September 21, 2012
CJ CheilJedang''s lysine selling price weakens in Q3 2012
Despite solid market demand and spot prices are on a quick rebound, CJ CheilJedang''s lysine selling price is weakening in the third quarter of this year.
CJ CheilJedang''s lysine selling price in the third quarter of 2012 is forecast at the middle and high US$1,800/tonne level below our previous forecast of US$1,980/tonne and the company''s guidance of US$2,100/tonne.
Lysine spot prices in China turned bearish in May and plunged in June-July due to supply pressure from CJ CheilJedang''s expanded production lines, inventory releases by competitor GBT, and purchase delays at customers in anticipation of a price fall.
Spot prices began bouncing back quickly in August, but CJ CheilJedang''s third quarter lysine selling price will be lower than expected due to the long-term supply contracts entered into when prices were low. However, CJ CheilJedang''s lysine selling price is forecast to rise again in the fourth quarter of this year as spot price strength trickles down.
Spot prices in China are regaining the level before the June price correction, and the upcoming high-demand season for pork will give an added boost to lysine prices. CJ CheilJedang''s increasing lysine supply is being fully digested in the market, which indicates the robust state of lysine demand. CJ CheilJedang will be able to widen its lead over rivals on the back of sales growth and cost competitiveness.
Downward pressure on grain prices is growing as the full-quarter effects of the company''s processed food price increases will begin in the fourth quarter.
CJ CheilJedang has secured all the grain supply it needs until the fourth quarter of this year, but the recent grain price surge is dampening investor sentiment. However, downward pressure on grain prices is rising in line with raw sugar (mainly produced in Latin America) price weakness as the harvest time approaches for soy and corn (mostly cultivated in the US).
Grain prices will likely fall on speculators'' profit taking as demand is softening amid global economic weakness. China and other major importing countries are seeking to diversify suppliers, and grain sowing activity is picking up in the southern hemisphere where the sowing season has arrived. The USDA revised up its 2012-13 corn supply forecast in September, citing a more stable outlook for corn and other crops. The agency slashed supply forecast or raised price forecasts in July and August. Meanwhile, the full-quarter effects of the company''s processed food price increases will begin in the fourth quarter of this year.
Furthermore, another round of price hikes is forecast for soyoil and flour in the fourth quarter unless wheat and soy prices tumble.
Quarterly earnings may not be a reliable guide because they tend to fluctuate excessively depending on external variables such as raw material prices and foreign exchange rates.
The company is continuing to improve its medium- and long-term fundamentals by gradually reducing dependence on volatile materials and domestic animal feed operations, while strengthening focus on domestic processed foods, overseas animal feed, and overseas biotech.