Fitch: Scenario of Commodity Price Inflation a Challenge for U.S. Corporate Credit Quality

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has published a special report assessing the impact of a scenario of prolonged commodity inflation on credit quality across U.S. Corporate Issuers. The report reviews overall exposure to commodity inflation by sector; the ability of issuers within a sector to neutralize higher commodity costs through various offsets (SG&A cuts, efficiency programs, change in product mix or marketing); and relative winners and losers within a sector. According to Fitch, the recent sharp and sustained increase in a basket of commodity prices represents a growing source of concern for fixed-income investors. Although core inflation measures in the U.S. and other developed economies remain largely in check, input inflation across a broad range of agricultural, energy, and industrial commodities has spiked sharply and is expected to put increasing pressure on margins and end-user prices in a number of commodity-dependent sectors in 2011.

Fitch says the financial impact of sustained commodity inflation varies widely by sector and company in the corporate sector. At the high end, the most affected commodity-sensitive sectors include protein processors, ethanol producers, and airlines, while at the low end they include beverage producers and automotive suppliers.

Exposure within each category remains important as well, with premium brand producers being relatively insulated and able to neutralize commodity price increases with cost offsets, while low-margin discounters have less room to maneuver and thus might be worse off in a serious commodity crunch.

In contrast to the 2008 commodity spike, most firms in sensitive sectors appear to be in a better position to pass through higher costs via pricing, owing in large part to more resilient demand fundamentals across a range of consumer and industrial products. Nevertheless, the potential for intensifying margin pressure later in the year exists, particularly in light of the fact that firms already exhausted most of the easier restructuring options during the recession.

The special report 'Commodity Inflation in a Multi-Speed World - Corporate Winners and Losers' is available on Fitch's website: www.fitchratings.com. This report complements the Fitch special report, '$150 per Barrel Crude Oil: Credit Implications Across the Corporate Sector,' published May 3, 2010, which examined the impacts that an inflationary run-up in crude oil prices would have across multiple corporate sectors.

Additional information available at www.fitchratings.com

Applicable Criteria and Related Research

'$150 per Barrel Crude Oil: Credit Implications Across the Corporate Sector,' May 3, 2010

Applicable Criteria and Related Research: Commodity Inflation in a Multi-Speed World -- Corporate Winners and Losers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604067

$150 per Barrel Crude Oil: Credit Implications across the Corporate Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=515225

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