Investors may over overreacted, a little, to the threat
posed to makers of corn sweeteners from the election of Donald Trump as US
president, Credit Suisse said, seeing some scope for recovery in Tate &
In the sweeteners markets "one always has to consider the
politics and the economics – and in that order", Credit Suisse said, with corn,
from which the likes of high fructose corn syrup (HFCS) are refined, and sugar strategic
commodities for many of their producing countries.
However, "we do not see a major political threat" to the markets,
the bank said, adding that the "economics in the industry right now are very
good", estimating that makers of HFCS achieved 2-5% price increases for 2017 in
their key annual negotiations with major users, such as soft drinks makers.
While not the "bumper 12-13%" achieved for 2016, this year's
increase was enough to prevent "margin erosion" for HFCS makers, which besides
Tate & Lyle, also include Archer Daniels Midland, Cargill and Ingredion.
Investors' immediate market reaction to November's election
of Donald Trump as US president was to send shares in the listed HFCS makers tanking,
with Tate & Lyle stock slumping 12% on the day.
The decline reflected investor concerns that Mr Trump,
having branded North America's Nafta agreement in 1993 as the "single worst
trade deal ever" signed by Washington, would reopen a Mexico-US rift over
sweeteners which has a bitter history.
US HFCS producers, by market share
1: ADM, 31%
2: Cargill 28%
3: Tate & Lyle, 26%
4: Ingredion, 12%
5: Roquette, 3%
Source: Credit Suisse
Fears by Mexico, a sugar producer, that Nafta would prompt a
flood of imports of HFCS, which the US exports, prompted trade curbs which cost
manufacturers of the sweetener heavily, and required World Trade Organization
Tension remains between the countries' sweeteners industries,
with Washington currently considering a complaint from US cane refiners over
sugar imports from Mexico, which has agreement to export in essence some 1.5m
tonnes of sugar to the US every year, with restrictions on the quality make-up.
'Make it fairer'
However, Credit Suisse said that this sugar dispute was "highly
unlikely" to escalate into a fresh sweeteners battle which extended to HFCS
"The concern would only be if this spat reached an impasse
and one or the other side took punitive action."
And the bank reckoned that Mr Trump's bark may be worse than
his bite, underling that the president elect "appears to have backtracked on
several things stated in the run up to the election", highlighting comments
from Anthony Scaramucci, senior advisor to his transition team.
Mr Scaramucci told business leaders last month that "I don't
think we're looking to rip up Nafta as much as we are looking to right-size it
and make it fairer.
"I don't think anybody in the administration from the top to
the bottom is looking for protectionism."
Share price prospects
Still, although Tate & Lyle shares remain well below
levels they stood at before Mr Trump's election, and at a "modest discount" to
peers, Credit Suisse flagged limited potential for the stock to recover.
It cut its price target for the stock by 50p to 750p, some
8% above current levels, with a "neutral" rating.
"We need to recognise that sector valuations have slipped in
the last three months as interest rate expectations have risen.
"The forward price/earnings multiples of staples are off 10%,
so while Tate & Lyle's valuation may have slipped, it has done so only
modestly relative to the sector."