise 52% of its balance sheet.

COFCO's acquisition of Nidera gave it control of an advanced facility at the Romanian port of Constanta. According to the Chinese description, this gives COFCO strategic access to corn, wheat, barley, and rapeseed in Romania, Hungary, and Serbia for export to Europe, the Middle East, and Africa. COFCO Agriculture also has a sunflower seed oil-processing plant in the Ukraine.

COFCO says it exports 1.5-to-2 million metric tons of corn, barley and other grain from Ukraine to Europe, Iran, Southeast Asia, and North Africa. Nidera reportedly exported a record 4 million metric tons from the Black Sea region during 2015.

On May 18, COFCO's chairman, Yu Chunbo, announced that the company plans to import at least 1-to-2 mmt of wheat annually from Russia to China. This is the "minimum level of cooperation" between the two countries, Yu said. The volume could rise to 3-to-5 mmt, depending on the price.

The company's communist party secretary told journalists that COFCO plans to further expand and improve its global layout to implement the country's national grain import and export strategy with the greatest possible efficiency as part of  China's "national team."

"Efficiency" is not the adjective that comes to mind as a description of COFCO's financial performance. Another recent article points out that COFCO's acquisitions of Nidera and Noble Agriculture vaulted the company into the ranks of the large "ABCD" multinational companies when measured by assets, but its profitability is still relatively weak. COFCO's $62.4 billion in assets after its  rank the company at number 3 in size among multinational grain companies in the world . However, the article points out that its net income of $200 million is relatively weak, comparable to that of the number 4 ABCD. COFCO's profitability looks even weaker when one considers that the company gets $712 million in subsidies from the Chinese government. Without the subsidies, COFCO apparently would be making losses.

The subsidies do not include the windfall profits COFCO makes by importing grain at low 1% tariffs using import quotas set aside by the government for use by designated state trading companies--primarily COFCO. Ninety percent of the 9-million-ton tariff rate quota for wheat is reserved for state trading companies, while hundreds of private sector companies must scramble get a share of the 10% of quota divvied up among them. The state share of the 7.2-million-ton corn quota is 60%. Presumably, COFCO uses the state-owned quota to import corn from Ukraine and will use it to import wheat from Russia.

1 comment:

Godfree Roberts said...

COFCO is a commodity SEO: its job is to deliver a commodity – food – to China and distribute it as inexpensively as possible. Some years it may need subsidizing and other years it will make back its subsidy. This prevents anyone making economic gains or establishing monopoly power over something that every Chinese needs.