In the world of commodities, the supply chain of each commodity is generally dominated by a few companies globally. Just take the example of the global grain supply chain, which is dominated by the ABCDs: Archer Daniels Midland Company (NYSE: ADM), Bunge (NYSE: BG), Cargill and (Louis) Dreyfus controls about 80% of the global grain supply chain. If we look at some of the common staples we buy every day, each item is generally sourced and distributed by a limited number of trading companies. For instance, the chicken you eat might be from a Cargill farm, the pineapple you buy…
In the world of commodities, the supply chain of each commodity is generally dominated by a few companies globally. Just take the example of the global grain supply chain, which is dominated by the ABCDs: Archer Daniels Midland Company (NYSE: ADM), Bunge (NYSE: BG), Cargill and (Louis) Dreyfus controls about 80% of the global grain supply chain.
If we look at some of the common staples we buy every day, each item is generally sourced and distributed by a limited number of trading companies. For instance, the chicken you eat might be from a Cargill farm, the pineapple you buy is most likely from Del Monte, and the cooking oil you cook with might be produced by Wilmar International (SGX: F34).
Interestingly, Singapore is home to three companies in this fascinating business of commodities trading. Noble Group (SGX: N21), Olam International (SGX: O32) and Wilmar International – all part of Singapore’s stock market benchmark, Straits Time Index (SGX: ^STI) – have each carved out a niche for themselves in the world of commodities.
Noble Group focuses on three main segments: Energy; metals, minerals and ores (MMO); and agriculture. However, its energy business is by far its largest, taking up two-thirds of its total revenue in both 2012 and 2013. Noble has interests ranging from the supply of oil and gas in North America to the distribution of coal in Indonesia and Mongolia. Noble Group continues to reinvest in this business and expects more growth from it in the future.
China, China, China – and palm oil
If we talk about Wilmar International, we will always end up talking about China. Wilmar started out in the palm oil business, providing an integrated supply chain: 1) It plants oil palm trees; 2) it mills the palm fruit to obtain crude palm oil; 3) it refines crude palm oil into different edible oils, fats, and oleo-chemicals and; 4) it produces branded consumer products (like cooking oil for instance) from the refined palm oil.
Wilmar International has since increased the scale of this business and now supplies more than 50% of China’s palm oil consumption.
Nuts, spices and beans
Back in Nov 2012, Olam faced criticism about its business model from short-seller Muddy Waters. Since then, it has tried hard to improve its balance sheet and strengthen its business with those efforts starting to show up in its numbers.
Those improvements have not gone unnoticed and just last month, a consortium led by Temasek Holdings (one of the Singapore government’s investment arms) indicated their desire to buy over shares of Olam from existing shareholders at S$ 2.23 per share.
Olam, although not as large as all these other supply chain giants mentioned above, has managed to carve out a niche for itself – it is currently the largest global distributor of cashew nuts, onions, garlic, and sesame seeds.
It’s easy to take for granted the things we eat or use daily. However, if we understand how complex it is to get simple things – like the salt on our table, for instance – from its source and how many of our local companies are helping us to ensure we continue to enjoy the basic necessities, it might be able to prompt us to better appreciate the simple things in life.
And as for the investing side of things, it’s also good to understand where the strengths of different commodity players lie. It’s easy to lump them all as ‘commodity plays’ but as we’ve seen, these companies can each excel at different areas, presenting investors with unique investing opportunities depending on the circumstances.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Wilmar International.