commodity exposure index

8/3/2019 Commodity Exposure Index

http://slidepdf.com/reader/full/commodity-exposure-index 1/12

Trcost becmarked 186 FTSE 350 compaies o prot risk from te•

costs of oi, coa, weat ad cotto embedded i spp cais, ad raked

tem b sector to create a Commodit Eposre Ide. Findings show a wide

variation in the level o exposure between sectors, but on average, a 10% change in the

price o each o these commodities equates to a 2% change in earnings beore interest,

taxation, depreciation and amortisation (EBITDA). P4

Te top e most eposed sectors are Food Prodcers, Eectricit, Gas•

Water & Mtitiities, Cemicas ad Beerages. On average across these

sectors, a 10% change in commodity costs equates to 6% o earnings. Companies are

unlikely to be able to pass on all o these costs to end customers in the current economicclimate. P5

Of te 26 sectors aased, Food Prodcers are most eposed – a 10% rise•

i commodit prices eates to 13% of EBITDA. With current and expected uture

volatility in wheat and other prices, this is clearly a major strategic issue or the sector. P5

For ma sectors, water wi become a icreasig importat isse oer •

te comig ears. Our analysis shows that i water embedded in supply chains were

priced to reect the scarcity o supplies, water costs would present an even more signifcant

risk to bottom lines than the other commodities analysed. I all water used by suppliers were

priced at US$1.13 per cubic metre (see P2), water costs would account or a larger share o

EBITDA than oil, coal, wheat and cotton combined in 21 sectors. P6/7

Eposre to commodit ad water scarcit costs aries most for •compaies i te Food Prodcers, Food & Drg Retaiers ad Geera

Idstrias sectors. Whether through pricing or scarcity, pressure on water resources

will increasingly aect the pricing o key commodities such as wheat and cotton, hitting

Food Producers most. Companies that have more resource-intensive supply chains than

sector peers could ace above-average fnancial risk rom increasingly volatile and rising raw

material prices. Companies in sectors with the greatest variations in exposure to commodity

costs stand to gain most rom becoming more resource efcient than competitors. Those

less dependent on resources to generate earnings will be more stable fnancially. P8

Compaies ca egage sppiers o resorce se to ep deeop more•

effectie, efciet ad secre ae cais ad maage acia risk

from oatie commodit costs. Firms can also diversiy supply chains, increase

local sourcing, develop closer relationships with suppliers, or vertically integrate upstreamactivities. Water scarcity costs can be used as a shadow price or water to evaluate uture

Capex and procurement proposals, taking account o 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 frst mover advantage. P9

www.trucost.com www.greenmondays.com 1

October 2011

ExECuTIvE SuMMARy

Ma FTSE 350 compaies ae see teir margis it b sarp rises i raw

materia costs, promptig a mber of prot warigs drig 2011. A recet

std b Erst & yog reported tat risig raw materia prices were beid

29% of prot warigs issed b uK-isted compaies i 2011. Meawie,

te Word Bak ad OECD ae caed for a sarp rise i water prices to ep

maage water as a ite resorce. Trcost as bee aasig resorce

efciec across te ae cais of major compaies for oer 10 ears. I

partersip wit Gree Moda, Trcost ooked at wic sectors wod be

most disrpted b frter icreases i oi, coa, weat ad cotto prices, as

we as b water pricig tat reects resorce scarcit.

FTSE 350 COMMODITy

ExPOSuRE InDEx

RESEARCh AnD AnAlySIS

liese a Ast, Stee

Bock, Aastair MacGregor

COnTACT TRuCOST

Sara Waiwrigt

Trucost Plc

+44 (0)20 7160 9800

[email protected]

COnTACT GREEn MOnDAy

Georgie vere nico

Green Monday

+44 (0)20 3137 1728

georgie.verenicoll

@greenmondays.com

http://www.greenmondays.com/

mailto:[email protected]






http://slidepdf.com/reader/full/commodity-exposure-index 2/122 www.greenmondays.com www.trucost.com

FTSE 350 Commodity Exposure Index

1 Index Mundi Commodity Price Index, Dec2002 – Aug 2011, includes both Fuel andNon-Fuel Price Indices

2 Ernst & Young, Analysis o proft warnings

ssued by UK quoted companies, Q2 2011

3 Index Mundi Commodity Price Index, Feb2010 – Aug 2011, includes both Fuel andNon-Fuel Price Indices

4 Grantham, J., Time to Wake Up; Days o Abundant Resources and Falling Prices areOver Forever, Quar terly Letter, April 2011

“Companies thatdecouple supplychains rom rising

commodity priceswill create better margins.”

FORWARD By GREEn MOnDAy

Evidence is growing o a undamental shit in the trajectory o commodity prices, with proound

implications or how companies work with supply chains. While commodity prices have uctuated during

the past two months, the broader trend o rising prices remains startling. Since 2002, commodity prices

have risen by 202%,1 and other recent indicators show:

29% o profts warnings issued by UK-listed companies in 2011 have been due to rising commodity•

prices.2

UK ood price ination was 6% in August 2011, despite the sluggish economy.•

Global commodity prices have risen by 33% in the past 18 months.•3

Is this change structural or cyclical? Jeremy Grantham, widely ollowed by investors as a picker o bubble

markets, is among commentators pointing to “a paradigm shit”.4 The co-ounder o GMO, a US$150 billion

investment und, has argued that rising resource prices, uelled by population growth, climate change and

growing prosperity, is “perhaps the most important economic event since the Industrial Revolution.”

