How are Commodity Prices Expected to Impact Earnings in 2022?

How are Commodity Prices Expected to Impact Earnings in 2022?

According to the World Bank, there's a mixed picture for commodities in 2022. Globally, prices for crude oil are expected to hit $74 per barrel during 2022, compared to 2021's $70 price tag. This is attributed to greater economic activity as the world continues its reopening. Metal commodities, on the other hand, are projected to drop in 2022 by 5 percent. Similarly, the “softs,” or farming-based commodities, are expected to find an equilibrium or fall nominally in 2022. With much uncertainty related to the pricing of commodities and their impact on 2022’s markets, how have commodity prices impacted company profits and past market cycles?

Earnings, Profits and Measuring Margins

When it comes to evaluating margins, we examine how profitable sales have been after factoring in external and internal costs. Be it at the net margin level, the gross margin level, or the operating margin level, businesses get a wide analysis of their profitability.

There are many reasons companies could see margin pressure and, therefore, reduced profitability. Competition, internal production challenges (e.g., rising overhead caused by increases in wages, raw materials, electricity, etc.), so-called “black swan” events such as pandemics, and other geopolitical events impacting commodities and tariffs are among the many reasons for margin pressure.

The World Bank, focusing on the outlook for oil, sees potential for domestic shale production to pick up less quickly and the favoring of crude oil versus natural gas. Higher energy prices could slow growth, and the uncertainty of the pandemic could affect energy demand. However, based on reduced investments in crude oil, recovery has fallen since 2014 and again in 2020. Many initially think of the price they pay at the pump. However, indirect costs of increasing crude oil can impact shippers, retailers, airlines, fertilizer manufacturers and farmers, the transportation industry – and the stock prices of those publicly traded companies.

As for other commodities, there are considerations for direct and indirect industry performance. For example, the price of lumber can immediately impact how much homebuilders charge for a new home; however, it also impacts the real estate market, additions, and other industries that use large quantities of wood.

Analyzing Stock Market Sector Performance

When it comes to looking at commodity prices, consumer behavior, and market cycles for the past six decades (starting in 1962), consumer staples have been a steady winner. Looking 10 years back from mid-April 2021, based on Indices, consumer sector stocks grew by 8.2 percent, versus the S&P 500’s annualized returns of 11.86 percent over the same timeframe.

The consumer staples sector is one industry where high commodity prices are likely to impact earnings less than consumer discretionary. With consumer staples, a necessity that is independent of the health of the economy, the level of demand is stronger than in other sectors. While consumer staples aren't immune from competition, they are often easier for companies to push price increases through.

In 2022, many Central Banks globally are expected to push a more hawkish monetary policy. Only time will tell whether or not global monetary actions will get a handle on commodity prices and influence markets accordingly.