Rising crude: Consumers brace for price impact across categories

Petrol and diesel prices are already running at all-time high levels. But the bad news may not end at the petrol pumps.

The rising crude has a direct, or indirect, impact on almost every sector. If fuel costs keep inching up, consumers may end up paying more for almost everything — from TVs and cars to even medicines. The only silver lining may be in the form of flight tickets as intense competition prevents airlines from passing on the higher costs to fliers.

We take a look at the crude impact on some of the major sectors.

White goods

Consumer durable firms, though not directly impacted by the crude oil price hike, will have to bear the impact of the rise of raw materials which are linked to oil rates.

Sunil D’Souza, managing director, Whirlpool India said that oil, though not a direct input, has a significant bearing since it is not only the feedstock for a number of commodities and the prime index for energy costs in production, but is also an important determinant of freight costs in a freight heavy industry like ours.

Freight costs are estimated to be around 10-15 percent of the overall costs of consumer durable companies. Any hike in oil prices leads to a subsequent increase in transport costs, pushing up the overall production costs.

While consumer durable firms, impacted by the twin issues of falling rupee and rising input costs have already decided to hike prices from June, may further increase prices if the oil situation continues.

Ajay Seth, Head Channel Operations, Panasonic India said that the cascading impact of rising crude oil prices and the continual depreciation of rupee will impact the economics of the consumer durable industry going forward.

“We have enough inventory at our disposal to sustain the current prices of our products, in case the cost of raw material begins to rise. However, if this scenario continues to escalate only then will we look at increasing the prices of our products," he added.

Aviation

Air turbine fuel (ATF) prices have already increased by over 7 per cent till April this year, and the impact was seen in the fourth quarter results of airlines. Fuels costs shaved off Rs 81 crore from SpiceJet’s bottomline. In the case of IndiGo, the country’s largest airline by market share, its yield declined by 5.6 per cent due to higher fuel prices.

ATF makes up for almost 40 per cent of the overall costs of airlines.

Unfortunately, the intense competition will not allow airlines to pass on the increased cost to customers. In fact, Ajay Singh – Chairman & MD of SpiceJet – recently said airlines may have to absorb the additional costs even if crude hits the $100-mark.

But this would mean that their margins will be squeezed, and the recent good run – with most airlines reporting profits - may come to a grinding halt.

Pharmaceuticals

High crude oil prices may not be good news for pharmaceutical industry.  Hardening of oil prices will lead to higher input costs, though impact on freight will be negligible as pharma isn't much of bulk goods.

“Freight is a very small element of 1 and 1.5 percent of the overall costs, but input material costs like diesel used in boilers will go up, plus it could have impact on the prices of petrochemical based raw materials,” said DG Shah, Secretary General of Indian Pharmaceutical Alliance (IPA). IPA is a lobby group of large Indian drug makers.

Shah said the IPA hasn’t done any official study on the impact of crude oil prices.

Though high crude oil prices coincides with weakening of rupee considered to be positive for exporters – but for industry that relies on import of active pharmaceutical ingredient (API) and intermediate the advantage cancels out. India imports little over 80 percent of its APIs and intermediates from China.

“Realization in rupee will be higher, but there is also foreign exchange outgo on account of raw material imports,” Shah said.

Auto

Apart from higher freight costs, auto companies are worried if the rising crude will taper down demand.

Bajaj Auto, the country’s fourth largest two-wheeler maker, has already hiked prices twice this calendar year, and may be forced to do again.

“Freight rates have gone up substantially and it has impacted us”, said Kevin D’Sa, president (finance), Bajaj Auto. “If oil prices keeping going up like this then we might have to look at our prices once again”, he added.

This will impact demand for new vehicles, across segments.

Post monsoon the demand is expected to come down if diesel prices remain high for heavy vehicles. Margins will come down and delinquencies will rise”, said Umesh Revankar, managing director, Shriram Transport Finance.

Logistics

Logistics make up for 13-15 per cent of  product costs in India, much higher than the global average of 6 per cent. Roads carry 60 per cent of the freight in India. A rise in fuel costs, has an immediate impact.

“The rates have been passed on to the customers under contracts we have with the customers. The rates in the market have started to go up and customers have started to accept it, it’s a process,” said Vineet Agarwal, managing director, Transport Corporation of India.

Tyres

Raw materials constitute around 60-65 per cent of a tyre company’s production cost. And out of the raw material basket, crude-based ones constitute about 60 per cent.

“Roughly, a 10 per cent increase in raw material costs, impacts tyre industry's margins by 7 per cent, if price corrections are not taken accordingly,” said Gaurav Kumar, CFO, Apollo Tyres, in a recent call with investors.