Paradigm shits generate changes in business models. Companies that are able to decouple their supply

chains rom rising commodity prices will create better margins than slower-to-respond competitors.

Companies which are engaging their supply chains, fnancing efciencies and sharing technologies, such

as Siemens and PepsiCo, will prosper. Supply chain management will take an increasingly active role in

identiying and addressing resource price risks and opportunities.

With this in mind, Green Monday has partnered with Trucost to create an Index that measures theexposure o dierent sectors to the key commodities o oil, coal, wheat, cotton and water. It has been a

complex piece o work, requiring many levels o data going through supply chains, and we believe it tells

a story that has been untold to date. We are grateul to Trucost or its work, and we hope the fndings are

valuable or management teams and investors alike.

Jim Woods

Director o Content, Green Monday

SCOPE OF AnAlySIS

This study seeks to identiy FTSE 350 sectors most exposed to costs that may show volatility in supply chains.

Data on FTSE 350 companies were analysed to identiy the potential sensitivity o dierent sectors to rising

commodity prices. The analysis o short- to medium-term risks is based on Trucost’s calculations o use o

cotton, wheat, oil and coal in supply chains. Data on commodity prices or 2010 rom The World Bank were

used to calculate exposure to rising costs (see P3). A 10% increase in the price o each commodity was

applied to quantitative data on amounts o oil, coal, wheat and cotton estimated to be used in the supply chains

o companies in each sector, based on Trucost’s data.

The orward-looking analysis actors in potential water costs as a uture commodity risk. Trucost analysed the

potential increase in commodity costs i the price o water embedded in supply chains was adjusted or water

scarcity issues. The water scarcity price is based on Trucost’s review o literature matching pricing with scarcity

at various locations, excluding inrastructure or supply costs. The mean average global water scarcity price o US$1.13 per cubic metre (m3) was applied to estimated quantities o each company’s global indirect water use.

Actual company use o commodities and water is likely to vary rom estimates depending on actors such as

resource efciency. Price uctuations and the varied abilities o companies to control rising input costs and

pass them on are not reected in estimates. However, the analysis provides a star ting point to develop an

understanding o which sectors could be most sensitive to rising commodity prices.

Companies analysed are categorised in sectors based on the Industry Classifcation 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 signifcant commodity investment

exposure, this is difcult to extrapolate rom publicly available inormation, thereore any conclusions drawn with

respect to their risk rom direct and relatively low resource use would be potentially misleading. Companies in

the Basic Resources and Oil & Gas sectors will generally be net benefciaries o rising commodity prices even

when these increase their material input costs. While Trucost is able to analyse these actors and can conduct

resource net beneft analysis based on the pricing power o dierent sectors, doing so is outside o the scope

o this analysis. This study ocuses 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 fnd out more about Trucost’s methodology, see Appendix 2.





ThE PERFECT STORM? RISInG COMMODITy PRICES COInCIDE WITh WEAKER DEMAnD

Many listed companies in sectors ranging rom Food & Beverage to Travel & Leisure are being caught

between higher input costs and cash-strapped customers. Wheat prices have jumped 70% since June

2010 due to droughts in several countries, and cotton prices surged ater storms in the U.S. and oods in

Asia reduced yields. Growing price volatility and above-ination cost increases are putting pressure on

operating margins or many companies in the FTSE 350 Index.

Companies in industries where demand is weak, such as the retailer Carpetrigt Pc, are struggling to

pass on higher input costs as they turn to competitive pricing to maintain sales. Even frms enjoying strong

demand and good pricing power have struggled to stay proftable since the speed o the surge in input

costs means there is a lag beore they pass these on to their customers. Craswick Pc was among ood

producers that saw “signifcant raw material price ination” lower operating margin during the frst hal o

2011, despite higher revenue.5 When Cranswick released a trading statement in July to cut proft orecasts,

its share price tumbled by more than 10%. And more inationary pressure is in store – the Organisation or

Economic Co-operation and Development (OECD) orecasts that prices could rise by 20% or cereals and

30% or meats between 2011 and 2020, compared to the last decade. 6

Food price ination is contributing to economic uncertainties and ood insecurity, which has catalysed

political instability in the Middle East and North Arica. This has added to pressure on uel supplies driven

by greater demand rom emerging markets, which caused oil prices to almost double since the start o

2009.7 Although the West Texas Intermediate crude oil price ell rom a high o US$113 a barrel in April

to US$88/bbl in September,8 prices remain higher than during the two-year period to November 2010

and threaten to weaken global economic growth.9

Industrial frms able to raise prices are also being hit; sharp sales price rises at paper and packaging

frm Modi Grop Pc were not enough to oset rising input costs and return the company’s Aylesbury

newsprint business to proftability in the frst six months o 2011.10 Firms that have been able to pass on

higher input costs to customers until now are uncertain o their ability to keep doing so, as alling consumer

confdence aects spending. Although easJet Pc largely managed to pass on a rise in jet uel prices

above US$150 per tonne,11 it has warned o uture customer sensitivity to escalating energy costs.

World Bank data show that even beore the price hikes seen this year, oil, coal, wheat and cotton prices

rose by between 25% and 244% between 1990 and 2010. Table 1 below shows the rise in prices o the

commodities over the 20-year period.

