Commodity Exposure Index
05 October 2011
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- 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.On average, a 10% change inthe price of each of these commodities equates to a 2% change in (EBITDA).
- The top five most exposed sectors are Food Producers, Electricity, Gas, Water & Multiutilities, Chemicals and Beverages.
- Of the 26 sectors analysed, Food Producers are most exposed – a 10% rise in commodity prices equates to 13% of EBITDA.
- Exposure to commodity and water scarcity costs varies most for companies in the Food Producers, Food & Drug Retailers and General Industrials sectors.
- 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.
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.
Why did Green Monday commission the analysis?
Evidence is growing of a fundamental shift in the trajectory of commodity prices, with profound implications for how companies work with supply chains. Since 2002, commodity prices have risen by 202% and 29% of profit warnings issued by UK-listed companies in 2011 have been due to rising commodity prices.
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”. 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, will prosper. Supply chain management will take an increasingly active role in identifying and addressing resource price risks and opportunities.
Green Monday 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, with valuable findings for management teams and investors alike.
Jim Woods, Green Monday