Documentos de Académico
Documentos de Profesional
Documentos de Cultura
ExECuTIvE SuMMARy Many FTSE 350 companies have seen their margins hit by sharp rises in raw material costs, prompting a number of profit warnings during 2011. A recent study by Ernst & young reported that rising raw material prices were behind 29% of profit warnings issued by uK-listed companies in 2011. Meanwhile, the World Bank and OECD have called for a sharp rise in water prices to help manage water as a finite resource. Trucost has been analysing resource efficiency across the value chains of major companies for over 10 years. In partnership with Green Monday, Trucost looked at which sectors would be most disrupted by further increases in oil, coal, wheat and cotton prices, as well as by water pricing that reflects resource scarcity. Trucost benchmarked 186 FTSE 350 companies on profit risk from the costs of oil, coal, wheat and cotton embedded in supply chains, and ranked them by sector to create a Commodity Exposure Index. Findings show a wide variation in the level of exposure between sectors, but on average, a 10% change in the price of each of these commodities equates to a 2% change in earnings before interest, taxation, depreciation and amortisation (EBITDA). P4 The top five most exposed sectors are Food Producers, Electricity, Gas Water & Multiutilities, Chemicals and Beverages. On average across these sectors, a 10% change in commodity costs equates to 6% of earnings. Companies are unlikely to be able to pass on all of these costs to end customers in the current economic climate. P5 Of the 26 sectors analysed, Food Producers are most exposed a 10% rise in commodity prices equates to 13% of EBITDA. With current and expected future volatility in wheat and other prices, this is clearly a major strategic issue for the sector. P5 For many sectors, water will become an increasingly important issue over the coming years. Our analysis shows that if water embedded in supply chains were priced to reflect the scarcity of supplies, water costs would present an even more significant risk to bottom lines than the other commodities analysed. If all water used by suppliers were priced at US$1.13 per cubic metre (see P2), water costs would account for a larger share of EBITDA than oil, coal, wheat and cotton combined in 21 sectors. P6/7 Exposure to commodity and water scarcity costs varies most for companies in the Food Producers, Food & Drug Retailers and General Industrials sectors. Whether through pricing or scarcity, pressure on water resources will increasingly affect the pricing of key commodities such as wheat and cotton, hitting Food Producers most. Companies that have more resource-intensive supply chains than sector peers could face above-average financial risk from increasingly volatile and rising raw material prices. Companies in sectors with the greatest variations in exposure to commodity costs stand to gain most from becoming more resource efficient than competitors. Those less dependent on resources to generate earnings will be more stable financially. P8 Companies can engage suppliers on resource use to help develop more effective, efficient and secure value chains and manage financial risk from volatile commodity costs. Firms can also diversify supply chains, increase local sourcing, develop closer relationships with suppliers, or vertically integrate upstream activities. Water scarcity costs can be used as a shadow price for water to evaluate future Capex and procurement proposals, taking account of water stress in certain areas. Firms that redesign business models, value chains, products and services to optimise resource use can develop more resilient supply chains and gain first mover advantage. P9
October 2011
Sarah Wainwright
www.trucost.com
www.greenmondays.com
Is this change structural or cyclical? Jeremy Grantham, widely followed by investors as a picker of bubble markets, is among commentators pointing to a paradigm shift.4 The co-founder of GMO, a US$150 billion investment fund, has argued that rising resource prices, fuelled by population growth, climate change and growing prosperity, is perhaps the most important economic event since the Industrial Revolution.
Companies that decouple supply chains from rising commodity prices will create better margins.
Paradigm shifts generate changes in business models. Companies that are able to decouple their supply chains from rising commodity prices will create better margins than slower-to-respond competitors. Companies which are engaging their supply chains, financing efficiencies and sharing technologies, such as Siemens and PepsiCo, will prosper. Supply chain management will take an increasingly active role in identifying and addressing resource price risks and opportunities. With this in mind, Green Monday has partnered with Trucost to create an Index that measures the exposure of different sectors to the key commodities of oil, coal, wheat, cotton and water. It has been a complex piece of work, requiring many levels of data going through supply chains, and we believe it tells a story that has been untold to date. We are grateful to Trucost for its work, and we hope the findings are valuable for management teams and investors alike.