Table 1: Commodit prices (uS Doars)

Commodity Unit 1990 2000 2010

Coal, Australian $/mt 40 26 99

Crude oil, avg, spot $/bbl 23 28 79

Wheat, US, HRW $/mt 136 114 224

Cotton A Index ¢/kg 182 130 228

Source: World Bank, Economic Policy and Prospects Group12

The World Trade Organisation has highlighted economic growth in emerging economies, limits to

production capacity in the short run and the relative prices o resource substitutes as market orces

contributing to price volatility. It says the imperections in some natural resource markets raise questions

about the efciency o production.13 Prices based on short-term supply and demand create a market

ailure that allows problems to build up over decades and hurt market-based economies that are

unprepared or collective resource depletion.14

Market ailure is particularly reected in water pricing, which does not accurately reect water scarcity.

Global water and wastewater taris 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 o environmentally-sound treatment and

disposal o wastewater.16 Further rises in water charges are vital to encourage more efcient use and

investment in water inrastructure. The World Bank and OECD have called or “substantial” increases in

water prices so that households and industry pay the true cost o the water they consume to help manage

water as a fnite resource.17



5 Cranswick Trading Statement, First Quarter Trading Update, 26 July 2011

6 Agricultural Outlook 2011-2020, Organisationor Economic Co-operation and Development-Food and Agriculture Organization

7 FactSet, 8 September 2011

8 Oil Market Report, IEA, 10 August 2011

9 IEA report looks at oil, gas market prospectsthrough 2016, International Energy Agencynews release, 16 June 2011

10 Mondi Group, Hal-yearly report 2011

11 http://www.bloomberg.com/apps/quote?ticker=JET1NECC:IND, last accessed 27September 2011

12 http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21574907~menuPK:7859231~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html, last accessed 27 September 2011

13 World Trade Report 2010, Trade in naturalresources, World Trade Organization, 2010

14 Resource Limitations 2: Separating theDangerous rom the Merely Serious, GMOQuarterly Letter, July 2011

15 Global Water Intelligence, Water tariscontinue upward momentum, September 2010

16 http://www.oecd.org/document/31/0,3746,en_2649_37465_45799583_1_1_1_37465,00.html, last accessed 27 September 2011

17 Experts call or hike in global water price,guardian.co.uk, 27 April 2010


http://www.bloomberg.com/apps/quote?ticker=JET1NECC:IND



http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21574907~menuPK:7859231~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html






http://www.oecd.org/document/31/0,3746,en_2649_37465_45799583_1_1_1_37465,00.html

















COMMODITy ExPOSuRE InDEx

Trucost benchmarked 186 FTSE 350 companies in 26 ICB sectors on average proft risk rom the costs

o oil, coal, wheat and cotton. Market prices were applied to modelled quantities o each resource used

in supply chains. Data on companies in each sector were used to calculate the potential eect o a

10% increase in commodity costs on earnings beore interest, taxation, depreciation and amortisation

(EBITDA), excluding eight companies with negative EBITDA. On average, a 10% increase in the prices

o oil, coal, wheat and cotton used in supply chains could cause EBITDA to all by 2% across the Index.

Exposure to inationary pressures varies or each commodity and sector (see Chart 1). Some costs could

be passed on to other sectors and consumers. However, more volatile and rising prices will increasinglyaect proftability or some companies as they compete with sector peers that have less resource-intensive

supply chains and are better able to control input costs.

4 www.greenmondays.com www.trucost.com


“A 10% rise in theprices o oil, coal,wheat and cotton

used in supplychains couldcause earnings toall by up to 13%on average at asector level.”

Chart 1: Sector rakig o aerage cage i earigs wit a 10% icrease i

commodit prices




http://slidepdf.com/reader/full/commodity-exposure-index 5/12www.trucost.com www.greenmondays.com 5

Food Producers with a limited ability to pass through rising input costs could see profts all by 13% on

average. Companies in the Electricity, Gas, Water & Multiutilities, Chemicals and Beverages sectors are

also relatively sensitive to rising commodity prices. A 10% change in commodity costs equates to 6% o

earnings on average across the top fve sectors.

Profts could be most exposed to oil price rises in the Gas, Water & Multiutilities, Chemicals and

General Industrial sectors. Oil price inelasticity o demand, growing demand in non-OECD countries

and persistent supply-side risks are likely to sustain high oil prices in the medium term. 18 Oil utures are

trading at more than US$92/bbl or settlement rom late 2012 onwards.19 Oil prices could rise urther i at

least a share o ossil-uel subsidies totalling more than US$300 billion globally in 2009 are dropped, aspledged by G20 countries.20 In the Utilities sector, absolute exposure to oil prices through supply chains

is likely to be higher or natural gas distribution companies than electricity distributors, power generators

or water and waste utilities analysed. However, Iteratioa Power Pc plans to expand its capacity

to generate electricity rom oil rom 2% to 4%.21

Earnings are also at risk rom rising oil prices in the Travel & Leisure sector. A US$50/tonne rise in the

price o jet uel could shave £7 million o easJet’s pre-tax proft.22 It is one o several companies

increasingly hedging cost positions to manage input ination and l imit uncertainty. However, greater price

volatility could make hedging risky i buyers are locked into higher prices.

