By Rajesh Kurup
The sharp surge in global crude oil prices is worrying Corporate India, as it will further push up input costs for sectors like cement, steel, infrastructure and paints. Operating margins of companies are already under pressure and with Brent crude oil price hovering around $100 per barrel, margins will remain under pressure. Crude prices are at their highest level since 2014 and estimates are that they could remain elevated in the near term. The surge in prices have come on the back of fears of disruption in supplies from Russia, on reports that President Vladimir Putin had ordered troops into Ukraine. The prices are up 47.55% since last year, according to Bloomberg data.
“The rise in fuel price impacts supply chain and logistics cost of raw materials for the real estate sector, leading to an escalation in the cost of construction. This further adds woes to liquidity management needed as working capital to finance project development and impose additional burden. If not streamlined further, then it has potential to make the project unviable and prune profit margins,” Niranjan Hiranandani, national vice-chairman of the National Real Estate Development Council (NAREDCO), told FE.
“The industry pins hope on regulatory authorities to do course correction by keeping fuel cost in check, so the transportation cost is feasible and the project is developed and delivered in time,” Hiranandani, who is also the managing director of the Hiranandani Group, said. Impacted by crude prices, the overall costs of cement producers would rise by 11-12% in the current fiscal, while steel firms are unlikely to see cost pressure and the long-term impact on National Highway (NH) projects would be nil.
“More than 65% of the cost for cement players are directly or indirectly linked to crude prices. Power, fuel and freight, which account to about 55-60% of the total cost, is expected to see a surge in the current fiscal led by rising diesel and pet coke prices. Similarly, packaging costs (3-4% of total cost) would rise by 20-30% as prices of high-density polyethylene bags (packaging bags) rise, and overall costs would rise by 11-12% in current fiscal due to increase in crude prices,” Hetal Gandhi, director at Crisil Research said.
However, steel producers, being more dependent on other raw materials such as iron ore and coking coal, are unlikely to see pressure on costs.
“The steel sector is relatively less susceptible to volatility of crude oil prices. Freight costs, which accounts for 5-8% of total costs, are set to see a marginal rise led by increasing diesel prices,” Gandhi said.The infrastructure sector, mainly roads, where major maintenance work is currently due, could face some pricing pressure. Though 60-70% of NH projects are built using bitumen, however, with milestone-based payments for engineering, procurement and construction (EPC) and hybrid annuity model projects linked to inflation, long-term impact on developer margins are “nullified”, Gandhi added.
