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Investors Take Note: Here’s 1 Thing You Must Know About Commodity Companies

Singapore’s stock market is no stranger to companies involved with the palm oil industry – according to bourse operator Singapore Exchange, there are eight palm oil-related companies listed here in Singapore as of July 2014.

They are namely Bumitama Agri Ltd (SGX: P8Z), First Resources Ltd (SGX: EB5), Golden Agri-Resources Ltd (SGX: E5H), Global Palm Resources Holdings Ltd (SGX: K6J), Indofood Agri Resources Ltd (SGX: 5JS), Kencana Agri Ltd (SGX: F9M), Mewah International Inc (SGX: MV4), and Wilmar International Ltd (SGX: F34).

Over the past 12 months, these eight companies have seen their shares absolutely shellacked with the price of Malaysian palm-oil futures recently hitting a six-year low of RM1,863 per ton in late August this year. The price of palm-oil futures had hit a 2014-peak of around RM2,900 per ton; it’s currently around RM2,200 per ton.

Company Share price change from 14 Sep 2014 to 14 Sep 2015
Bumitama Agri -33.6%
First Resources -20.7%
Golden Agri-Resources -38.6%
Global Palm Resources -24.0%
Indofood Agri Resources -44.1%
Kencana Agri -40.9%
Mewah International -17.3%
Wilmar International -17.9%
Average -29.6%

Source: S&P Capital IQ

It’s easy to imagine that the shares of the eight palm-oil related companies will see a reversal in fortunes if and when crude palm oil prices start to climb. But, that’s far from a given – there’s a chance that these companies will still see their share prices slide even if the price of crude palm oil rises.

Here’s a good example of how a boom in the price of a commodity need not necessarily mean that the shares of the commodity’s producers will do well:

  • On 30 September 2005, the price of gold in Australia was A$621.25 per ounce. Nearly 10 years later today, it’s at A$1,552.87 per ounce. This represents a compound annual growth rate of nearly 10%.
  • But, over the same period, the S&P / ASX All Ordinaries Gold Index, an index for gold-producers in Australia’s stock market, had lost nearly 4% per year by moving from 3,372 points to 2,245 points.

Shares of palm oil companies in Singapore have been in the doldrums of late, with falling crude palm oil prices likely been an accomplice. But, like I already mentioned, that does not mean that the shares would do well even if crude palm oil prices start rising.

At the end of the day, it’s the individual company’s long-term business performance that matters – and that can be a completely different matter from how the price of a commodity moves.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.