Higher coal prices have also bumped up energy costs. Coal prices have risen rom US$25 per tonne

in the 1990s to more than US$120/tonne.23 Severe weather in countries including Australia damaged

inrastructure and cut supplies earlier this year, causing prices to reach a two-year high. Suppliers

might absorb some o the rising costs o raw materials, but a share will ow through in higher prices.

Rising coal prices have increased costs or electricity producers such as Dra Grop Pc,24 and rising

coal costs passed on by suppliers could also cause earnings to all in the General Industrials and

Automobiles & Parts sectors.

As expected, higher wheat prices would be most signifcant or Food Producers, Beverages companies

and Food & Drug Retailers. Rising wheat prices pushed pig prices up 15%,25 adding pressure on

companies such as Craswick. Craswick supplies pork to the retailer J Saisbr Pc, which

improved efciency to o set cost ination in 2010. However, Sainsbury’s expects that cost savings will

not be enough to ully oset expected ination in 2011/12.26

Exposure to rising cotton prices is greatest in the Personal Goods sector. Higher cotton costs passed on

by Personal Goods companies could add pressure on the margins o General Retailers. Steeper cotton

prices caused a drop in retail sales at net Pc, which warned o a worsening outlook or clothingprices this autumn/winter due to record cotton prices. Price hikes o some 6% were not enough to ully

recover an 8% increase in Next’s input costs, and the retailer expects the cost price ination rate o 8%

to continue in the second hal o 2011.27

Increased raw material prices can raise the value o inventories. Companies can enter long-term

contracts or increase inventories to fx raw material costs. However, this eeds ur ther price volatility as

it increases demand in the short term.28 The trend towards replacing long-term supply contracts with

trading on organised exchanges could reverse to improve transparency and accountability.

WATER: ThE hIDDEn COMMODITy COST

The rising prices o commodities traded on exchanges and their visible impact on proft warnings has

put a spotlight on resource use in the supply chains o many FTSE 350 companies. However, ew haveturned their attention to water as a commodity risk. Water taris can be complex and the costs o using

water inefciently are hidden and embedded in supply chains.

Agriculture accounts or more than 70% o global water withdrawals, and agricultural demand is set

to grow as ood production is expanded by some 70% to eed an expected nine billion people by

2050.29 Water is oten withdrawn most unsustainably rom signifcant ood-producing areas such as the

southwestern United States, the Murray Darling basin in Australia and the Punjab region o India. 30 In

China, persistent drought aecting huge areas o grain-producing regions in the north is putting upward

pressure on wheat prices.31 However, water taris do not reect the scarcity o resources in countries

including China,32 where water is priced at some US$0.31 per cubic metre (m3).33 Globally, irrigation

charges or taris or municipal supplies range rom less than 0.1 cents/m3 or agricultural users in

Romania and Canada to US$1.30/m3 in Holland.34

Competition between agricultural, industry, energy and household users is increasing, and industrial useis expected to grow rom 16% to 22% o global demand by 2030. 35 Urban water taris vary signifcantly

across countries, with average global water prices across 265 cities amounting to US$2.42/m3 in 2009.36

The need to stabilise prices or domestic and agricultural users may add pressure on industry to carry a

greater share o cost recovery or inrastructure and efciency measures to help close the gap between

supply and demand.


18 Medium-term Oil & Gas Markets 2011,Overview, International Energy Agency


20 http://www.iea.org/weo/docs/weo2010/

actsheets.pd , last accessed 27 September 2011

21 International Power, Annual Report 2010

22 easyJet Interim Management Statement, 22July 2011

23 Adaro executives enjoy rise in coal demand,Financial Times, 5 July 2011

24 Drax Group Plc, Hal Year Report 2011

25 Rising pig prices hit Cranswick, FinancialTimes, 26 July 2011

26 Financial Review 2011, J Sainsbury Plc

27 Next Plc, Trading Statement, First Hal Sales,3 August 2011

28 Pindyck R.S. Volatility and Commodity Price

Dynamics, The Journal o Futures Markets, Vol.24, No. 11, pp. 1029–1047, 2004

29 UNEP, International Water Managementnstitute, Ecosystems or water and ood

security, 2011

30 http://www.oecd.org/document/31/0,3746,en_2649_37465_45799583_1_1_1_37465,00.html

31 China to spend US$1bn to battle drought;Gov.cn (ofcial Chinese government website),10 February 2011

32 Low water prices must be revised, ChinaDaily, 27 May 2011

33 China Cities Raise Water Price in Bid toConserve, The Wall Street Journal, 31 July2009

34 http://www.ao.org/docrep/008/y5690e/

y5690e02.htm, last accessed 27 September 2011

35 2030 Water Resources Group (2009)Charting our Water Future, Economicrameworks to inorm decision-making

36 Excluding wastewater taris, Global Water ntelligence


http://www.iea.org/weo/docs/weo2010/factsheets.pdf

















Trucost calculated the potential increase in commodity costs or FTSE 350 companies i water used in

supply chains were priced to reect scarcity, using the adjusted global average water scarcity price o

US$1.13 per cubic metre (m3). Estimated exposure to water costs only takes account o quantities o

water used in supply chains. Water costs are measured relative to estimated commodity costs or each

company, including the 10% price rise.

