Managers under pressure due to higher input costs

By Ahmed ElAmin

- Last updated on GMT

Related tags: Consumer protection, Peak oil, Cost

Input and energy costs for such commodities as wheat, corn, and
barley, will remain high on the list of pressures plant managers
will face over the course of this year, according to a new forecast
report by Standard & Poor's (S&P).

The ratings agency expects the peak in prices for energy and commodity supplies to constrain or depress the profitability of European consumer goods companies in the coming year, depending on their ability to pass on cost increases to end-consumers. Other factors affecting operations could come from the significant increase in European consumers' awareness of environmental issues such as global warming, S&P stated. Such continuing pressures will put the onus on food plant managers to increase the efficiencies of their operations and supply chain, and to cut any remaining fat out of their operations. The expected input cost pressure will result from two divergent trends, as the price for oil and oil-related products such as packaging appears to moderate from historically high levels. The agency expects prices for agricultural commodities to increase further. Many commodities have increased in price over the past couple of years to a relative peak, or even to record absolute prices. Such imputs as aluminium, oil, and even grains have risen in price over the past year. The price of plastic packaging has also been rising, due the higher cost of petroleum. S&P expects the ability to pass on the costs to consumers may prove tougher than in 2006. "Ongoing pricing power is restricted to the most strongly branded sectors within consumer goods such as spirits, confectionery, and tobacco,"​ S&P stated. "It is not expected to support the profitability of other segments." ​ Current market sentiment is that the oil price will remain volatile in 2007, although less so and at a lower level than in 2006. Transport costs might benefit with that decreased level, but other oil-related costs may be subject to inflationary pressure due to supply and demand imbalances, S&P stated. As an example, the price of glass is forecast to increase due to a current shortage of supply, or may be slower to decline, as manufacturers in the energy, plastic, or packaging sectorsrestore their margins, the agency said. Sugar and tea prices are already ast peak levels. But other agricultural commodities are expected to rise in price. The agency noted that inventories tightened in 2006. For example the stockpiles of wheat and corn are at their lowest level in 25 years and 28 years, respectively. Meanwhile demand for food, feed, and biofuel uses continued to increase strongly in line with the growing appetite of emerging markets. "Agricultural commodities are also affected by structural competition between crops for land space, which could generate specific supply imbalances, and, in turn, have an impact on the profitability of particular industries,"​ the agency said. "Brewing costs will be affected in 2007 by higher barley prices, for example, as less land was devoted to the crop." ​ Unusual weather conditions Australia and parts of the US could also affect supply for a large number of base crops, including wheat. Other factors affecting operations could come from the significant increase in European consumers' awareness of environmental issues such as global warming. Subsequently, in 2007, European consumer goods companies will need to adjust their strategies to address both the impact of and concerns about environmental and climate change. The agency sees some upside for companies, who can lash environmental concerns in their bid to lower the impact of input costs. Some companies such as Scottish & Newcastle have been focusing on energy efficiency and low-emission energy supply, both as cost-saving measures and out of concern for their impact on pollution. "Nevertheless, Standard & Poor's believes further significant pressures will hit the sales and profits of consumer goods companies in the short-to-medium term, as European consumers are increasingly valuing sustainability in their product choices,"​ the agency said. The trend will force manufacturers to overhaul supply chains and product offerings to account for environmental concerns. As retailers and consumer advocacy groups aim to make the carbon footprint of products easier to assess and relate to, it will become an increasingly important part of the purchasing decision, in terms of absolute amount and as a differentiating factor. For example Tesco announced in 2006 a decision to develop standards to measure and display the carbon impact of all the products it distributes. Furthermore, environment-related regulatory actions, such as the emissions trading system or other constraints linked to manufacturing, could also have an impact on profitability.

Related topics: Market Trends

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