17 July 2018 ( Lagos ) : On balance, against the backdrop of high yields, expanded acreage area, and favourable weather conditions, which suggests higher supplies, analysts retain their lower price outlook for raw sugar and crude palm oil over the rest of 2018. Against their previous prognosis, they now expect barley and rubber prices to moderate over 2018, as they expect sufficient market supplies to depress prices. 

While, they retain their positive view for cocoa, they now predict an uptrend in wheat prices, as they expect the combination of high consumption and muted production to create tighter supplies. Overall, they maintain a varied outlook for commodity prices over 2018.

Distilling the impact of trends in global soft commodity markets on corporates in the Nigerian FMCG sector, their bearish price outlook for raw sugar in 2018 guides to lower costs of sales and higher margins for refined sugar manufacturers including Dangote Sugar and Golden Penny Sugar – a subsidiary of Flour Mills of Nigeria, given that around 98% of their raw sugar requirement is imported. Similarly, bearish barley prices should be positive for brewers including Nigerian Breweries, Guinness Nigeria, and International Breweries while lower global CPO prices is negative for palm oil manufacturers, Okomu Oil and Presco, given the direct pass-through16 of international CPO prices to domestic prices. 

Consequently, analysts expect low CPO prices to limit revenue growth for the palm oil companies over 2018. With regard expected soft rubber prices, they believe this would also limit rubber revenue growth, particularly for Okomu given that the company exports all its rubber products and thus, exposed to international prices of rubber. 

Elsewhere, their positive price outlook for wheat suggests gross margin pressures for Flour Millers including Flour Mills of Nigeria, Dangote Flour, Honeywell Flour and Northern Nigerian Flour Mills. Analyst's view is premised on the fact that these millers import a sizable chunk of their wheat requirement owing to limited domestic supply. Rounding up their coverage, high cocoa prices in 2018 should be negative for Cadbury’s gross margin and earnings.

Source: ARM Securities Limited

Reporting for EasyKobo on Tuesday, 17 July 2018 in Lagos, Nigeria

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