Pricing water used in the supply chains o the FTSE 350 companies at US$1.13/m 3 could raise

commodity costs by a urther 140% on average. Although actual water prices would vary geographically

and Government subsidies are likely to help contain tari hikes, the analysis shows that some sectors

could be signifcantly exposed to any increase in water costs. Input costs would increase most relative

to commodity costs or the Tobacco, Food Producers, Food & Drug Retailers, Personal Goods and

General Retailers sectors, as shown in Chart 2. Water scarcity costs could have a bigger impact on

earnings than the combined costs o oil, coal, wheat and cotton in 21 sectors.

Chart 2: Sector rakig o aerage cage i earigs if commodit prices rise b

10% ad icde water scarcit pricig*

6 www.greenmondays.com www.trucost.com


“Pricing water atUS$1.13/m3 couldcause commodity

costs to morethan double.”





Given the fnancial exposure o Food Producers to a rise in commodity costs, more sustainable and

efcient water pricing could cause earnings in the sector to all signifcantly. In the short term, water

scarcity costs are more likely to be incurred through alls in ood production in areas with greater pressure

on water resources than through water pricing that reects the availability o supplies, with knock-on

eects on ood prices. For instance, water scarcity contributed to sudden and largely unanticipated ood

price increases in 2006/07.37

Water is among environmental measures that uieer Pc, in the Food Producing sector, regards as

most signifcant, alongside carbon dioxide rom energy use and waste generation. Two-thirds o the raw

materials Unilever buys come rom agriculture, and changing weather patterns and water scarcity areamong threats to the long-term viability o agricultural production highlighted in its Annual Report and

Accounts 2010.38 Unilever also recognises the risk that ailure to design resource-efcient products with

lower environmental ootprints could damage its reputation and thereore long-term cash ow, revenue

and proftability. Food Producers such as Dair Crest Pc are also exposed to higher uel costs, which

increase ertiliser, packaging and distribution costs. The dairy oods company expects commodity input

costs to keep rising, with vegetable oil, uel and packaging orecast to be around £25 million higher in

2011/12 than in 2010/11.39

Tobacco and Beverages companies could fnd it increasingly difcult to compete with ood producers

or access to limited water supplies. Firms with suppliers operating in areas o water stress and growing

competition or resources could ace the greatest price rises. Trucost can apply regional water scarcity

prices to water used in company-specifc supply chains to take account o pressures on resources at

locations where suppliers operate. Water can be mapped by sector within supply chains to identiy whichsuppliers could beneft most rom improving water efciency (see Chart 3). Inormation on water-intensive

sectors can be used to engage with relevant suppliers to understand the relationship between volumes o

water used and the security o supplies. Water scarcity costs can be used as a shadow price or water to

evaluate uture Capex and procurement proposals, taking account o water stress in specifc areas.

Chart 3: Spp cai water se b sector

Among those most exposed to water scarcity costs are General Industrials frms, which are already under

growing pressure to absorb rising raw material costs rather than pass them on. For instance, the transport

and logistics frm Stobart Grop Pc has so ar used uel price escalators in customer contracts to manage

exposure to higher energy costs, but is under pressure rom cost ination and customers already hit by uelprice rises.40 Higher water costs in value chains, or disruption to supplies o water-intensive products, could

increase the costs o inputs such as chemicals and packaging.

Ream Pc is among Industrials increasing selling prices as input prices rise. The consumer packaging group

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 or products “as customers

adjust their packaging mix and the materials they use.”41 Meanwhile, frms ocused on recycling stand to gain

rom price rises. For instance, revenues at DS Smit Grop Pc have been bolstered by growing demand or

recycled packaging.42

Some companies are improving supply chain efciency to help manage exposure to rising input costs. The

pub chain JD Weterspoo Pc has worked with Dhl Iteratioa Gmbh to create logistics hubs43

and improve resource efciency, resulting in landfll tax savings and new revenue streams rom waste.44 Actualexposure to rising commodity prices varies between companies within sectors, depending on actors

such as purchasing power, supply chain management, resource efciency, product mixes and abilities

to pass on costs to customers. Resource efciency is likely to be a more signifcant driver o competitive

advantage in the most exposed sectors.



37 UNEP, International Water Managementnstitute, Ecosystems or water and ood

security, 2011

38 http://www.unilever.com/images/OutlookandrisksAR10tcm13259508.pd , lastaccessed 27 September 2011

39 Dairy Crest Group Plc, Annual Report 2011

40 Stobart Group Ltd, Preliminary results or the 12 months ended 28 February 2011, 23May 2011

41

Rexham, Annual Report 201042 DS Smith Plc, Interim ManagementStatement, 6 September 2011

43 JD Wetherspoon slashes deliveries with DHL,ogisticsmanager.com, 1 April 2010

44 DHL Envirosolution’s support or JDWetherspoon, guardian.co.uk, 14 June 2011

“Water scarcitycosts can beused as ashadow price or water to evaluateuture Capexand procurementproposals, takingaccount o localwater stress.”


http://www.unilever.com/images/OutlookandrisksAR10tcm13259508.pdf







PROFIT RISK FROM COMMODITy COSTS vARIES By COMPAny AnD SECTOR

Trucost assessed earnings at risk rom a 10% increase in commodity prices within sectors. Although input costs

were already deducted rom earnings, fndings show that some companies analysed are more sensitive than

sector peers to steeper raw material prices passed on by suppliers. Exposure to rising costs o oil, coal, wheat

and cotton in supply chains varies most among Food Producers, as shown in Chart 4.

