Industrial commodity prices have risen sharply in the last four months, raising concerns that India Inc's honeymoon with cheap raw materials is over.
While nickel prices have risen the most since April at 120 per cent, others aren't far behind. Some key raw materials like copper, aluminium, zinc, iron ore and the Indian crude basket have seen prices rising between 44 and 74 per cent (see table below).
The exceptions are HR coil prices in the US and Russian coal. Prices of these commodities have risen a moderate 13.41 and 7 per cent, respectively, since April.
The first quarter ended June saw the margins of many Indian companies rise sharply owing to savings on raw material prices. The cushion of long-term supply contracts means that rising input costs can be expected to squeeze earnings only a quarter or two later
A senior executive at Bajaj Auto said the impact of higher raw material costs would be felt after the second quarter of this financial year since most supply contracts were for three to six months.
Amitabh Chakrabarti, head of equity at Religare Securities, however, predicted that companies could face a double whammy: the benefits of lower raw material cost would gradually recede but the impact of poor monsoons would not give them much headroom for increasing prices.
| RISING WORRIES | |||
| Commodity ($/ tonne) | Apr 1, '09 | Aug 14, '09 | % chg |
| China iron ore fines spot | 63.50 | 110.50 | 74.02 |
| Copper | 3963.50 | 6386.00 | 61.12 |
| Indian crude ** | 46.94 | 72.22 | 53.86 |
| Aluminium | 1337.00 | 2016.50 | 50.82 |
| Zinc | 1261.00 | 1874.00 | 48.61 |
| Steel (US import HR coil) | 410.00 | 465.00 | 13.41 |
| Coal (Russia Baltic 6000 kc) | 57.00 | 61.00* | 7.02 |
| * As on Aug 7, 2009 ** $/barrel Source : Bloomberg | |||
Secondary steel producers, which mostly make construction steel, are a case in point. The increase in iron ore prices is unlikely to be passed on to consumers since demand for construction is currently low due to the monsoons, so they will have to absorb higher costs for at least the next couple of months.
Some companies argue that prices were still 30 to 50 per cent lower than their multi-year peak in July last year, but that's small consolation for most. Some steel companies, for example, have already begun raising prices, but the encouraging sign is that it hasn't affected demand yet owing to the buoyancy in infrastructure sectors.
Some primary steel producers have long-term contracts for iron ore supply but many smaller companies have to pass on the rising burden of input cost. Iron ore prices in China have risen nearly 75 per cent higher since April.
Landed iron ore fines at the ports in China are selling at $115 a tonne against $85 a month back. The government's recent decision to levy royalty on iron ore on an ad valorem basis will impose an additional price burden of 10 per cent on buyers.
Coking coal, another important material for steel producers, has also become more expensive. In the last month, the price of imported coal has risen nearly 10 per cent from $150 per tonne to $164.
Automobile companies said they would not raise price at this point but could reconsider this decision when the long-term supply contracts end.
Some others are optimistic. Ravi Sud, chief financial officer, Hero Honda, said, "Prices are expected to remain range-bound but raw material costs will certainly not shoot up like last year. Prices will go up but they will come down too,' he said.
Maruti Suzuki, India's biggest car maker, said the company would not raise prices immediately, since there had been no direct impact of the increase in metal prices.
Shashank Srivastava, chief general manager (marketing) Maruti Suzuki, said, "Most manufacturers, including us, signed contracts with suppliers when prices were very low. We are aware that input prices have moved up recently but we will not be impacted by it immediately."
Tyre companies, however, are considering raising prices. Apollo Tyres, the country's second-largest tyre maker (by tonnage) is planning to up tyre prices 4 to 5 per cent on account of a 10 to 15 per cent increase in the prices of natural rubber over the last quarter of the previous financial year. Senior executives of the company said that since natural rubber prices were expected to move beyond Rs 98 per kg, the company will have to look at a marginal increase.
While there is divergence of opinion on the immediate impact of the price surge, there is a near-consensus on outlook. No one is expecting prices to soften anytime soon. The sharp increase in commodity prices followed China's decision to import metals for reserves and improvement in demand from OECD countries.
Earlier this year, many metal firms stopped production because prices had fallen below their cost of production. According to a report from Barclays' Commodity Research, "Chinese producers have already re-started production capacities, but outside China, higher prices are unlikely to be enough to encourage large-scale restarts. Other producers will only choose to restart production if and when they are convinced that prices are sustainable above production costs."
This means that supplies will not improve fast, at least in the short term as the resumption of production takes time and prices can soften only if new production outpaces demand in China, as well as in OECD countries.