SCOPE OF AnAlySIS This study seeks to identify FTSE 350 sectors most exposed to costs that may show volatility in supply chains. Data on FTSE 350 companies were analysed to identify the potential sensitivity of different sectors to rising commodity prices. The analysis of short- to medium-term risks is based on Trucosts calculations of use of cotton, wheat, oil and coal in supply chains. Data on commodity prices for 2010 from The World Bank were used to calculate exposure to rising costs (see P3). A 10% increase in the price of each commodity was applied to quantitative data on amounts of oil, coal, wheat and cotton estimated to be used in the supply chains of companies in each sector, based on Trucosts data. The forward-looking analysis factors in potential water costs as a future commodity risk. Trucost analysed the potential increase in commodity costs if the price of water embedded in supply chains was adjusted for water scarcity issues. The water scarcity price is based on Trucosts review of literature matching pricing with scarcity at various locations, excluding infrastructure or supply costs. The mean average global water scarcity price of US$1.13 per cubic metre (m3) was applied to estimated quantities of each companys global indirect water use. Actual company use of commodities and water is likely to vary from estimates depending on factors such as resource efficiency. Price fluctuations and the varied abilities of companies to control rising input costs and pass them on are not reflected in estimates. However, the analysis provides a starting point to develop an understanding of which sectors could be most sensitive to rising commodity prices. Companies analysed are categorised in sectors based on the Industry Classification Benchmark (ICB) system used by the FTSE Index. The study excludes companies in the Financials and Oil & Gas ICB industries, as well as those in the Basic Resources supersector. Although Financials may have significant commodity investment exposure, this is difficult to extrapolate from publicly available information, therefore any conclusions drawn with respect to their risk from direct and relatively low resource use would be potentially misleading. Companies in the Basic Resources and Oil & Gas sectors will generally be net beneficiaries of rising commodity prices even when these increase their material input costs. While Trucost is able to analyse these factors and can conduct resource net benefit analysis based on the pricing power of different sectors, doing so is outside of the scope of this analysis. This study focuses solely on the impact on companies costs. Excluding the three sectors, as well as eight companies that had negative earnings, the research covers 186 companies in the FTSE 350 (see Appendix 1). To find out more about Trucosts methodology, see Appendix 2.
Index Mundi Commodity Price Index, Dec 2002 Aug 2011, includes both Fuel and Non-Fuel Price Indices
Ernst & Young, Analysis of profit warnings issued by UK quoted companies, Q2 2011 Index Mundi Commodity Price Index, Feb 2010 Aug 2011, includes both Fuel and Non-Fuel Price Indices Grantham, J., Time to Wake Up; Days of Abundant Resources and Falling Prices are Over Forever, Quarterly Letter, April 2011
www.greenmondays.com
www.trucost.com
Unit
$/mt $/bbl $/mt /kg
1990
40 23 136 182
2000
26 28 114 130
2010
99 79 224 228
Cranswick Trading Statement, First Quarter Trading Update, 26 July 2011 Agricultural Outlook 2011-2020, Organisation for Economic Co-operation and DevelopmentFood and Agriculture Organization FactSet, 8 September 2011 Oil Market Report, IEA, 10 August 2011
IEA report looks at oil, gas market prospects through 2016, International Energy Agency news release, 16 June 2011 Mondi Group, Half-yearly report 2011
10
11