Chart 4:Rage i EBITDA at risk from 10% rise i commodit costs

Varied exposure to price rises within sectors would aect the ability o companies to pass on rising costs.

Companies that have above-average exposure to rising commodity prices could fnd it more difcult to pass on

higher input costs without losing market share to sector peers.

Actual fnancial risk rom commodity price rises depends on actors including dierences in business activities.

and the resource intensity o supply chains. Varied exposure to rising commodity costs within sectors indicates

potential or companies to reduce risk and gain competitive advantage through measures such as engaging

with suppliers to improve resource efciency.

Exposure to water scarcity costs also varies signifcantly 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 rom

using resources more efciently. Firms that are more resource-intensive than the average or their sector could

beneft most rom decoupling commodity risk rom supply chains to maintain price stability.

Chart 5:Rage i eposre to water scarcit costs


“Companiesthat are moreexposed to

price rises withinsupply chainsthan sector peerscould fnd it moredifcult to passon rising costs.”





RESOuRCE COnSTRAInTS hERE TO STAy

Economic jitters and expectations o weakened demand, along with increased supply, have temporarily

dampened prices o commodities such as energy. I the global economy alters, lower oil demand and

higher spare capacity could keep a lid on oil prices in the short term, but uture prices will largely depend

on investment to bring new supplies to market in line with demand growth. 45 Extraction rom unconventional

sources such as oil sands, as well as carbon constraints such as emissions trading and taxes, will add to

ossil uel prices in the uture. The International Energy Agency (IEA) orecast that global energy demand

could rise by 36% rom 2008 levels by 2035,46 and oil and coal are expected to remain the main uels in

the energy mix. Although coal prices have begun to soten, the coal market remains strong47 and suppliescould be tight i coal miners in Australia are hit by more oods orecast or December/January.48

Supply constraints or commodities such as cotton, wheat and coal have begun to recover rom severe

weather during the past year in several regions. Cotton prices have allen rom their peak in March, but at

more than US$1 per pound in September, are still more than double 2008 levels. 49 The Agricultural Outlook

to 2020 by the OECD and Food and Agriculture Organization (FAO) predicted alls in commodity prices in

the short term, depending on weather.50 However, cotton and wheat prices rose again in September ater

the U.S. Government lowered production orecasts because drought severely damaged crops.51,52

Market balances can change rapidly, and the OECD and FAO expect more extreme weather conditions53

and related crop yield uctuations to become an even more critical driver o price volatility in the uture.

More climate variability and change will challenge agriculture, fsheries and orestry to deliver the increase

in global ood production needed to eed the growing world population.54 Global agricultural productivity

growth is slowing and could be limited by resource pressures, particularly or water and land. More regions

are acing water scarcity and the risk o a reduction in productive land. 55 Water and ecosystems, as well as

increasingly scarce resources such as potash and phosphates,56 need to be managed more sustainably.57

Companies will also ace higher water prices as utilities pass on rising costs or energy, inrastructure,

achieving water quality standards and licencing conditions, and treating wastewater and sewerage. Global

water requirements are expected to reach 40% above current accessible and reliable supplies by 2030,58

and climate change impacts such as more requent and severe weather events are expected to add

pressure on resources.59 Droughts and oods, rainall variability and the depletion o groundwater supplies

are already challenging the eective management o water resources in many countries.60

The peak in commodity prices in 2008 beore the global fnancial 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 ination. Theneed to position businesses or growing resource constraints and competition is at the heart o strategies

o FTSE 350 companies such as Marks ad Specer Grop Pc.

Although most in the FTSE 350 are yet to ully extract opportunities to develop more eective, efcient

and secure operations and supply chains, globally some frms are starting to manage fnancial risk

rom the rising costs o resource constraints. Companies such as sportliestyle frm PuMA and the

telecommunications service provider Sprit nete Corporatio are using data on supply chain

resource use to identiy potential risks and engage with suppliers on improving efciency. Others are

diversiying supply chains, creating more localised supplier hubs, developing closer relationships to

strengthen security o supplies, or turning to vertical integration.61 Innovation and exibility are likely

to increasingly dierentiate frms that redesign business models, value chains, products and services

to optimise resource use. Businesses that recognise emerging risks which are still under the radar o

competitors can develop more resilient value chains and gain frst mover advantage.


45 IEA report looks at oil, gas market prospectsthrough 2016, International Energy Agency

news release, 16 June 201146 http://www.iea.org/weo/, last accessed 27September 2011

47 2011 Coal Trends and Q4 Outlook, Coalnvesting News, 1 September 2011

48 Australian coal miners ace more oodorecasts, Argus, 7 September 2011


50 Agricultural Outlook 2011-2020, OECD

51 Texas fres and drought cost arms $5.2 bn,Financial Times, 7 September 2011

52 Grain prices rally on lower crop orecasts,Financial Times, 7 September 2011

53 Agricultural Outlook 2011-2020, OECD

54 Climate Change and Food Security in theContext o the Cancun Agreements – FAOsubmissions to the UNFCCC

55 http://www.ao.org/news/story/en/item/86991/code/, last accessed 27 September 2011

56 Resource Limitations 2: Separating theDangerous rom the Merely Serious, GMOQuarterly Letter, July 2011

57 Ecosystems or water and ood security, UNEnvironment Programme/International Water Management Institute, August 2011

58 2030 Water Resources Group, Charting our Water Future, Economic rameworks to inormdecision-making, 2009

59 The 3rd United Nations World Water Development Report: Water in a Changing

World, 200960 OECD, Managing Water or All, An OECDPerspective on Pricing and Financing, Keymessages or policy makers, 2009

61 Winners and Losers in the New CommodityPrice Regime, Monitor Company Group LtdPartnership, 2011

nExT STEPS

Companies can use Trucost data to systematically identiy risks and opportunities to reduce

exposure to rising resource and pollution costs, along each tier o supply chains.

