Wilmar International, the world’s largest palm oil trader, posted its first quarterly profit decline in at least four years as refining margins shrank and production yields from its plantations drop.

Net income fell 15% to US$344.5 million ($467.7 million), or 5.4 cents a share, for the three months ended June, from US$407 million, or 6.4 cents, a year earlier, the Singapore-based company said today in a statement. Earnings rose every quarter since at least 2006, according to data compiled by Bloomberg.

 

Chief Executive Officer Kuok Khoon Hong is seeking to diversify from Wilmar’s palm oil business, and last month agreed to spend A$1.75 billion ($2.17 billion) to buy CSR Ltd.’s Australian sugar unit. Slowing economic growth in China is affecting consumer demand, Kuok told reporters today.

 

“Higher fertilizer costs were the key to lower margins at Wilmar,” UBS analyst Andreas Bokkenheuser said by phone. “The company is hitting a regulatory ceiling in China in terms of market share, they can’t grow their market share much more. Wilmar is forced to move into other business such as sugar, which will also allow them to better use their distribution supply line in China.”

 

Wilmar, supplier of almost half of China’s cooking oil, fell 2% to $6.14 at 4:37 p.m. in Singapore trading.

 

The second-quarter profit missed estimates by Goldman Sachs Group Inc. and JPMorgan Chase & Co. by 17% and 20%, respectively. Analysts may cut profit forecasts by 10% to 20%, UBS said in a note.

 

“Since two months ago we did see a slowdown in the Chinese offtake of consumer products especially in the high end,” Kuok said. “I think we’re still registering slower sales. The general slowdown is because of the economy in China.”

 

The Chinese government is reining in loans growth and curbing property speculation to prevent the economy from overheating.

 

Wilmar’s sales rose 18% to US$6.8 billion. The revaluation of convertible bonds cut profit by US$41.7 million, it said. Pretax profit for its merchandising and processing business, which made up 68% of the total, fell 4.7% on “poorer industry refining margins from tighter supply of crude palm oil and relatively less competitive pricing of palm oil compared to other edible oils,” the company said.

 

The plantations and palm oil mills business, the second- biggest contributor, posted a 24% decline in pretax profit on lower palm oil prices and a drop in yields.

 

“Crude palm oil production was down,” Kuok said. “The price difference with bean oil narrowed a lot and as a result margins were weaker. Going forward we hope it will improve because normally palm production in the second half is higher than the first half.”

 

Soybean oil’s premium over palm oil fell to an average of 11% in the second quarter, from 19.3% a year earlier, according to Bloomberg data. Soybean oil for December traded at 42.35 cents a pound in Chicago Board of Trade at 1:28 p.m. Singapore time, compared with October-delivery palm oil which was at 2,704 ringgit ($1,160) a ton in Malaysia.

 

A longer-than-normal rainy season is disrupting harvesting in Indonesia, and output may drop as much as 10% this year, Susanto, head of marketing at the Indonesian Palm Oil Association, said Aug. 12.

 

Wilmar is in talks to acquire a 20% stake in Singapore-listed Kencana Agri, Kuok said.

 

“Profit was 7% below our forecast and margins were lower across most business areas,” Carey Wong, an analyst at OCBC Investment Research Pte., said by phone in Singapore. “Prices for raw materials inputs are rising, and there’s a time lag before Wilmar can pass those on to customers.”

 

Rising food prices over the past few months of staples such as sugar and wheat have raised the risk of China imposing price controls, which may have an impact on Wilmar, Wong said. China in 2008 imposed price controls on cooking oil, leaving producers unable to pass on higher input costs.

 

China’s inflation rate rose to 3.3% in July, the highest in 21 months, as floods destroyed crops, leading to increased food costs.

 

Kuok last month said Wilmar is willing to spend as much money as Sucrogen, CSR’s sugar unit, needs for expansion. Sugar demand in Asian markets, including China and India, outstrips annual supply by 30%, Wilmar said July 6, citing the International Sugar Organization.

 

“Sugar consumption is definitely on the rise, especially in Asia, and China as a market is developing fast,” said OCBC’s Wong. “Wilmar has a vast network in China, and the CSR acquisition is a good path for them to go down.”