The global commodity prices have seen a massive surge recently stoking fears of rising inflation. The rise in prices comes amid an increase in COVID cases and restricted economic activity.
The prices of domestic flat steel continued to trend higher for the eleventh consecutive month in May 2021. Domestic hot-rolled coil (HRC) prices rose 9 percent to average Rs 63,633 per tonne in May 2021. It was 75 percent higher YoY.
Rising iron ore prices in the international market coupled with strong demand for steel backed by stimulus measures by major economies are pushing up the prices of steel.
Iron ore prices hit $230 per tonne in recent weeks topping the record $ 194 a tonne hit more than a decade ago. Iron ore prices are up 140 percent, YoY.
Steel, copper, plastics, and aluminium constitute the key commodity inputs for the automobile, real estate, FMEG, white goods sectors. Rising commodity prices have raised concerns over cost inflation in these sectors.
For the auto sector, analysts believe this unprecedented cost inflation in an uncertain demand environment poses a unique challenge for original equipment manufacturers (OEMs) – as previous instances of sharp commodity inflation have coincided with strong demand growth for OEMs, enabling an easier passthrough.
However, with the current demand uncertainty, it would be a difficult balancing act between demand and margins. Analysts estimate a gross increase in FY22 raw material cost due to commodity inflation at 550 bps for two-wheelers and four-wheelers and 730 bps for commercial vehicles (CV).
Two-wheeler OEMs have taken proactive price increases even in the face of very weak demand. On the other hand, PVs and tractor OEMs have been more circumspect about price hikes despite seeing strong demand momentum, brokerage Motilal Oswal said.
The brokerage believes it would take 3–4 quarters for the OEMs to negate the impact of such sharp cost inflation as they undertake initiatives to cut costs and through calibrated price action.
High commodity prices are posing a risk to the gross margins of companies operating in the Consumer Durables industry. However, the impact on the individual firm can vary based on the competitive landscape across various product categories.
Analysts expect white goods space (ACs/refrigerators/washing machines) to see moderation in demand on account of continued price inflation.
Among electrical space, cables and wires may benefit from commodity price inflation. Conversely, other categories such as fans and lighting tend to defend margins owing to their lower ticket size items, non-discretionary nature, and higher replacement demand relative to the underpenetrated white goods category, Motilal Oswal said.
Rising prices of cement and steel have also been a serious concern for real estate developers as they are key raw materials used in construction. This has increased the overall construction cost for developers. Also, it's a huge burden for all players - but it is the smaller, cash-starved builders who are most affected.
While steel prices are at unprecedented highs globally, base metal prices have also rallied sharply, with aluminium, zinc, and copper trading at multi-year highs.
With the near-term outlook on pricing remaining strong due to a tight demand-supply situation and fears of production cuts in China, metal companies are likely to see superior profitability in FY22.
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Among the steel companies, SAIL has a higher sensitivity to steel prices, whereas, in the non-ferrous space, NALCO and Vedanta are the biggest beneficiaries of higher aluminum prices, Motilal Oswal said.
(Edited by: By Jomy)
First Published: IST