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Tough Times for Foreign Soy Crushers in China |
Excess Capacity and Additional Plants Indicate Crushed Margins
Anyone who has paid any attention to the soybean crushing sector in China knows that the last year or so have been brutal in terms of margins. Except for relatively brief periods since May 2010, soybean crush margins have been negative for both South American and U.S. soybeans imported and crushed in China. There was a short period in September when margins were positive, but they turned negative again in October and have mostly remained that way since then. The most recent data we've seen shows that Chinese crushers currently are losing around 150 yuan/MT (about $23.60/MT) processing South American soybeans and about 115 yuan/MT (about $18.15) processing U.S. soybeans based on replacement values. The average loss since early October has been about 58 yuan/MT for South American soybeans and about 34 yuan/MT for U.S. soybeans.
China's crush margins are so poor because of a huge excess of crushing capacity. China's soybean crush volume in 2010/11 was about 55 MMT, but its crush capacity is close to 100 MMT per year. However, a significant share of the excess crush capacity is from older plants located in the northeast along the coast that mostly do not operate the bulk of capacity and serve to crush imported soybeans. Any time margins are positive because of good soymeal demand, the excess capacity means that the companies increase their throughput and soon drive margins to negative territory. And it is largely soymeal demand and prices that are the key determinants of margins since China is a large net importer of soyoil, and there is almost always a good market for soyoil.
To make matters worse, additional crushing plants are under construction in China which are expected at add an additional 10 MMT of annual crush capacity. We have seen data that indicates China's total soybean crush capacity likely will surpass 110 MMT by the end of 2012. Yet, USDA is forecasting total crush volume in China will reach only 60.1 MMT in 2011/12. This scenario almost guarantees continued negative crush margins for the foreseeable future unless a lot of less efficient or poorly located capacity plants shut down.
Almost all the new and planned soybean crushing capacity is owned by Chinese firms. The China National Cereals, Oils and Foodstuffs Corporation (COFCO), a state-owned company, has been the largest builder of new crushing capacity. Sino Grains Oils, another state-owned company, also has added capacity. Foreign companies, like Cargill, Bunge, Wilmar and Noble, have mostly been forbidden to build or acquire additional capacity in the last couple of years. However, some of the businesses have leased capacity from Chinese firms. It has clearly been Chinese government policy to favor Chinese-owned firms in the crushing industry, and it mostly has been state-owned firms that have been favored.
One has to wonder if the Chinese government's ultimate goal is to run foreign-owned companies out of the soybean crushing industry in China. Clearly, the government has indicated it does not want foreign firms to expand their capacity, but its objective now may be to drive them out of the business entirely. By allowing and supporting the building of additional soybean crushing capacity by state-owned firms, the government must know it is going to cause the entire industry to lose money. However, it may be that the government assumes that if this occurs, it ultimately will be the foreign-owned firms that exit the business first. That will be the case particularly if the government covers losses of the state-owned companies and perhaps discreetly does the same for private Chinese-owned firms. The multinational firms may have deep pockets, but they are not as deep as those of the Chinese government.
(This article was originally published in the 29 December 2011 issue of Ag Perspectives as part of a WPI analysis by John Baize. Click here to find out more about subscribing to Ag Perspectives.)
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