A drop in crude oil prices is likely to ease cost pressures for a large number of companies across sectors — from paints and industrial segments to textiles and fast-moving consumer goods (FMCG) — which use crude-linked derivatives as a key input. Firms, however, say they remain cautious about cutting product prices as they carefully monitor demand conditions and the impact it could have on value growth.
Earlier this week, Brent crude futures slipped to nearly a three-year low of below $70 a barrel amid slowdown concerns in China. While they consolidated to around $72 levels on Friday, most analysts and companies expect crude oil prices to be muted for now.
Titanium dioxide, a crude derivative, accounts for about 20-25% of the raw material cost for paint companies. Players such as Asian Paints and Berger Paints had taken price hikes of about 1-2% in July-August and will hold on to the price lines for now, executives said.
“As the price of crude oil declines, operating margins will improve. But we are unlikely to drop product prices immediately, since we have to keep market conditions in mind, even as raw material prices change,” Abhijit Roy, MD & CEO, Berger Paints, said.
“Our margins are in the range of about 15-17%. It may cross the 17% mark due to the softening of raw material prices. But the impact will be visible only from the third quarter,” Roy added.
Sources at Asian Paints also indicated that they were unlikely to cut product prices after recently hiking rates by about 1%. The price hike had come after nearly 12-18 months and had been carefully thought through, keeping in mind both volume and value growth, they said.
While both Berger Paints and Asian Paints saw a 7-12% growth in sales volumes in the June 2024 quarter, value growth had declined by 2-3% during the period, owing to price cuts taken and a shift in product mix. Both companies are keen to reverse this trend, sector experts said.
“Commodity prices will keep fluctuating. This time, the drop in crude is linked to demand concerns, mainly due to the slowdown in China. Paint companies in India will evaluate the demand conditions here before deciding on pricing action,” HM Bharuka, a paint industry expert and former vice-chairman and MD of Kansai Nerolac, said.
Pidilite Industries, the maker of adhesives such as Fevicol and Fevikwik among other products, which depends on vinyl acetate monomer (VAM), a key raw material that is a derivative of crude oil, has said pricing action will depend on the softness in the price of the commodity in the future.
“There were mid-single digit price rollbacks in FY24 since the price of VAM had softened during the period,” Bharat Puri, MD, Pidilite Industries, said. “Further price reductions will depend on how input prices move from here,” he said in an earnings call after the firm’s June quarter results last month.
VAM prices have softened to levels of about $850-1,000 per metric tonne (MT) in the last one year, sector experts said. But as VAM makers in the US and Europe tighten supplies, prices could firm up going ahead, they added.
As much as 60% of Pidilite’s raw material costs are due to VAM, and the company meets its VAM requirement largely through imports, analysts tracking the company said.
For FMCG companies, a fall in crude-linked derivatives will mean that they can pass on some of the gains to consumers as they look to shore up volume growth. But this will also mean that price-led growth, which is currently flat to negative, may fall sharply, hurting value growth.
Most home and personal care (HPC) companies have been acutely aware of falling FMCG value growth over the last few quarters as commodity prices on the crude side have been benign. For perspective, almost 40-50% of an HPC company’s raw material basket is crude-linked depending on the category and product type.
Derivatives such as linear alkyl benzene (LAB), for instance, are used in detergents, light liquid paraffin (LLP) is used in hair oils, creams and cosmetics. While high-density polyethylene (HDPE) goes into the packaging of all FMCG products from soaps to detergents, hair oils, creams, shampoos, conditioners and toothpastes.
During an interview with FE this week, Hindustan Unilever CFO Ritesh Tiwari said inputs such as crude palm oil and coconut oil had turned inflationary in recent months, which could have an impact on the vegetable oil basket, though crude-linked inputs were soft.
“While crude has been benign, we are monitoring other inputs such as crude palm oil, which goes into making soaps, hair care and some skin care products, which has turned inflationary in recent months. We avoid knee-jerk reactions to commodity upswings and downswings. Pricing action will be calibrated,” Tiwari said.
Ashwin Jacob, partner at Deloitte India, said: “Lower trending crude prices, if sustained for some time, will have a beneficial effect on industries and sectors closely linked to crude prices. More specifically, several chemical sub-sectors such as paints and polymers will benefit from lower crude prices in the short term. This will likely result in better margins for some of the incumbents, and possibly some impact on the end-industry demand, if lower prices are passed on.”
With inputs from Arunima Bharadwaj
From: financialexpress
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