Manufacturers face higher input costs as El Niño lifts commodity prices

Palm oil and natural rubber prices have risen more than 24% this year.

Hong Kong food manufacturers, edible-oil refiners, and tyre makers face higher input-cost risks as El Niño pushes up commodity prices, including palm oil and natural rubber, according to CGS International. 

Palm oil prices were up 24.7% year to date as of 1 September, whilst the corresponding equity sector was down 38%.

In addition, natural rubber prices rose 24.4%, whilst the related sector fell 4.9%.

The brokerage said the difference reflects the kinds of companies listed in the city. 

Palm oil and rubber producers are mostly listed in Indonesia, Malaysia and Singapore, whilst Hong Kong has more companies that use these commodities to make food, edible oil, tyres and other products.

“For these names, a 25% rise in the underlying commodity price is a cost shock, not a revenue event,” CGSI added.

Thermal coal remains an exception, with companies in the sector having greater upstream and midstream exposure. 

Thermal coal prices jumped 41.7% year to date, whilst the corresponding Hong Kong sector rose 18%.

Previous El Niño periods showed a similar difference between commodity producers and companies further down the supply chain. 

CGSI pointed out that during the 2015/16 episode, the Hang Seng Materials sub-index rose 28.1% and energy gained 8.7%, compared with a 3.3% increase in the Hang Seng Index. Industrial goods declined 8.3%, whilst consumer goods fell 2.3%.

“Looking into 2027, the physical supply effects are therefore most relevant where the biological lag has yet to run its course,” the brokerage said.

Natural rubber prices have historically peaked four to five quarters after an El Niño event, whilst palm oil production can respond with an eight- to 12-month lag. 

Higher commodity prices could also affect Hong Kong equities more broadly if they feed into food inflation and keep US interest rates elevated.

CGSI noted that the US Federal Reserve raised its policy rate by 25 basis points to 3.75%–4.00% on 17 September, whilst the US 10-year Treasury yield had moved back above 5%. 

It said a stronger food-inflation impulse could keep rates higher and offset some of the earnings benefits enjoyed by commodity producers.