The ongoing Ukraine-Russia conflict has caused commodity prices across the globe to soar to record-highs amid concerns of supply disruption. Crude surged to $105 a barrel, while palm oil & wheat prices hit record highs. This is likely to result in supply chain disruptions in India that will lead to further inflation, especially for the FMCG industry.
India has seen unprecedented inflation in the past year with prices of commodities rising to multi-year highs. From HUL to Britannia, ITC and Nestle, most FMCG majors have flagged inflation as a concern during their October-December (Q3) results.
With the current conflict, prices of edible oils, wheat, palm oil, barley, etc are expected to rise further. This is because Ukraine and Russia account for a large part of the world’s commodity trade.
Sunflower oil is likely to be the most hit because India imports 70% from Ukraine, 20% from Russia (remaining 10% from Argentina), roughly 2.5 million tonnes annually. Adani Wilmar
, maker of Fortune Oil gets 20 percent of its volume from sunflower oil and is almost entirely dependent on imports from these regions. Its JV partner Wilmar, which has plants in Ukraine has suspended operations amid the ongoing crisis.
The company has stocked up inventory for the next 60 days but has said that if the conflict continues, there could be supply disruptions, shooting up sunflower oil prices. Adani Wilmar’s stock surged 10 percent on Friday amid the prospect of rising sunflower oil prices.
has flagged concerns of rising raw material costs. “The evolving geopolitical scenario can flare up the prices of crude oil and other commodities further which will have a cascading impact on raw materials and packing materials. Organisations will have to gear up and take measures to absorb some of the cost through aggressive optimisation initiatives and perhaps pass on some of the pressure to consumers in a calibrated manner,” Saugata Gupta, MD and CEO, Marico said.
Ukraine and Russia also account for a major share of the global wheat and corn trade. Ukraine reportedly accounts for a quarter of the global wheat trade and a fifth of corn sales. Russia and Ukraine together account for 20% of the world’s corn trade and 30 percent of the world’s wheat export. Corn prices are at 33-week highs, while wheat prices have hit nine-year highs. Any further impact on crop production and global supply will shoot up prices across the globe.
India is self-sufficient when it comes to wheat. However, a rise in global wheat prices will run up Indian prices as well. This is likely to impact prices of atta, bread, biscuits and other food products that use wheat as a raw material
told CNBC-TV18 that it expects wheat prices to increase amid the possibility of supply disruptions.
Parle, which has taken a 6-7 percent price hike already said that the company has inventory covered for the next 2-3 months, but there would be demand coming in from overseas markets for wheat because Russia and Ukraine supply would get affected, which in turn will result in an increase in wheat flour prices or wheat prices in India as well.
Palm oil prices hit record highs on the back of the conflict. Malaysian palm oil futures rallied over 8 percent on Thursday to record highs, also the highest daily increase in six months. Unlike sunflower oil, Palm oil does not come from either Ukraine or Russia. This rally is a collateral impact of the geopolitical tensions.
Since India imports almost all of its palm oil requirements, rising global prices will further impact FMCG majors like HUL
, P&G and Godrej Consumer since Palm Oil is a key raw material in most FMCG products like skincare, packaged foods, soaps, etc. These companies have already seen very high input costs and have taken multiple rounds of price hikes in the past 2 quarters. Rising crude oil prices could also impact packaging and logistics costs for these companies
With respect to an impact on FMCG companies, Abneesh Roy, ED- Institutional Equities of Edelweiss Securities told CNBC-TV18 that the current tensions could impact margins of companies in the April-June (Q1) quarter, resulting in grammage cuts and further price hikes. As a result, rural slowdown is likely to continue till Q1.
Russia is also the world's second-largest producer of barley, while Ukraine is the fourth largest. This commodity, a key ingredient in beer, will further increase the costs of beer makers.
Spot prices of barley, which accounts for almost 30% of total retail marketing cost for the alcoholic beverage rose 62.5% on a year-on-year basis. The impact on the prices of beer in India is indirect. India produces most of its barley requirement locally, but the global prices will also run up prices in India. This also comes at a time when alcoholic beverage makers have been battling with rising input costs on all fronts, along with lesser demand.
While the pricing of alcohol in India is largely controlled by state governments, and any hike in prices could take time to materialize, this will impact margins of beer companies, a Motilal Oswal report said.
However, India’s largest beer maker United Breweries
has flagged inflation pressures due to the crisis.
“We have already been operating in a high inflation environment. With the current crisis, we foresee the pressures of inflation and supply chain disruptions accelerating in the short term. We are actively working towards mitigating the impact through a combination of productivity, cost control, optimisation and judicious price increases for which we are in conversations with state governments,” a company spokesperson told CNBC-TV18.