Compaies ca se Trcost data ad aasis to:

Identiy suppliers most exposed to rising commodity prices and environmental costs.1.

Map environmental risks across supply chains.2.

Benchmark suppliers on environmental efciency and identiy opportunities or improvement.3.

Identiy potential to reduce exposure to rising input costs rom resource use and pollution.4.

To fnd out more about Trucost’s products and services, or our research processes and tools,

please visit www.trucost.com or email [email protected]


http://www.iea.org/weo/

http://www.fao.org/news/story/en/item/86991/icode/


http://www.trucost.com/






http://www.iea.org/weo/




APPEnDICES

Appedi 1: Compaies aased for te report

A.G. Barr Plc DS Smith Plc Logica Plc Spirent Communications Plc

Aegis Group Plc Dunelm Group Plc Marks and Spencer Group Plc Sports Direct International Plc

Aggreko Plc easyJet Plc Marston's Plc Stagecoach Group Plc

ARM Holdings Plc Electrocomponents Plc Meggitt Plc SThree Plc

Ashtead Group Plc Enterprise Inns Plc Melrose Plc Stobart Group Ltd.

Associated British Foods Plc Euromoney Institutional Investor Plc Michael Page International Plc Supergroup Plc

AstraZeneca Plc Experian Plc Micro Focus International Plc Synergy Health Plc

Autonomy Corp. Plc Fenner Plc Millennium & Copthorne Hotels Plc TalkTalk Telecom Group Plc

Aveva Group Plc Fidessa Group Plc Misys Plc Tate & Lyle Plc

Avis Europe Plc Filtrona Plc Mitchells & Butlers Plc Telecity Group Plc

Babcock International Group Plc FirstGroup Plc Mitie Group Plc Telecom Plus Plc

BAE Systems Plc G4S Plc Moneysupermarket.com Group Plc Tesco Plc

Balour Beatty Plc Genus Plc Morgan Crucible Co. Plc Thomas Cook Group Plc

BBA Aviation Plc GKN Plc Mothercare Plc Travis Perkins Plc

Bellway Plc GlaxoSmithKline Plc N. Brown Group Plc TUI Travel Plc

Berendsen Plc Go-Ahead Group Plc National Express Group Plc Ultra Electronics Holdings Plc

Berkeley Group Holdings Plc Greene King Plc Next Plc Unilever Plc

Booker Group Plc Greggs Plc Northgate Plc United Business Media Ltd.

Bovis Homes Group Plc Halords Group Plc Northumbrian Water Group Plc United Utilities Group Plc

British American Tobacco Plc Halma Plc Ocado Group Plc Victrex Plc

British Sky Broadcasting Group Plc Hays Plc Pace Plc Vodaone Group Plc ADS

Britvic Plc Hikma Pharmaceuticals Plc Pearson Plc Weir Group Plc

BT Group Plc Home Retail Group Plc Pennon Group Plc WH Smith Plc

BTG Plc Homeserve Plc Persimmon Plc Whitbread Plc

Bunzl Plc Howden Joinery Group Plc Premier Farnell Plc William Hill Plc

Burberry Group Plc Imagination Technologies Group Plc Premier Foods Plc Wm. Morrison Supermarkets Plc

Bwin.Party Digital Entertainment Plc IMI Plc PZ Cussons Plc Wolseley Plc

Cable & Wireless Communications Plc Imperial Tobacco Group Plc QinetiQ Group Plc WPP Plc

