You rise, you fall, you’re down when you rise again


Global macroeconomic uncertainties particularly in Euro-zone, lower consumer confidence and slowdown in demand in emerging markets have dampened sentiments in global commodities market, said a report issued by Topline Research on Friday.
From beginning of May, it said, the CRB index that constitutes of 19 commodities is down 11% while price of WTI crude, Arab light crude and coal prices are down 20%, 16% and 3%, respectively. Cotton which was already under-pressure has declined by 16%. Other commodity prices like PTA and Px have also come under pressure, while fertilizer prices have remained relatively immune.
The decline in international commodities prices is expected to have divergent impact on different listed sectors. Decline in international oil prices is expected to negatively affect E&P sector’s profitability. A US$10/bbl change in oil prices alters sector’s FY13 earnings by 6.3% with POL being the most sensitive (7.0%), while OGDC and PPL earnings change by 6.5% and 5.9%, respectively.
For OMCs, we expect APL to remain relatively immune but for PSO it is a blessing in disguise. Declining oil price would reduce PSO’s margin on FO and cause inventory loss, but reduction would also slowdown the built-up of circular debt and subsequently improve its liquidity position.
In similar context, IPPs liquidity position is also expected to improve due to reduce built-up of circular debt. For refineries, reduce prices means lower benefit of deemed duty in absolute terms and result in inventory loss. For every US$10 change in the oil prices, deemed duty changes by US$1.4/bbll, which effect NRL and ATRL annualized earnings by Rs3 and Rs2 per share. However, for NRL, the reduction in oil prices bodes well for lube margins at least in the short run.
Decline in coal prices could further improve margin of local cement manufacturers. Our estimates suggest that every US$10 per ton decline in coal price improves DGKC and Lucky FY13 earnings by 8-9%
Similarly, falling steel prices bodes well for Auto Assemblers and slightly improve their margins, assuming PKR-Yen parity to remain same.
Compared to other commodity prices, international urea and DAP prices remained relatively immune. However, domestic urea prices still more than 30% discount to int’l prices, the change in int’l prices has minimal bearing on predominantly urea producers like FFC, FATIMA and Engro. For DAP producers like FFBL, the int’l DAP prices has remained relatively immune to commodity price fall boding well for the profitability.
On textile sector, fall in cotton prices is expected to reduce margins on cotton yarn., However, given integrated business, like NML, the impact would be slightly diluted given the diversified portfolio that include high end products.
In chemical sector we cover LOTPTA. Since price of Int PTA (end product) reduced by 20%, while overall PTA-Px margin have decline by 20% boding negatively for the company.