- For the first time, since 2017, commodity prices are on an upswing, according to Goldman Sachs’ commodities research team.
- A new note from the firm takes a look at the rise in commodity prices and what it means for stocks.
- We list 13 stocks set to soar while withstanding input cost inflation.
Commodity prices are moving sharply and it’s caught the attention of Goldman Sachs equity analysts.
“For the first time since 2017, commodity prices across the complex are on an upswing,” Goldman Sachs analyst Jessica Graham said in a February 1 research note.
Goldman Sachs’ commodities research team expects further gains in raw material prices, as demand improves and inventory draws gain momentum. Crude oil is trading around $60 a barrel for the first time in a year, while the prices of copper and nickel are up by more than 40% in the last 12 months.
Graham and her team released a note exploring the impact of rising commodity prices on equities; identifying which companies are best and worst positioned to pass rising costs on to consumers.
What’s the outlook for commodities?
For 2021, the firm is estimating there will be a 26% year-over-year increase in raw material cost inflation, if spot rates were to hold. The second quarter of this year will bring the strongest headwind of raw material cost inflation since 2010, Graham said.
The bullish outlook on rising commodity prices is based on three perspectives:
1) Brent oil price acceleration
The commodities team now expects Brent crude oil to reach $65 a barrel this summer, compared to previous estimation of year-end.
Oil prices in general have started to reach pre-pandemic levels. The West Texas Intermediate (WTI), the benchmark for US oil, rose above $55 a barrel last week for the first time in over a year.
2) Supply shortage
“Importantly, demand is now above supply in every major commodity market but cocoa and zinc, with inventory draws gaining momentum – copper has drawn record inventory for the season, with stocks at 2008 levels, oil is drawing at >1mn b/d and the soybean carryout is projected near record lows,” Graham said.
The analysts expect further upside potential in commodities where there are already physical shortages, such as soy, copper and iron ore.
3) China’s stimulus
The stimulus being provided by China, the world’s largest importer of commodities, for the county’s 14th Five-Year Plan should provide a tailwind for base metals in 2021, Graham said.
What does this mean for stocks?
To understand the impact on equities, the team looked at margin moves through the commodity price upswing cycle of 2017 to 2018 as well as the level and stability of gross margins historically.
They found that, heading into the 2008 financial crisis, there was decelerating gross margin expansion trends as sustained commodity inflation took place, even as economic growth remained robust.
While in the 2017 cycle, the analysts saw a decline in the percentage of companies that were able to expand gross margins in 2019.
“The last upswing of commodity inflation (2017-18) resulted in lower margins across the market, though there tends to be a lag before margins start to decline,” Graham said.
One of the challenges for the equity analysts is that commodity exposure is not reported across companies in a standardized fashion and can vary over the course of a cycle.
However, the analysts expect input cost inflation and implications on profitability will become a bigger focus for corporates and investors so they leveraged GS Data Works to provide company analysis on the impact commodity inflation.
The team analyzed earnings call transcripts of companies from the STOXX 600 to identify those for which commodity cost pressure had been most relevant.
“Commodity input cost intensity appears (measured by number of mentions on quarterly earnings calls) to be most concentrated in industrials and consumer sectors,” Graham said.
Input costs appeared to impact industrial conglomerates, airlines and containers and packaging, while beverages and construction materials historically had a more stable profile, Graham said.
“We look back at gross margin dynamics during the most recent commodity price cycle (2017-18) to identify companies across our coverage that are potentially well positioned to withstand input cost inflation vs. where margins could be at risk,” Graham said. “We acknowledge that each cycle is different and company hedging strategies may impact the commodity cost/pricing relationship in any given year, but believe that history may provide a useful perspective on how margins may move should commodity pressures persist.”
Insider breaks down the list of stocks Goldman Sachs says to buy from the STOXX 600 index with exposure to commodities and that look likely to be able withstand input cost inflation.
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