Trading tips: How price movement of raw materials impacts company profitability?
Political unrest, weather and geological disasters and global supply issues are the common factors that affect cost of goods sold. A change in the price of raw materials is a surefire way of affecting gross profit.
Jul 20, 2018 09:07 IST IIFL Derivative Desk
Here is a list of factors that affect different sectors:
1. Paint sector: Titanium dioxide (TiO2) prices in China and other crude derivatives
2. Shrimp sector: soymeal and fishmeal prices
3. Paper sector: pulp prices (The major exporters are Indonesia, Malaysia and Chile)
4. Liquor sector: The wholesale Molasses Index (Molasses is used to produce ethanol used to manufacture spirit)
5. Tyre sector: Rubber prices on the Tokyo Commodity Exchange and domestic price of RSS Grade 4 rubber
6. Coconut oil sector: copra prices
7. Battery sector (auto): lead prices
8. FMCG sector: Vegetable oils (palm oil, copra, rice bran, mentha oil, soyabean oil), and crude linked derivatives (HDPE: High Density Polyethylene is used in packing material for all essential consumer items ranging from soaps to detergents, hair oils, creams, shampoos and toothpastes, while LAB: Liner Alkyl Benezene, is used in making detergents)
9. Metal sector: aluminium prices and zinc prices on the London Metal Exchange (LME), iron ore and coking coal price.
10. Shipping sector: The Baltic Dry Index (BDI)
Conclusion: Successful management is important for the long-term trade and profitability. An analysis of how the price of raw materials affects company profits before trading is a part of successful trade. Further, since most of the raw material are tradeable in the derivative segment, an indepth study must be done under the derivative expert supervision.