http://www.bloomberg.com/apps/ quote?ticker=JET1NECC:IND, last accessed 27 September 2011 http://econ.worldbank.org/WBSITE/ EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,c ontentMDK:21574907~menuPK:7859231~pag ePK:64165401~piPK:64165026~theSitePK:476 883,00.html, last accessed 27 September 2011 World Trade Report 2010, Trade in natural resources, World Trade Organization, 2010 Resource Limitations 2: Separating the Dangerous from the Merely Serious, GMO Quarterly Letter, July 2011 Global Water Intelligence, Water tariffs continue upward momentum, September 2010 http://www.oecd.org/document/31/0,3746, en_2649_37465_45799583_1_1_1_37465,00. html, last accessed 27 September 2011 Experts call for hike in global water price, guardian.co.uk, 27 April 2010
The World Trade Organisation has highlighted economic growth in emerging economies, limits to production capacity in the short run and the relative prices of resource substitutes as market forces contributing to price volatility. It says the imperfections in some natural resource markets raise questions about the efficiency of production.13 Prices based on short-term supply and demand create a market failure that allows problems to build up over decades and hurt market-based economies that are unprepared for collective resource depletion.14 Market failure is particularly reflected in water pricing, which does not accurately reflect water scarcity. Global water and wastewater tariffs rose by 8.5% on average between 2008 and 2010,15 but increases in water bills over the past decade have mainly covered the costs of environmentally-sound treatment and disposal of wastewater.16 Further rises in water charges are vital to encourage more efficient use and investment in water infrastructure. The World Bank and OECD have called for substantial increases in water prices so that households and industry pay the true cost of the water they consume to help manage water as a finite resource.17
12
13
14
15
16
17
www.trucost.com
www.greenmondays.com
A 10% rise in the prices of oil, coal, wheat and cotton used in supply chains could cause earnings to fall by up to 13% on average at a sector level.
www.greenmondays.com
www.trucost.com
18
Medium-term Oil & Gas Markets 2011, Overview, International Energy Agency FactSet, 8 September 2011
19
20
http://www.iea.org/weo/docs/weo2010/ factsheets.pdf, last accessed 27 September 2011 International Power, Annual Report 2010
21
22
easyJet Interim Management Statement, 22 July 2011 Adaro executives enjoy rise in coal demand, Financial Times, 5 July 2011 Drax Group Plc, Half Year Report 2011
23
24
25
Rising pig prices hit Cranswick, Financial Times, 26 July 2011 Financial Review 2011, J Sainsbury Plc
26
27
Next Plc, Trading Statement, First Half Sales, 3 August 2011 Pindyck R.S. Volatility and Commodity Price Dynamics, The Journal of Futures Markets, Vol. 24, No. 11, pp. 10291047, 2004 UNEP International Water Management , Institute, Ecosystems for water and food security, 2011 http://www.oecd.org/document/31/0,3746,en_ 2649_37465_45799583_1_1_1_37465,00.html
28
29
30
31
China to spend US$1bn to battle drought; Gov.cn (official Chinese government website), 10 February 2011 Low water prices must be revised, China Daily, 27 May 2011 China Cities Raise Water Price in Bid to Conserve, The Wall Street Journal, 31 July 2009 http://www.fao.org/docrep/008/y5690e/ y5690e02.htm, last accessed 27 September 2011 2030 Water Resources Group (2009) Charting our Water Future, Economic frameworks to inform decision-making Excluding wastewater tariffs, Global Water Intelligence
32
33
34
35
36
www.trucost.com
www.greenmondays.com
Pricing water at US$1.13/m3 could cause commodity costs to more than double.
www.greenmondays.com
www.trucost.com
Water scarcity costs can be used as a shadow price for water to evaluate future Capex and procurement proposals, taking account of local water stress.
Among those most exposed to water scarcity costs are General Industrials firms, which are already under growing pressure to absorb rising raw material costs rather than pass them on. For instance, the transport and logistics firm Stobart Group Plc has so far used fuel price escalators in customer contracts to manage exposure to higher energy costs, but is under pressure from cost inflation and customers already hit by fuel price rises.40 Higher water costs in value chains, or disruption to supplies of water-intensive products, could increase the costs of inputs such as chemicals and packaging.
