Multifaceted influence on SL of excessive commodity costs: report


Rising international gasoline costs set to push up Sri Lanka’s import invoice, placing stress on currencies


  • Rises in commodity costs put stress on currencies, stress utility corporations and push inflation
  • A number of sectors, together with agro-industry, building and lubricants, shall be affected
  • Prices more likely to rise throughout the board, industrial metals will rise 14% to 16%
  • Rising oil costs can have a serious influence on the import invoice

The reversal of worldwide commodity costs can have a multifaceted influence on the Sri Lankan economic system, placing stress on currencies as a result of a better import invoice, straining the funds of service corporations public and can have cascading results on most sectors, main to cost revisions and inflation, in accordance with a report launched yesterday.

ICRA Lanka, which is a subsidiary of Moody’s Investor Providers, launched its newest Insights report warned that with a gradual restoration in financial actions, a rise in home demand for oil is more likely to improve the import invoice and will thus exerting extra stress on the foreign money.

The report highlighted a collection of penalties, together with a rise in oil costs that may put stress on the monetary place of utility corporations within the brief time period.

He warned that the vitality value revision may have a cascading impact on many sectors of the economic system. Extra importantly, it may set off a common rise normally value ranges.

The Sri Lankan agricultural sector, which employs round 27% of the workforce, shall be hit onerous, with native farmers anticipated to expertise a rise of round 3-4% in fertilizer prices in 2021. Tea, rubber and coconut are anticipated to expertise wholesome demand by 2021 however, though rubber costs are anticipated to take care of momentum, the value of tea could solely improve by round 1% in 2021, ICRA Lanka added.

The agricultural sector additionally consumes a big quantity of imported intermediate items resembling fertilizers ($ 221 million in 2019) and wheat and corn ($ 346 million). Native farmers are anticipated to expertise a rise of round 1-4% within the prices of the aforementioned inputs in 2021.

“Downstream sector merchandise resembling kerosene, gasoline oil, gasoline oils, lubricants, waxes, asphalt and different petrochemicals would additionally revise costs affecting a mess of industries.”

Nonetheless, many large-scale building contractors are much less more likely to expertise margin erosion as a result of rising uncooked materials costs. Nonetheless, small to medium-scale entrepreneurs who usually enter into fixed-price contracts could have to soak up some losses.

When international steel costs collapsed in Q1 2020, native importers didn’t decrease costs however really did improve as a result of import restrictions. Due to this fact, they could have developed some loss absorbing capability to take care of costs over the medium time period.

Final yr marked the bottom commodity costs in historical past and Sri Lanka was capable of faucet into low oil costs, amid falling home demand to ease some stress on the rupee by lowering oil import prices by round 30% in 2020 in comparison with 2019. Nonetheless, with commodity costs anticipated to rise in 2021, Sri Lanka may face challenges on a number of fronts.

“With the imposition of import restrictions, the present account deficit narrowed by about $ 4 billion in 2020. Sri Lanka imports about $ 20 billion in items per yr. Intermediate items, together with petroleum and associated merchandise, metals, fertilizers and chemical substances, that are primarily inputs for home industries, account for over 50% of the nation’s import invoice. “

Sri Lanka imported about 13.5 million barrels of crude oil (20% of the entire import invoice) price about $ 3.9 billion in 2019 and the decline in international oil costs related to the decline in home consumption saved about $ 1.3 billion in 2020. In accordance with the CPC’s provide plan for 2021, the price of imports of crude oil and refined merchandise is predicted to be 2, $ 5 billion, in comparison with about $ 59 a barrel of crude oil.

Nonetheless, OPEC’s intention to chop manufacturing in February and March this yr pushed costs above $ 60 a barrel for the primary time in additional than a yr. China’s fast financial restoration can also be maintaining oil costs on the rise. Goldman Sachs predicts that brent crude oil costs will hit $ 65 a barrel through the yr, whereas US Vitality.

With the gradual resumption of financial actions, a rise in home demand for oil is more likely to improve the import invoice and thus could put extra stress on the foreign money. As well as, rising oil costs will put stress on the monetary place of utility corporations within the brief time period.

Revising vitality costs can have a cascading impact on many sectors of the economic system. Extra importantly, it may set off a common rise normally value ranges.

As well as, downstream sector merchandise resembling kerosene, gasoline oil, gasoline oils, lubricants, waxes, asphalt and different petrochemicals would additionally revise costs affecting a mess of industries.

The Data Administration (EIA) expects a drop of $ 55 a barrel because of the slowing tempo of withdrawals from international oil inventories.

Base metals markets are anticipated to return to regular in 2021, supported by elevated funding spending by governments around the globe and the restoration in international industrial exercise. Copper, aluminum and iron ore – key industrial metals – are forecast to see their costs rise by round 14-16% this yr.

Sri Lanka imported round $ 563 million price of base metals in 2019. Rising industrial steel costs have a number of implications, particularly for the development {industry}. Merchandise-rated contracts embody provisions that will enable building corporations to assert will increase in the price of uncooked supplies based mostly on revealed month-to-month value indices.

Due to this fact, many large-scale building contractors are much less more likely to expertise margin erosion as a result of rising uncooked materials costs. Nonetheless, small to medium-scale entrepreneurs who usually enter into fixed-price contracts could have to soak up some losses.

When international steel costs collapsed in Q1 2020, native importers didn’t decrease costs however really did improve as a result of import restrictions. Due to this fact, they could have developed some loss absorbing capability to take care of costs over the medium time period.



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