Palm Oil and Crude Prices Fall: Food and Energy Stocks See Mixed Impact

What the fall in palm oil and crude prices means

Malaysian palm oil futures saw a decline on Monday, a movement attributed to a broader weakness across other edible oil markets, including Dalian and Chicago, as well as a drop in international crude oil prices. This indicates a general softening in global commodity markets, particularly for oils.

Why it matters for food and energy stocks

For Pakistani companies, the prices of key imported commodities like palm oil and crude oil directly affect their cost structures and revenue streams. A fall in palm oil prices is generally positive for companies that use it as a raw material, as it reduces their input costs. Conversely, a decline in crude oil prices can be negative for oil and gas exploration companies whose revenues are linked to international oil benchmarks, but positive for companies that use crude derivatives as feedstock. For oil marketing companies and refineries, falling crude prices can lead to inventory losses, as the value of their existing stock decreases.

Which stocks, and why

Several companies on the Pakistan Stock Exchange could see an impact from these price movements:

For companies in the food sector, a drop in palm oil prices is generally beneficial. Engro Foods, which produces dairy products like Olper's, explicitly lists edible oil as a key input cost. Lower palm oil prices could help reduce its production expenses. Similarly, other food and personal care companies such as Nestle Pakistan, National Foods, Colgate-Palmolive Pakistan, and Unilever Pakistan Foods also use various edible oils in their products, so a fall in prices could offer some relief on their cost side.

In the energy sector, the impact is mixed. For oil and gas exploration companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum, a fall in international crude oil prices is generally negative. Their wellhead prices for oil and gas are often linked to global crude benchmarks, meaning lower crude prices could translate into lower revenue. For oil marketing companies such as Pakistan State Oil, Attock Petroleum, and Shell Pakistan, a sudden drop in crude prices can lead to inventory losses, as the value of their stored fuel declines. Refineries like National Refinery, Attock Refinery, and Pakistan Refinery also face similar inventory valuation challenges when crude prices fall.

Conversely, companies in the chemicals sector that use crude oil derivatives as feedstock could benefit. Lotte Chemical Pakistan, a PTA producer, and Engro Polymer & Chemicals, a PVC producer, rely on oil-linked raw materials. Lower crude prices can reduce their feedstock costs, potentially improving their margins.

What to watch

Investors should monitor the trajectory of global commodity prices, particularly for palm oil and crude oil. While daily fluctuations are common, sustained trends in these prices will have a more noticeable impact on the profitability of the affected companies. Future company earnings reports and management commentaries will provide clearer insights into how these commodity price movements have influenced their input costs, revenues, and inventory valuations.