Rexam Plc is among Industrials increasing selling prices as input prices rise. The consumer packaging group
37
UNEP International Water Management , Institute, Ecosystems for water and food security, 2011
38
http://www.unilever.com/images/ OutlookandrisksAR10tcm13259508.pdf, last accessed 27 September 2011 Dairy Crest Group Plc, Annual Report 2011
39
and beverage can maker is putting more customers onto contracts that are designed to pass through costs. Nonetheless, the company reports that Steep and prolonged rises in input prices may have a material impact on results. It warned that a substantial rise could cause a change in demand for products as customers adjust their packaging mix and the materials they use.41 Meanwhile, firms focused on recycling stand to gain from price rises. For instance, revenues at DS Smith Group Plc have been bolstered by growing demand for recycled packaging.42 Some companies are improving supply chain efficiency to help manage exposure to rising input costs. The pub chain JD Wetherspoon Plc has worked with Dhl International Gmbh to create logistics hubs43 and improve resource efficiency, resulting in landfill tax savings and new revenue streams from waste.44 Actual exposure to rising commodity prices varies between companies within sectors, depending on factors such as purchasing power, supply chain management, resource efficiency, product mixes and abilities to pass on costs to customers. Resource efficiency is likely to be a more significant driver of competitive advantage in the most exposed sectors.
40
Stobart Group Ltd, Preliminary results for the 12 months ended 28 February 2011, 23 May 2011 Rexham, Annual Report 2010
41
42
DS Smith Plc, Interim Management Statement, 6 September 2011 JD Wetherspoon slashes deliveries with DHL, logisticsmanager.com, 1 April 2010 DHL Envirosolutions support for JD Wetherspoon, guardian.co.uk, 14 June 2011
43
44
www.trucost.com
www.greenmondays.com
Chart 4:
Companies that are more exposed to price rises within supply chains than sector peers could find it more difficult to pass on rising costs.
Varied exposure to price rises within sectors would affect the ability of companies to pass on rising costs. Companies that have above-average exposure to rising commodity prices could find it more difficult to pass on higher input costs without losing market share to sector peers. Actual financial risk from commodity price rises depends on factors including differences in business activities. and the resource intensity of supply chains. Varied exposure to rising commodity costs within sectors indicates potential for companies to reduce risk and gain competitive advantage through measures such as engaging with suppliers to improve resource efficiency. Exposure to water scarcity costs also varies significantly among Food Producers and Food & Drug Retailers (see Chart 5). Companies in sectors with the greatest variation in exposure to risks stand to gain most from using resources more efficiently. Firms that are more resource-intensive than the average for their sector could benefit most from decoupling commodity risk from supply chains to maintain price stability.
Chart 5:
www.greenmondays.com
www.trucost.com
IEA report looks at oil, gas market prospects through 2016, International Energy Agency news release, 16 June 2011
46
http://www.iea.org/weo/, last accessed 27 September 2011 2011 Coal Trends and Q4 Outlook, Coal Investing News, 1 September 2011 Australian coal miners face more flood forecasts, Argus, 7 September 2011 FactSet, 9 September 2011 Agricultural Outlook 2011-2020, OECD
47
The peak in commodity prices in 2008 before the global financial crisis took its toll, and their rise in 2010/11, signal a long-term trend. Climate change impacts and increased demand driven by rising population levels, economic growth and urbanisation will continue to drive price volatility and inflation. The need to position businesses for growing resource constraints and competition is at the heart of strategies of FTSE 350 companies such as Marks and Spencer Group Plc. Although most in the FTSE 350 are yet to fully extract opportunities to develop more effective, efficient and secure operations and supply chains, globally some firms are starting to manage financial risk from the rising costs of resource constraints. Companies such as sportlifestyle firm PuMA and the telecommunications service provider Sprint nextel Corporation are using data on supply chain resource use to identify potential risks and engage with suppliers on improving efficiency. Others are diversifying supply chains, creating more localised supplier hubs, developing closer relationships to strengthen security of supplies, or turning to vertical integration.61 Innovation and flexibility are likely to increasingly differentiate firms that redesign business models, value chains, products and services to optimise resource use. Businesses that recognise emerging risks which are still under the radar of competitors can develop more resilient value chains and gain first mover advantage. nExT STEPS Companies can use Trucost data to systematically identify risks and opportunities to reduce exposure to rising resource and pollution costs, along each tier of supply chains. Companies can use Trucost data and analysis to: 1. 2. 3. 4. Identify suppliers most exposed to rising commodity prices and environmental costs. Map environmental risks across supply chains. Benchmark suppliers on environmental efficiency and identify opportunities for improvement. Identify potential to reduce exposure to rising input costs from resource use and pollution.
