Falling commodity prices help some
Decline lowers raw material costs for many manufacturers
The plunge in commodity prices is hammering the profits of giant producers such as Exxon Mobil and Alcoa, but it’s a windfall for companies paying less for raw materials.
The winners from the commodities crash could help offset the pain of losers such as Alcoa as earnings season gets in full swing. The aluminum giant kicked off the quarterly reports last week by posting profits nearly 50% short of analysts’ estimates. The reason: a 19% decline in aluminum prices the past year.
Beneficiaries of the lower prices are tougher to identify because gains are spread across the economy and may be limited for individual companies, says Ste- ven DuBuc, commodities expert at consulting firm AlixPartners.
Still. the drop in raw materials costs “is going into somebody’s pocket,” he says. The savviest firms, he says, have negotiated discounts while passing little, if any, savings to their customers.
The bear market for commodities, largely a result of China’s economic slowdown, is unusual because it’s happening while the U.S. economy is growing solidly, DuBuc says. That’s giving many companies a rare chance to pocket the savings but maintain retail prices amid still-strong demand.
Airlines, for example, have realized a bonanza in jet fuel savings, while fares have dipped just slightly. American Airlines is expected to save billions of dollars in fuel costs this year.
Automakers are also big winners. With aluminum, steel and copper costs dropping sharply, the average raw material cost per vehicle has fallen nearly $600 the past year, AlixPartners research shows. Most of that has flowed to the automakers, and with auto sales back to pre-recession levels, manufacturers haven’t had to pass the savings to car buyers
Signet Jewelers, Casey’s General Stores and mattress fabricmaker Culp all netted fatter profit margins in the most recent quarter because of lower prices for gold, coffee and cheese, and fiber, the firms recently told analysts.
Benefits are more nuanced for others. Chainsaw-maker Stihl has seen just a modest drop in steel and resin costs because they comprise a small part of materials enhanced to be stronger and more flexible, Vice President Christian Koestler says.