Rising costs, poor demand squeeze key Europe sectors
FRANKFURT (Reuters) - Shares in European industrials, chemicals and airline groups are set to stay under pressure for the rest of the year as input prices rise and demand for products and services remains depressed.
Oil racked up the highest quarterly gain since 1990 in the second quarter, rallying 42 percent. So far this year, prices of key industrial inputs copper and nickel have risen 58 and 33 percent respectively, while steelmakers have raised prices this month.
The rise in raw materials has been driven by the prospect of an uptick in the global economy but this optimism has not fed through to selling prices for companies' products.
Producer prices for goods from companies such as ABB (ABBN.VX) dropped 4.6 percent in April, and the International Air Transport Association has forecast losses of $9 billion (5.5 billion pounds) this year for the about 200 airlines it represents.
"Pricing power remains very low -- if you want to keep your market share you cannot charge your customers more," said Robert Griffiths, an equity strategist at Cazenove in London.
"Towards the end of the year might be a good time to look at shares again that are under pressure now, as investors are likely to be careful until they see a pickup in demand in Europe," he said.
Stocks of the European travel and leisure industry .SXTP and chemical companies .SX4P -- sectors dependent on oil, as a fuel and the basis for inputs -- are little changed on the year so far, in sharp contrast with mining .SXPP, up 36 percent, and banks .SX7P, up 19 percent.
Engineers Siemens (SIEGn.DE) and Finmeccanica (SIFI.MI) have fallen by around 10 percent each this year, underperforming a 3.7 percent rise in the broader market .STOXX.
While the rate at which companies can raise prices has fallen, there is pressure on other fronts as well: unit labour cost growth has accelerated year-on-year, equity strategists from Nomura pointed out.
"Euro area firms were adding to staff numbers as recently as the second quarter 2008 and have been relatively slow to trim headcount as the economy slowed," they said in a note.
Falling incomes are also set to hit consumer demand. The European Central Bank predicts wages to decline "significantly" this year in the private sector. Price growth in the euro zone in June for the first time ever was negative and the ECB says consumer prices will fall for a couple of months.
In the auto sector rising raw material costs are adding to the burden from existing overcapacity globally. Nissan (7201.T) recently offered the highest customer cash rebate ever, according to research from the University Duisburg-Essen.
"Orders have shrunk so rapidly that companies had to play by their customers' rules when it came to pricing," said Simon Britta, engineering sector analyst at Julius Baer in Zurich.
"The later the economic recovery, the greater the pressure on margins will be."
MORE PRESSURE TO COME Continued...
