Drought in southwest China brings stock investment opportunities

Since the beginning of this year, severe drought has been sweeping southwest China and affected farm produce and sugar harvests of the locality and even the whole nation. Market analysts thus claim that investment opportunities brought by the drought may have been approaching.

Farm produce and the related industries suffered the heaviest blow from the drought. Analysts of CITIC Securities say the drought is likely to affect the national output of staple agricultural products such as winter wheat, rapeseed, and sugar. Therefore, listed grain and sugar producing companies such as Shandong Denghai Seeds (002041.SZ), Hefei Fengle Seed (000713.SZ), Cofco Tunhe (600737.SH), Nanning Sugar Industry (000911.SZ), are promising to attract investors' attention.

The planting area and grain output in southwestern China's five provinces and regions respectively accounted for 20 percent and 16 percent of the country's total in 2008. As the drought has been spreading, it will be very difficult for China to reap bumper harvests for the seventh year running in 2010.

An analyst with CITIC Securities predicted that more than 80 percent of sugar mills in country's largest sugar producing area Guangxi Zhuang Autonomous Region would complete sugarcane crushing by the end of March. At that time, the drought's impact on the national sugar output will be clearer.

The analyst estimated that domestic sugar output would reach 10.5 million to 11 million metric tons (tonnes) in crushing season of 2009/10, down 11.5 to 15.5 percent from last season. Taking into account that the drought may also affect spring sugarcane growth, the sugarcane planting area in crop year of 2010/11 is likely to increase less than the planned 15 to 20 percent set by the agricultural department.

In the past month, sugar prices on the international market have slumped. However, domestic sugar prices just slipped by 5 to 10 percent, consolidated by expectation of a fall in output. Analysts say that sugar prices in China will still maintain at high levels, ranging from 5,000 to 5,500 yuan/tonne.

On top of this, plagues of insects usually follow drought. If the drought continues, there is a bigger chance for this to happen. In these circumstances pesticide sales will rise, improving performances of related listed companies such as Shenzhen Noposion Agrochemicals (002215.SZ), Nanjing Redsun (000525.SZ) and Jiangsu Yangnong Chemical (600486.SH).

An analyst with Huatai United Securities also signaled investment opportunities in listed firms dealing with drought-relief and water conservation machines, hydraulic engineering, drought-relief fertilizer and biological agents, seed businesses, and farm produce whose output is affected by drought.

Power shortages caused by the drought will also generate investment opportunities. Nearly 70 percent of Yunnan's electricity capacity comes from hydropower generation. The province has been in short supply of electricity since the end of last year and has planned to restrict electricity consumption for those enterprises that are energy-intensive and highly polluting.

Huaitai United Securities pointed out that the tight power supply also suppressed lead refineries' capacity release in the region, and therefore would boost lead prices in the short term. It holds that Shenzhen Zhongjin Lingnan Nonfemet (00060.SZ), Sichuan Hongda (600331.SH) are expected to benefit from lead price rise.

Yunnan produced 338,900 tonnes of lead in 2008, accounting for 10.8 percent of the country's total output of 3.14 million tonnes.

Meanwhile, power supply shortages will lead to a fall in yellow phosphor output. China's phosphor resources concentrate in Hubei, Hunan, Sichuan, Guizhou and Yunnan provinces. The five provinces' phosphor reserves take up 76.7 percent of the country's total. However, severe drought in Sichuan, Guizhou and Yunnan has caused a drop in electricity generation, which has affected phosphor production in these areas.

Phosphor prices rose moderately at the beginning of this year but then slipped back as demand failed to increase significantly. An analyst with TX Investment Consulting said that if the drought continues spreading, phosphor prices are likely to rise and its downstream STPP prices may also be boosted. He suggested investors pay attention to the Hubei Xingfa Chemicals Group (600141.SH).

source: istockanalyst