The weekend saw commodity prices tumble the most since August, amid expectations that they will soften further. But, that may have been only temporary relief for India Inc, as the general expectation is also that prices will firm up again by the second half of this year.

Andrew Holland, Chief Executive Officer, Ambit Private Capital, expects
commodity prices to soften further before firming up around the second
half, once the global recovery strengthens. Ravi Sud, Chief Financial
Officer, Hero Honda, says companies will still see some pressure in the
next few quarters, but it won’t be of the same kind we saw in the
second quarter of 2008-09, when commodity prices had peaked.
“Ultimately, economics will prevail.’’

Hitesh Agrawal, head of research at Angel Broking, said expansion of
margins for companies from here onwards will be difficult, though an
odd one may gain from some inventory or an ongoing contract where
prices are still favourable. ‘‘Prices have also moved up in
anticipation of contracts which are due for renewal,’’ he said.

Annual contracts in many commodities like iron ore and coal are due for
renewal and this is one reason why some analysts feel commodity prices
may not fall much from these levels. Jignesh Shah, head of investment
strategy at ABN Amro Private Banking, said the big improvment in this
time’s third quarter results were a function of the base effect, having
been well down in the same period last year. ‘‘Margins were driven by
cost-cutting efforts and efficiency improvements. Both these factors
will reduce year-on-year growth,’’ he said.

On the recent slump in commodities prices, Holland says, ‘‘Liquidity
was driving prices. With easy liquidity going away, there’s no real
support for commodities… Commodities have run too high; the
fundamentals don’t justify the rise. There’s no real demand.’’

This agrees with what Sud suspects, that the run in commodity prices
was largely speculative, and not backed by physical demand. ‘‘When the
futures start moving up, physical prices also start moving up after a
lag effect,’’ he says.

Dipen Shah, senior vice-president (private client group), Kotak
Securities, doesn’t expect commodities to rise much in the near term,
as the global economy is still to recover as expected and there are
concerns in Europe.

Pressure still there

Hero Honda’s raw material bill (as a percentage of operating expenses)
has risen from 67.95 per cent in the first quarter to 68.4 per cent in
Q2 to 68.55 per cent in Q3. This will continue in Q4, but good (25 per
cent growth) volumes have enabled it offset rising input costs.

Other companies have not been so lucky. Hit by sugar prices which have
doubled over last year, Pepsi and Coke have increased prices by 9-20
per cent across packs; Britannia Industries saw net profits tumble 37
per cent in the December quarter and MD Vinita Bali has indicated it
may be forced to increase product prices by 4-8 per cent.

Smaller biscuit makers like Priyagold and Anmol are countering higher
raw material costs by cutting retailers’ margin, but they fear it will
start impacting their sales. Milk prices have gone up, as the cost of
cattlefeed like de-oiled rice bran cake, jowar, maize and molasses have
gone up by around 30 per cent in the last year.

In many cases, companies have been able to raise prices. But, this has
been able to only partly offset the increase in raw material prices.
Take Apollo Tyres. In January, it raised prices by three per cent. But,
in the past six months, its raw material costs have increased 15 per
cent, and it could do with another raise of 8-9 per cent.

Vehicle makers, many of whom are Apollo’s customers, provide a price
increase with a lag when commodity prices go up but when these go down,
they want to reduce prices almost immediately, explains Suman Sarkar,
CFO, Apollo Tyres. Analysts expect Apollo’s operating margins to come
down by 200 basis points in Q4.

Source: Business Standard

Search to find what you want

• The trend towards higher commodity prices, but recovery is slow

    The year has started off well for commodities and shipping rates amid signs of an improving global economy. But there have been worrying signs, including weak employment data from the US, and a much smaller than expected earnings report from America’s largest aluminium producer, Alcoa. Experts at a seminar held

• 2010, year from base metal

    Last year was dedicated to gold, and 2010 seems to be the year of base metals. According to analysts, prices for aluminium, copper, nickel, lead and zinc are all set to outsmart gold prices this year as industrial demand for these base metals from emerging economies increases. Chin and India

• The global demand for commodities on the rise

    Raw materials may return more than financial assets for the first time in three years as the global economy rebounds, according to Bloomberg surveys and 2009’s most accurate commodity forecasters. Oil, corn, gold and palladium will advance as much as 17 per cent this year, the analysts said. The S&P

• Scotiabank sees rise in coal and iron ore in 2010

    Ms Patricia Mohr vice president and commodities specialist at Scotiabank forecasts commodity prices should continue to be higher due to ongoing strength in China’s economy, some re stocking of basic materials across the G 7, more active investor interest in commodities as an asset class and renewed weakness in the

• Increased demand for iron ore from China, Japan and the EU expects

    Demand for iron ore and coal is expected to grow next year, reflecting higher steel production, pushing Australia’s output close to capacity. The Australian Bureau of Agricultural & Resource Economics said world trade in iron ore would increase by 8 per cent to 987 million tonnes in 2010, compared with

• Australia s third largest commodity production decline

    Which is the largest selling commodity in Australia after coal and iron ore? The answer is simple and straight.

• High shipping costs, see UAE rethink palm oil hub

     High costs to re-export the commodity have moved traders to rethink a strategy to develop the United Arab Emirates into a trading hub for Malaysian palm oil. The UAE’s palm oil imports from Malaysia fell nearly 50 per cent between January to June due to rising shipping costs to re-export the

• Commodity investments are becoming more complicated

    Investing in commodities has never been simple and the increasing range of both strategies and vehicles has made investment decisions even more complex.

• Commodity investments are becoming more complicated

    Investing in commodities has never been simple and the increasing range of both strategies and vehicles has made investment decisions even more complex.

• United Arab Emirates no longer hub for Malaysian palm oil

     High costs to re-export the commodity have moved traders to rethink a strategy to develop the UAE into a trading hub for Malaysian palm oil. The UAE’s palm oil imports from Malaysia fell nearly 50 per cent between January to June due to rising shipping costs to re-export the commodity from

• Morgan Stanley finds Q3 commode markets u0026quot

    Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago. Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley

• Morgan Stanley finds Q3 commode markets u0026quot

    Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago. Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley

• Morgan Stanley finds Q3 commode markets u0026quot

    Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago. Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley

• Morgan Stanley finds Q3 commode markets u0026quot

    Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago. Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley

• Morgan Stanley finds Q3 commode markets u0026quot

    Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago. Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley