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Global Credit Research - 18 Mar 2011
New York, March 18, 2011 -- Moody's Investors Service says persistent high oil prices around
$100 a barrel will weaken the global economic recovery and hit
hardest the auto, airline, gaming and protein/agricultural
Furthermore, while oil prices declined immediately following the
earthquake and tsunami that hit Japan on March 11, reflecting expectations
of slower growth in the world's third largest economy, they
will likely rebound amid uncertainty over the extent of damage to a key
nuclear reactor and the possibility that the country will need more oil
to meet its demand for power.
Moody's assessments were contained in a special comment released
on March 17 on the effects of sustained oil prices on various corporate
sectors worldwide. The report was written by senior Moody's
analysts in the Americas, Asia Pacific, and Europe.
The report looks at eight sectors globally, including auto makers;
travel and leisure; food; transport; consumer durables;
metals and mining; chemicals; and homebuilding, construction
and forest products.
"Ultimately, the effects that high oil and fuel prices have
on businesses and consumers depend on a number of factors with some far
more exposed than others, especially since the severe oil spike
and rapid price collapse seen in 2008. Meanwhile, hedging,
though not a cure-all, will protect a number of companies,
and many have also reduced their exposure to crude-based fuel,"
says Moody's Managing Director Steven Wood in New York.
In terms of specifics, in the auto sector, US automakers are
better prepared for higher oil prices than in 2008, but there could
be credit implications if gasoline prices top $4 on a long-term
Similarly, the longer high oil prices persist, they more they
will affect earnings and cash flow generation for Japanese makers as the
situation slows demand for new vehicles. In Europe, consumers
have historically been more fuel-conscious than in North America,
and a further significant increase in fuel costs could also push them
towards even smaller cars or alternative transportation. This would
pressure revenues for a number of European automakers.
Within the travel and leisure sector, for the global airlines,
fuel is the key pressure point, but its costs should not affect
near-term profitability as improved operating profits should provide
a cushion. The airlines will also likely push for fare increases
and additional fees for travelers.
Within the gaming sector -- a subset of travel and leisure --
in the case of the US, a short-term material rise in oil
prices could neutralize some or all of the gains from cost-cutting
and improving customer numbers as well as slow the industry's recovery
in general. Most customers in the US drive to casinos, so
higher gasoline prices mean shorter visits with less money spent.
Meanwhile, the current fuel-price run-up has not hurt
gaming operators in Macau, Singapore, and Malaysia.
In fact, gaming revenues in Macau and Singapore, Asia's
two largest gaming markets, have grown rapidly in late 2010 and
early 2011 on strong economic growth and ample market liquidity.
Within the food sector, higher oil prices will further boost costs
for feed, fertilizer, equipment and transport in the food
protein industry in the US, Asia and Europe, but to different
degrees in each region. In Asia, the picture is complicated
by the burden which some governments bear for agricultural subsidies.
And in Europe, high crude prices will increase input costs for producers
of raw materials such as beet sugar and starch.
With the packaged foods industry in the US, rising oil costs are
not a major concern, but the biggest impact will come from consumers
who cut back on discretionary household spending. And in Japan,
the packaged foods and beverage industry will ease the pressure from higher
production, distribution and raw material costs through cost-cutting
and higher pricing.
The report is entitled "Sustained High Oil Prices Will Hit Hardest
Auto, Airline, Gaming, Protein/Ag Sectors."
It can be found at www.moodys.com
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Moody's says sustained high oil prices could hurt recoveries
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