Commodity prices are expected to be firm next year as well. This spells good news for commodity producers and bad news for end-users.
Prices of several commodities have touched multi-year highs this year. For instance, international coal prices are up between 25 per cent and 40 per cent over prices of last year, domestic steel prices are up 14 per cent in the last six months, sponge iron prices are up 35 per cent, spot iron prices are up 50 per cent, ferro chrome prices are up 30 per cent, alumina prices are up 80 per cent, caustic soda up 15-20 per cent, pulp prices up 8 per cent and crude oil prices are up 20 per cent.
The rise in commodity prices is likely to put pressure on earnings of various companies. Manufacturers of cement, steel, aluminium, petroleum products, steel, power and food products will have to live with around 5-15 per cent lower margins in 2004-05.
A CLSA report on commodity and freight rates says the commodity price rise has been driven by higher ocean freight rates that have risen around two to three times in the current calendar year.
These increases have been owing to demand growth from China for most commodities and underinvestment in hard assets during the 1990s.
While shipping companies are key beneficiaries of the rise in freight rates, the overall negative impact on profitability of corporates will be around 3 per cent as ocean freight is a small component of cost for most companies.
Steel & aluminium producers such as Tata Steel, Hindalco and Nalco are benefiting from the rise in metal prices.
Marketing companies in the oil & gas sector and cement companies, which are dependent on imported coal, will be the likely losers.
The rise in steel prices will impact BHEL and Larsen Toubro, which use steel for power plant equipment and engineering projects.
The price escalation clause for key materials, including steel, in most contracts will take care of the pressure on margins.
Bajaj Auto and Hero Honda, whose steel consumption costs account for around 12-15 per cent of the total raw material costs, are likely to face pressure on margins.
Steel costs account for about 25 per cent of raw material costs of Tata Motors. However, since the company buys steel through annual contracts, it is protected from cost escalations for some time.
For cement majors, Gujarat Ambuja Cement, ACC, Larsen & Toubro, and Grasim, higher coal costs will definitely impact margins, unless the companies hike product prices higher.
BSES and Tata power too use coal for generating power. The international coal prices are up between 25-40 per cent. There has been no rise in domestic coal prices, but any price revision by Coal India can impact profitability.
Petroleum products manufacturers such as HPCL, BPCL, IOC and Reliance Industries use crude as inputs. Crude prices are up 20 per cent in the last one year, while freights rate are up over 100 per cent. The impact on margins is limited as the government allows full pass through of rise with a time lag.
Among other companies, Hindalco is likely to be hurt by the rise in alumina, copper concentrate and coal prices. Hindustan Lever has been affected by the rise in prices of palm oil and chemicals.
HLL imports palm oil which accounts for 7 per cent of its sales, while it buys chemicals domestically, which accounts for 11 per cent of its sales.
© 2025