By Sitaraman Shankar
Rising commodity prices and poor demand are squeezing margins at chemical companies, airlines and auto makers but the hope of a general return to inflation will support their shares in the short term.
Inflation stemming from an economic recovery would allow the companies to lift prices of their products, giving some relief from a renewed surge in oil and metals like copper.
There is one major danger though: if the commodity price rise is exacerbated by supply shortages and global growth does not pick up, the screws will really tighten around companies that use commodity-based raw materials.
So far this year, the DJ STOXX European chemical, auto and travel and leisure share benchmarks have risen between 1 and 3.2 percent, compared with a 3.2 percent fall in the broader market .
"In the first instance you would certainly see a squeeze as there would be no increased demand or pricing for end products, but if consensus is correct, it will be a temporary effect and the market is clearly not too negative on these sectors," said Philippe Gijsels, strategist at Fortis in Brussels.
"Commodity prices have gone up over the last couple of weeks in a reflation trade. The markets appear convinced that the economy will pick up by the end of the year."
Oil has gone up 11 percent this year, and while a price of around $50 a barrel is still a far cry from the record $147 it hit in July last year, analysts expect the rise to continue.
Copper has zoomed 17 percent this month and Nickel has jumped 24 percent.
A notable exception to the metal rally is steel, though prices of pipes used in oil and gas exploration and tinplate used in cans have stayed relatively firm.
Credit Suisse on Thursday upgraded steel to "overweight" from "benchmark", citing among other things a recovery in the Chinese economy.
DEMAND OUTWEIGHS ALL
Shares in chemical groups, which depend heavily on oil-based inputs, held up well through the first half of 2008 even as oil prices soared.
This was because investors worried little about input costs so long as demand for companies' products was reasonably good.
But as a global credit crisis tipped economies into recession, stocks in cyclicals such as chemicals slipped.
Now, with hefty spending packages announced to spur top economies, upstream sectors are the first to benefit.
"The quick and easy move is to jump back into sectors benefiting from stimulus packages in China and America, such as commodities," said Mark Bon, a fund manager at Canada Life.
"Scrap steel has picked up in Asia, a good leading indicator for steel demand. Nylon-based products bottomed into February and are now picking up," he said.
But, he added, it remained difficult for user companies to raise prices.
"It's difficult to chase price movements in the short-to-medium term. Signs of an economic recovery may come through by year end; inventory building has to develop while prices are quite low and capacities mothballed," he added.
German chemicals giant BASF, for instance, is preparing shorter work weeks for up to 3,000 employees at its Ludwigshafen site and has decided to idle the smaller of its two steam crackers at the site.
It said on Wednesday that there were no signs of a sustained improvement in orders from key customer industries "in the foreseeable future".
Automakers have been cutting production sharply in the face of weak demand, and European car sales figures released on Thursday showed a 17.2 percent fall in the first quarter and posted a fall in March for the 11th month in a row.
Air France KLM said earlier this week that it had carried 9.4 percent fewer passengers and 19.2 percent less cargo in March. Scandinavian airline SAS also posted a fall in March traffic while Finnair said it was cutting prices.
"Airlines are going to have a longer lead time. The swing factor seems to be business travel, which is a bit slower to recover," said Bon.
Most analysts see inflation on the cost side continuing.
