Global commodity prices have recently seen a massive surge, fueling fears of rising inflation. The price hike comes amid an increase in COVID cases and reduced economic activity.
Domestic flat steel prices continued to increase for the eleventh consecutive month in May 2021. Domestic hot-rolled coil (HRC) prices increased 9% to an average of Rs 63,633 per tonne in May 2021. They were 75% higher year on year.
Rising iron ore prices on the international market, coupled with strong demand for steel supported by stimulus measures in major economies, are pushing steel prices up.
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Iron ore prices have hit $ 230 per tonne in recent weeks, breaking the record high of $ 194 per tonne set more than a decade ago. Iron ore prices increased 140% year-on-year.
Steel, copper, plastics and aluminum are the main basic inputs for the automotive, real estate, FMEG and white goods industries. Rising commodity prices have raised concerns about cost inflation in these sectors.
For the auto sector, analysts say this unprecedented cost inflation in an uncertain demand environment poses a unique challenge for original equipment manufacturers (OEMs) – previous examples of high commodity inflation having coincided with strong growth in demand for OEMs, allowing easier passage.
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However, with the uncertainty of current demand, it would be a difficult balancing act between demand and margins. Analysts estimate a gross increase in the cost of raw materials for fiscal year 22 due to commodity inflation at 550bp for two and four wheelers and at 730bp for commercial vehicles (CVs).
Two-wheeled OEMs have accepted proactive price increases, even in the face of very weak demand. On the other hand, PV manufacturers and tractor OEMs have been more wary of price increases despite strong demand dynamics, broker Motilal Oswal said.
The brokerage estimates that it would take 3 to 4 quarters for OEMs to offset the impact of such high cost inflation by taking initiatives to reduce costs and through calibrated price action.
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High commodity prices pose a risk to the gross margins of companies operating in the durable consumer goods sector. However, the impact on the sole proprietorship may vary depending on the competitive landscape of the different product categories.
Analysts expect the white goods space (air conditioners / refrigerators / washing machines) to experience moderation in demand due to continued price inflation.
In the electrical space, cables and wires can benefit from commodity price inflation. Conversely, other categories such as fans and lighting tend to defend the margins due to their smaller size items, non-discretionary nature and higher replacement demand compared to the category. of underpenetrated white goods, Motilal Oswal said.
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Rising prices for cement and steel have also been a serious concern for real estate developers, as they are key raw materials used in construction. This increased the overall construction cost for developers. Plus, it’s a huge burden on all players – but it’s the smaller cash-strapped builders that are hit the hardest.
As steel prices reach unprecedented levels around the world, base metal prices have also rallied sharply, with aluminum, zinc and copper trading at record highs for several years.
With near-term pricing outlook remaining strong due to tight supply and demand situation and production cut-back fears in China, metallurgical companies are expected to see higher profitability during the year 22.
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Among steel companies, SAIL has a higher sensitivity to steel prices, while in the non-ferrous space, NALCO and Vedanta are the biggest beneficiaries of rising aluminum prices, Motilal Oswal said. .