Wilmar's profit to slump amid China cooking oil price pressure

This could drain 3% from Wilmar's 2012 earnings if price hike continues.

According to CIMB, Wilmar’s consumer products unit in China may see a margin squeeze following the Chinese government’s “advice” to edible oil producers to refrain from raising cooking oil prices.

Here's more from CIMB:

The Chinese government has advised edible oil producers in China to avoid raising prices "unless absolutely necessary," stopping short of a repeat of last year's outright price cap on such products, major producer Wilmar International said. "There is no control on cooking oil prices," said a spokeswoman for Wilmar. Cofco Group was the other major producer that the government met with to discuss cooking oil prices, state media reported. Wilmar and Cofco control about 70% of China's retail cooking oil market.

We estimate that this could drain 3% from the group’s FY12 earnings if edible oil prices trend higher. We believe that the 5% drop in today’s share price has more than accounted for this negative news.

This could hit Wilmar’s profit margin in the medium term if edible oil prices continue to trend higher. Wilmar is the largest producer of consumer pack cooking oil in China with approximately 50% market share. The limited ability to raise cooking oil prices may squeeze the profit margin for its consumer product division which made up 4.5% of the group’s FY11 pretax profit.

The consumer pack cooking oil business in China accounts for more than 70% of the group’s consumer products segment. We forecast this division to achieve US$40 per tonne margin in FY13. Every US$10 per tonne reduction in profit margin from this division could reduce our earnings by 2.2%. The good news is that Wilmar raised cooking oil prices by 5% across the board in Aug last year. In March 2012, it increased its cooking oil prices for peanut and rapeseed oils by 8% and it raised the price of peanut oil by a further 8% in July.