Karachi, July 19, 2022 (PPI-OT): Softening commodity prices – a good omen for Pakistan

Bloomberg commodity index has declined 15% from its 52-week high in Jun-2022, driven by fears of a global recession, which bodes well for net commodity-importers like Pakistan.

Given our FY23 CAD estimates (US$14bn, 3.6% of GDP) accounting crude oil at US$90/bbl, a breather of more than 35% in the prices of Palm Oil, Steel and Allied and Cotton from their recent highs, (totally to ~15% of the import bill), would likely provide a more benign number vis-a-vis our estimates.

While ongoing direction change in commodities may impact listed companies (table below), it would be too soon to incorporate the same in earnings projections. Nonetheless, we highlight Pak Equities are already trading at attractive levels of 4x P/E.

Commodity prices change course

Bloomberg commodity index has declined 15% from its 52-week high in Jun-2022. Key reason of the fall has broadly been worries of diminishing demand and fear of recession as the world enters into a longer phase of higher inflation. With a strengthening US$, a bigger push recently came in after China’s lower GDP growth for the last quarter, and China announcing release of its metal reserves.

To recall, commodity prices that were already on an adrenaline rush due to the aftermath of the pandemic (higher money printing, supply bottlenecks), received a boost post the Russia-Ukraine war, reaching multi-decade highs in some cases too. The same quickly reflected in global inflation, leading central banks around the world to adopt monetary tightening to blow off the steam.

Creating a window for Pak macros

Pakistan being a net importer, would benefit from any decline in the dominant commodities. Oil factoring for 20% of Pakistan imports is expected to witness a decline in the coming months. To note, the country’s oil import bill reported realized price for May-2022 close to prevailing prices at US$96 (crude) and US$115/bbl (POL products). Hence, the decline may come with a lag after posting higher realized prices in the near months. Moreover, imports of Palm Oil, Steel and Allied and Cotton, accumulating to around 15% of the import bill would also likely witness a breather from more than 35% lower prices from their recent highs.

Having said that, LNG imports, are still at risk of escalating over demand from European countries, provided Pakistan receives uninterrupted LNG as per demand. Nonetheless, these imports only account for 6% of our import bill.

For FY23, our CAD estimates stand at US$14bn (3.6% of GDP), we have accounted for crude oil to average at US$90/bl (annualized impact of ~US$1bn or 0.2% of GDP on every US$5/bl change). Hence, our estimates call for a possibly benign reading on relief in the heads discussed above, barring oil. Moreover, due to above commodities witnessing a respite lead to expectations of the import bill receding in US$ terms, the country’s inflation readings are expected to remain under pressure over the strengthening US$.

Impact on PSX

The ongoing direction change in commodities are also expected to impact listed companies (refer to table). However, the Bloomberg Commodity Index is still 26% higher than its 52-week low recorded in Aug-2021. While it would be too soon to incorporate the ongoing changes to corporate earnings projections, we highlight Pak Equities already trading at attractive levels of 4x P/E, favouring Banks, E and Ps and high D/Y plays till clarity on commodity-based cyclicals.