Treatt is a UK stock and, a relatively small player in the flavours and fragrances industry but the company's latest interim management statement is confirming the general trend in the industry. Givaudan gave notice of the threat of rising raw material prices earlier this month and Treatt are saying the same thing.
From the recent Treatt statement ...
However, as prices have continued to rise, there has been an increase in working capital and margins have narrowed as not all price increases can be passed on to customers. The Group is seeking to manage the potential downside risk if, and when, prices begin to fall.
In other words, not only is it not possible to pass on rising costs but when prices do fall, there will be a short/mid term period whereby Treatt will be saddled with having paid high prices for Treatt's raw material costs. This matches what Givaudan said about the uncertainty over margins this year. I would expect $IFF International Flavors and Fragrances and Symrise to be exposed to similar pressures.
All of which is frustrating for these companies because the secular outlook for these companies -in particular Symrise- is positive, but I don't think it is time to buy them just yet.
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