According to India Ratings & Research, due to the current price levels of most commodities, a significant, sustained price correction is unlikely and thus the impact of recent price correction will be limited
India Ratings & Research (Ind-Ra) said it believes that the recent commodity price correction will have a limited impact on BSE 500 corporates. Additionally, given the current price levels of most commodities, a significant, a sustained price correction is unlikely.
According to the ratings agency, crude and its derivatives, metals, coal and agri-commodities can affect Indian corporates.
Crude and its derivatives
Ind-Ra said, the combined effect of a crude price rise (in US dollar terms) and rupee depreciation shaved off 4 percentage points on an average from the EBITDA margin of the corporates which use crude derivatives. These sectors are paints, plastics and lubricants. With the average crude price declining to $103 per bbl in FY13 from $107 per barrel (bbl) in FY12, these sectors have enjoyed some benefit to their margins. However, FY14 margins are unlikely to improve over the margins in Q4FY13.
On an annualised basis, the prices of crude and metals such as aluminium, nickel and steel are not likely to decline significantly from the current levels. Indian corporates who are the buyers of such metals would receive much limited benefit from the price correction. Owing to depreciating Indian rupee and physical premium, metal buyers generally receive at best half of the price correction benefits. The capital goods sector would be the highest beneficiary of these corrections. Other metal users such as auto, auto ancillary are likely to have limited benefit.
The current price of aluminium and nickel is at or below the respective 90th percentile marginal cost of production. However, potential for further price corrections remains for some base metals such as lead/zinc, copper, prices of which are currently 8%-12% above the marginal cost of production, Ind-Ra said.
According to the ratings agency, if the Indian rupee remains stable and coal prices fall further by another $10, which is likely, the earnings before interest, taxes, depreciation and amortization (EBITDA) of power generators may expand by 14% to 16%. For cement producers, a similar fall in coal prices may translate into a saving of around Rs2 per bag.
Key agriculture-based commodities considered by Ind-Ra are foodgrain for FMCG companies, sugar and edible oil for the food processing industry, rubber for tyre manufacturers and wood pulp for paper and newsprint industries. Most agri-commodities with the exception of grains and edible oils showed a price correction during March-September 2011. However, the secondary users of these commodities could not accrue the benefits of falling raw material prices in FY12 in the face of muted demand which has increased competitive intensity.
According to the ratings agency key beneficiaries of agri-commodities price correction are likely to be tea and coffee processors and tyre manufactures. FMCG companies in the food sectors may receive limited benefit driven by challenging volume growth and enhanced competitive pressure.