Capita Group Plc Inchcape Plc Rank Group Plc WS Atkins Plc

Carillion Plc Inorma Plc Reckitt Benckiser Group Plc Yule Catto & Co. Plc

Carnival Corp. Inmarsat Plc Reed Elsevier Plc

Carpetright Plc InterContinental Hotels Group Plc Regus Plc

Centrica Plc International Power Plc Rentokil Initial Plc

Charter International Plc Intertek Group Plc Restaurant Group Plc

Chemring Group Plc Invensys Plc Rexam Plc

Cobham Plc ITE Group Plc Rightmove Plc

Colt Group S.A. ITV Plc Rolls-Royce Holdings Plc

Compass Group Plc J Sainsbury Plc Rotork Plc

Computacenter Plc J.D. Wetherspoon Plc RPC Group Plc

Cookson Group Plc JD Sports Fashion Plc RPS Group Plc

Cranswick Plc Johnson Matthey Plc SABMiller Plc

Croda International Plc Keller Group Plc Sage Group Plc

CSR Plc ITV Plc Scottish & Southern Energy Plc

Daily Mail & General Trust Plc J Sainsbury Plc SDL Plc

Dairy Crest Group Plc J.D. Wetherspoon Plc Senior Plc

De La Rue Plc JD Sports Fashion Plc Serco Group Plc

Debenhams Plc Johnson Matthey Plc Severn Trent Plc

Devro Plc Keller Group Plc Shanks Group Plc

Diageo Plc Kesa Electricals Plc Shire Plc

Dignity Plc Kier Group Plc SIG Plc

Dixons Retail Plc Kingfsher Plc Smith & Nephew Plc

Domino Printing Sciences Plc Koax Plc Smiths Group Plc

Domino's Pizza UK & IRL Plc Ladbrokes Plc Spectris Plc

Drax Group Plc Laird Plc Spirax-Sarco Engineering Plc






The inormation used to compile this report has been collected rom a number o sources in the public domain and rom Trucost’s licensors. Some o itscontent may be proprietary and belong to Trucost or its licensors. The report may not be used or purposes other than those or which it has been compiledand made available to you by Trucost. Whilst every care has been taken by Trucost in compiling this report, Trucost accepts no liability whatsoever or any loss (including without limitation direct or indirect loss and any loss o proft, data, or economic loss) occasioned to any person nor or any damage,cost, claim or expense arising rom any reliance on this report or any o its content (save only to the extent that the same may not be in law excluded). Theinormation in this report does not constitute or orm part o any oer, invitation to sell, oer to subscribe or or to purchase any shares or other securitiesand must not be relied upon in connection with any contract relating to any such matter. ‘Trucost’ is the trading name o Trucost Plc a public limited companyregistered in England company number 3929223 whose registered ofce is at One London Wall, London EC2Y 5AB, UK.

© Trucost/Green Monday 2011

Appedi 2: Trcost data o corporate resorce se

Over the past 10 years, Trucost has researched, standardised and validated the world’s most comprehensive

data on corporate environmental impacts, including carbon, water, waste and pollutants. Trucost researches

and standardises company data disclosed in annual and environmental reports, on websites and in Carbon

Disclosure Project responses. Data on more than 4,000 companies are included in Trucost’s database, used

to model environmental profles or resource use in operations and supply chains. Corporate data used in this

study may include disclosures on energy and water use. Data are not ree-oat adjusted.

Trucost uses its environmental profling input-output model to estimate the type and level o a company’sresource use (the inputs) to produce goods or services (outputs), and the related level o pollutants. Detailed

government census and survey data on resource use and pollutant releases, industry data and national

economic accounts inorm calculations. The model uses data rom sources including the U.S. Bureau o

Economic Analysis and UN Food and Agriculture Organization (FAO) to calculate each company’s likely

operational and supply chain environmental impacts.

Calculations are based on the economic activity o any given company operating in 464 industries. Resource

use and environmental impacts are modelled or each sector and allocated to a company according to the

proportion o its revenues in each sub-sector. Trucost’s comprehensive coverage ensures that all companies

within the universe analysed are included, not just those that disclose environmental inormation. Environmental

profling using an input-output model may not account ully or company-specifc actors, and this analysis is a

“best eorts” attempt to understand environmental impacts in the current absence o sufcient and comparable

company disclosures on resource use in operations and supply chains.Data rom the World Bank on commodities prices or 2010 were applied to quantitative data on amounts o

oil, coal, wheat and cotton estimated to be used by FTSE 350 companies. The water price was based on a

unctional relationship between water availability and the value provided to monetise the scarcity value o water

in dierent areas. A sample o 18 comparable U.S. studies was used to plot the relationship between scarcity

and value, based on matching valuations in the literature to the scarcity o water at the locations at which the

studies were conducted to develop a demand curve or water. Resulting potential commodity and water costs

were measured relative to earnings or each company. Actual company use o commodities and water is likely

to vary rom estimates depending on actors such as resource efciency. However, the analysis provides a

starting point to develop an understanding o which sectors could be most sensitive to rising commodity prices.


ABOuT GREEn MOnDAy

Green Monday is an independent platorm that helps companies to build better businesses as sustainability

increasingly impacts the global economy. We look at sustainability rom the perspective o core business

strategy – join the Green Monday debate i you are interested in changing your business model to beat rising

commodity prices or executing a “green change management” programme, or i you want to know what the

leaders are doing. Events, Green Papers, Benchmark Surveys and GREENPRINT.

www.greemodas.com

ABOuT TRuCOST

Over the past 10 years, Trucost has researched, standardised and validated the world’s most comprehensive

data on corporate environmental impacts, including carbon emissions, water usage, waste disposal, pollutants

and natural resource use. This provides Trucost’s clients with:The most efcient approach to measuring carbon and wider environmental impacts across operations and•

supply chain tiers;

Clear identifcation o ocus areas or reducing material environmental risks;•

Validation o source data, including completion o gaps in data which are currently not being tracked or •

reported;

Comparison o environmental perormance against peers and sector benchmarks.•

www.trcost.com











COnTACT TRuCOSTSara Waiwrigt

Trucost Plc

uK & InTERnATIOnAl

+44 (0)20 7160 9800

[email protected]

nORTh AMERICA

+1 800 402 8774

[email protected]

PRESS

+44 (0)20 7160 9816

[email protected]

COnTACT GREEn MOnDAy

Georgie vere nico

Green Monday

DIRECT

+44 (0)20 7160 9855

GEnERAl EnquIRIES

+44 (0)20 3137 1728

[email protected]

3rd Floor

22 Chancery Lane

London

WC2A 1LS









commodity exposure index

Documents