A bearish global price outlook for commodities in 2018 by analysts could bolster gross margins of Fast Moving Consumer Goods Firms (FMCGs) that rely on the use of the raw material to meet production.
Flour millers including Flour Mills of Nigeria, Dangote Flour and Honeywell Flour Mills could see gross margin expansion as price of wheat is expected to remain unchanged in 2018.
For the first nine months through September 2017, the cumulative average gross profit margins of 10 consumer goods firms increased year on year (y/y) to 33.50 percent as against 22.80 percent as at September 2016.
“Going into the 2017/2018 season, USDA estimates a relatively unchanged global wheat production picture (-0.3 percent Year on Year to 752MT) as expectation of tight supply in US, Australia and Canada (-32.2MT to 95.9MT) is expected to offset high-yield induced output growth in the Euro area, India, and Russia (+27.9MT to 332.9MT),” said analyst at ARM Securities Limited.
According to data gathered by Bloomberg, price of wheat declined by 9.2 percent to $154.86 per bushel in 2017 from $535.2 in 2016 as production of the commodity was supported by output expansion in Russia, Australia, and US with a combined increase of 29.4 MT to bring their cumulative output to 168.9MT.
Similarly, sugar producers could see gross profit margins expansion as the decline in the price commodity at the international markets is expected to extend to 2018.
The price of sugar dropped by 13.15 percent per pound to $15.90 in 2017 as against $18.20 in 2016 as production expanded by 4.1 percent on the back of increased productions from Brazil, Euro area, and Russia.
“Looking further ahead, global sugar production is estimated to expand by 8 percent to 184.9MT in the 2017/2018 season,” said analysts at ARM Securities Limited.
But there could be gross margin contraction for brewers like Guinness, International Breweries, and Champion Breweries and Nigerian Breweries as the price of analysts remain bullish on the price of barley.
Global barley production is projected to contract by 3.7% YoY to 141.7MT, hinged on decline in production from Australia, Canada, and US, based on United State Department for Agriculture (USDA) estimate.
“For the 2017/2018 season, despite expectation of lower demand, production, which is expected to fall faster than demand translates to a wider deficit in the barley market,” said analysts at ARM Securities Limited.
The price of barley increased by 2.10 percent to $153.50 per ton in 2017, from $150.40 in 2016, according to data gathered by Bloomberg.
Beer producers in Africa’s most populous nation and largest oil producer substitute sorghum for barley, which means the effect of a hike in the price of commodity at the international market could be mitigated.