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.

July 20, 2018 9:16 IST | IIFL Derivative Desk
Costs of raw materials are critical for a company. In fact, these costs determine the basic profitability metric of gross profit (defined as the difference between sales and cost of goods sold). Factors such as political unrest, weather and geological disasters and global supply issues affect the cost of goods sold. A change in materials price is a surefire way of affecting gross profit. In simple word, an increase in costs will decrease profits and vice-versa.
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.

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