Trouble at the commodity markets

Trouble at commodity markets

China is a key factor in the availability and pricing of commodities. At this front lately there is a great trouble noticeable, influencing the pricing front, mostly for copper and iron ore, but evidently it is rubbing off also in the cotton area

According to reports in the last few days by WSJ Wall Street journal there is turmoil at commodity markets for various reasons. Lately, it is the move of a consortium led by Singapore state investment fund Temasek with its offer to buy the remainder of the not yet own food trading giant Olam International, in a USD 2 billion deal.

Temasek’s nrelationship to Olam, a leading player in the global supply of coffee, nuts and cotton, has felt much like a big brother protecting a younger sibling. When short seller Muddy Waters targeted Olam in late 2012, accusing the company of obscuring its liabilities, Temasek stepped in to protect a hometown company. It backed a USD 1.2 billion rights issue and bond raising and helped flush short sellers out of the stock.

Since that time, Olam’s stock has made little moves. The price has languished below where it was before Muddy Waters raised questions about how the company valued its “biological assets” and accounted for the value of acquisitions. The company vividly denied Muddy Water’s allegations, but took some of the criticism to heart, adjusting strategy and selling assets to raise cash. Still, the debt burden remained high at 6.9 EBITDA. A positive free operating cash flow is expected by 2016.

Having triple-A rated Temasek, with a USD 170 billion portfolio as parent, it gives the company room to repair its finances, but whether Olam remains listed on the stock exchange is doubtful, since Singapore’s exchange requires a free float of at least 10 %, and given the generous terms on offer, it is likely that many of the remaining shareholders will cash out. The price represents an 11 % premium to its pre-announcement price and an even greater premium to the long term price average, thus Olam’s stock rocketed up 38 % in the six weeks before the offer. All together it is now 12 % higher than at its pre-Muddy Waters price. The bid values Olam at 13 times next year’s earnings, compared with 11.5 times at rivals Wilmar International and Nobel Group.

CottonMI-CB815A_MKTLE_G_20140313182410It is noteworthy to remark that the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities such as copper, iron ore and coal, and it influences also cotton prices. As we know, China’s  strategic cotton reserve policy has been provoking also fluctuations of cotton prices, however in contrast to other commodities upwards. With other words, China has a great influence on many commodities, respectively on real demand, and how the financial markets are working. Experts however reckon that China doesn’t want to see a crisis.

Cotton future trading in New York hit a nearly one-year high last Thursday, juiced by an US government report showing continued exports for the cotton fibre even as costs rise. Experts believe that the latest gains are affecting demand. Cotton for May delivery taded up to 93.75 US cents a pound, a price unseen since March 15, 2013, later they fell back to 91.68 US cents. In 2014 prices have risen steaqdily in 2014, after this season’s cotton harvest shaped up to be the samllest since the 2009-10 crop year. TDhe US Department of Agriculture raised its forecast for cotton exports Monday a week ago, stating that these increased by 1.9 % to 10.7 million bales, but exports in the week ending March 6 were down 36 % from average of the previous four weeks. There are increasing concerns about tight supplies in the U.S. Cotton price are up 8.3 % this year. The crop year ends on July 31, but most of the cotton is harvested by the end of December.

While overseas demand for cotton is stong in the US, some analysts state that will not be the case if prices rise much further. Many traders and analysts put the breaking point at around 95 cents per pound. At that price, textile mills in Asia, the top importers of the fibre, might buy from other countries. Higher prices also are expewcted to encourage more American farmers to plant the fibre this spring, leading to a bigger 2014-15 crop.

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