Commodity prices soar amid supply fears from Russia

MUMBAI/CHENNAI: Input costs will rise and margins will tighten in several sectors, if the surge in commodity prices is not passed on. Prices for crude, aluminum, nickel, steel, palladium, among other raw materials, have skyrocketed since the United States and European countries imposed sanctions on Russia, the following his invasion of Ukraine.
Fears of prolonged supply shortages and global inflation are increasing input cost pressures in many sectors. While the steel and aluminum sectors benefit from the recovery, the automotive, consumer durables, construction and real estate industries will feel the effects.
The automotive sector is unlikely to get any respite from the current microchip shortage, ratings agency Crisil said in its report titled Russia-Ukraine Pressure on Multiple Sectors. Indeed, Russia and Ukraine produce 75% of the neon gas used to manufacture semiconductors. Protracted conflict and sanctions against Russia would further reduce semiconductor production, Crisil said.

Import dependence on palladium and platinum, which are used in catalytic converters, and nickel, which is used as a cathode in lithium-ion batteries, is relatively low and would therefore have minimal impact on domestic automakers. However, aluminum and copper, which have become more expensive, will drive up the cost of raw materials.
Volvo Eicher Commercial Vehicles managing director Vinod Aggarwal said: “Costs will increase as the price of supplying high-precision metals like aluminum and copper has increased. As a result, there will be price increases, which will impact demand just as the commercial vehicle industry has started to recover. Aluminum is used by the automotive industry for wheels as well as lightening, while copper is used in wiring harnesses. More than 70% of car manufacturers’ revenues are spent on raw material costs.
India Ratings & Research Associate Director Shruti Saboo said: “In the first 10 months of FY22, steel and aluminum prices increased by 15% and 34%, affecting the total vehicle manufacturing cost.” India’s electrification drive has also increased the demand for aluminum.
The chemical and paint industries, which use crude oil derivatives as feedstock, could see some margin compression in the first quarter of next fiscal year “as inventory previously purchased at lower prices runs out” , said Crisil. Spot natural gas prices, which are also tied to crude, could continue to climb. Urea makers, who use it as a feedstock, can pass on the higher prices, Crisil said. But if the war continues, the domestic availability of urea could become a problem for the agricultural sector because 8% of the needs are imported from Russia and Ukraine. Likewise, town gas operators have favorable economic costs relative to competing fuels, which could allow them to pass gas price inflation downstream — at least to some extent, Crisil said.
Diamond polishers could also see a squeeze on margins as continued trade disruptions could make rough more expensive. Alrosa, Russia’s largest diamond miner, accounts for 30% of global rough diamond production, prices of which jumped 21% in 2021.

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