48
49
50
51
Texas fires and drought cost farms $5.2 bn, Financial Times, 7 September 2011 Grain prices rally on lower crop forecasts, Financial Times, 7 September 2011 Agricultural Outlook 2011-2020, OECD
52
53
54
Climate Change and Food Security in the Context of the Cancun Agreements FAO submissions to the UNFCCC http://www.fao.org/news/story/en/item/86991/ icode/, last accessed 27 September 2011 Resource Limitations 2: Separating the Dangerous from the Merely Serious, GMO Quarterly Letter, July 2011 Ecosystems for water and food security, UN Environment Programme/International Water Management Institute, August 2011 2030 Water Resources Group, Charting our Water Future, Economic frameworks to inform decision-making, 2009
55
56
57
58
59 The 3rd United Nations World Water Development Report: Water in a Changing World, 2009 60
OECD, Managing Water for All, An OECD Perspective on Pricing and Financing, Key messages for policy makers, 2009 Winners and Losers in the New Commodity Price Regime, Monitor Company Group Ltd Partnership, 2011
61
To find out more about Trucosts products and services, or our research processes and tools, please visit www.trucost.com or email sarah.wainwright@trucost.com
www.trucost.com
www.greenmondays.com
10
www.greenmondays.com
www.trucost.com
Green Monday is an independent platform that helps companies to build better businesses as sustainability increasingly impacts the global economy. We look at sustainability from the perspective of core business strategy join the Green Monday debate if you are interested in changing your business model to beat rising commodity prices or executing a green change management programme, or if you want to know what the leaders are doing. Events, Green Papers, Benchmark Surveys and GREENPRINT . www.greenmondays.com
ABOuT TRuCOST
Over the past 10 years, Trucost has researched, standardised and validated the worlds most comprehensive data on corporate environmental impacts, including carbon emissions, water usage, waste disposal, pollutants and natural resource use. This provides Trucosts clients with: The most efficient approach to measuring carbon and wider environmental impacts across operations and supply chain tiers; Clear identification of focus areas for reducing material environmental risks; Validation of source data, including completion of gaps in data which are currently not being tracked or reported; Comparison of environmental performance against peers and sector benchmarks.
www.trucost.com
The information used to compile this report has been collected from a number of sources in the public domain and from Trucosts licensors. Some of its content may be proprietary and belong to Trucost or its licensors. The report may not be used for purposes other than those for which it has been compiled and made available to you by Trucost. Whilst every care has been taken by Trucost in compiling this report, Trucost accepts no liability whatsoever for any loss (including without limitation direct or indirect loss and any loss of profit, data, or economic loss) occasioned to any person nor for any damage, cost, claim or expense arising from any reliance on this report or any of its content (save only to the extent that the same may not be in law excluded). The information in this report does not constitute or form part of any offer, invitation to sell, offer to subscribe for or to purchase any shares or other securities and must not be relied upon in connection with any contract relating to any such matter. Trucost is the trading name of Trucost Plc a public limited company registered in England company number 3929223 whose registered office is at One London Wall, London EC2Y 5AB, UK. Trucost/Green Monday 2011
www.trucost.com
www.greenmondays.com
11
COnTACT TRuCOST
Sarah Wainwright
Trucost Plc
uK & InTERnATIOnAl
Green Monday
DIRECT
+44 (0)20 3137 1728 georgie.verenicoll@greenmondays.com 3rd Floor 22 Chancery Lane London WC2A 1LS
www.trucost.com
www.greenmondays.com
12