The invasion of Ukraine by Russia, as well as the flurry of punitive measures put on it by the US and European nations, has the potential to have two effects on India Inc. One, if not passed on, the resulting jump in commodity prices might raise input costs and pressure downstream sector margins.
Two, trade and banking restrictions may limit India’s export-import operations in the targeted region unless workarounds are discovered.
However, according to a CRISIL analysis, a few industries, such as steel and aluminium, may profit from increased prices. Overall, the impact of the continuing battle will differ depending on the industry.
. However, as the geopolitical situation improves, a clearer picture, including the credit quality of affected enterprises, will emerge.
Brent crude prices have soared beyond US$130/barrel, up from US$97/barrel before the Russian incursion. Oil marketing corporations are already losing money without a corresponding increase in retail fuel costs. Chemicals and paints industries that use crude oil-linked derivatives as their principal feedstock are feeling the effects of this. As inventory purchased at reduced prices run out, these industries may face a margin compression that might go far into the first quarter of the following fiscal year.
Other commodities will witness increased cost inflation as well. Steel and aluminium prices, which have recently risen from already high levels (Russia provides nearly 6% of world primary aluminium output), will continue to rise. While this would assist local primary steelmakers and aluminium smelters by increasing realisations, it would have a detrimental impact on the construction, real estate, and car industries.
Natural gas spot prices, which are similarly related to petroleum, may continue to rise. However, the downstream industries would be less affected. The higher pricing can be passed on to urea producers who utilise it as a feedstock. However, if the conflict continues, domestic urea supply might become a problem for the agricultural industry, as about 8% of the demand is met domestically.
City gas operators have favourable cost economics compared to competing fuels, according to the credit rating agency, which might allow them to pass on gas price rises downstream – at least to some extent.
Sanctions tied to trade and banking might affect industries that get critical raw materials like crude sunflower oil and rough diamonds, according to CRISIL. Sunflower oil accounts for over 10% of India’s edible oil consumption, with 90% of it coming from Russia and Ukraine.
An protracted battle might disrupt supply to domestic oil mills, which normally keep 30-45 days’ worth of inventories on hand and have few alternatives for changing their source on short notice.
For diamond polishers, persistent trade interruption can raise the cost of raw diamonds, putting a strain on their profit margins. Alrosa, Russia’s largest diamond miner, produces approximately 30% of the world’s rough diamonds, which saw a 21 percent increase in price in 2021.
The persistent semiconductor shortfall is unlikely to provide relief to the automotive industry. This is due to the fact that Russia and Ukraine supply over 75% of the neon gas required in semiconductor manufacturing operations such as etching circuit patterns into silicon wafers to build chips. A lengthy conflict, as well as sanctions against Russia, would stifle semiconductor output even further. According to the rating agency, import dependency on palladium and platinum, which are used in catalytic converters, and nickel, which is used as a cathode in lithium-ion batteries, is low and so may have only a minor impact on the vehicle sector.
The pharmaceuticals industry may only see a minor impact because its shipments to Russia and Ukraine are now free from sanctions, and Indian drugmakers’ exposure to these regions is modest, accounting for less than 3% of overall exports, according to CRISIL. To be sure, the government and the impacted enterprises are expected to take efforts to mitigate the situation, and CRISIL is keeping a close eye on the situation and will analyse its impact on credit quality on a case-by-case basis.
Consumers could also expect a significant increase in the price of animal protein, such as chicken, dairy products, and seafood. Amul, the world’s largest dairy company, hiked retail milk prices by 4% in all Indian markets on March 1st. “Due to growing energy, packaging, transportation, and cow feeding expenses, this price increase is necessary. As a result, the overall cost of operation and milk production has increased “Amul stated in a press statement. Mother Dairy, a milk brand, has also announced a price increase of Rs 2 effective March 6th.
The ongoing conflicts between Russia and Ukraine are expected to have an influence on local wheat and sunflower oil prices. Both nations produce considerable amounts of wheat, and Ukraine is one of the world’s leading exporters of sunflower seeds. Analysts say that while India is self-sufficient in wheat, it does import some high-quality grain. Furthermore, the drop in Russian and Ukrainian wheat prices on the international market would provide an appealing opportunity for Indian exporters, raising local prices significantly. In the last 8-10 days, the price of sunflower oil has risen by around 5% to 10% on the worldwide market. For customers who have been paying historically high prices for over two years, the Russia-Ukraine conflict has dashed any thoughts of relief from high cooking oil costs.
Chicken prices have risen by 25% since January, and industry insiders predict a further increase of 10% to 50% in March in various regions of the nation owing to a severe feed scarcity.
Tea exports, which are referred to as chai in both Russian and Ukrainian, may also meet difficulties. Russia is one of India’s largest tea buyers, accounting for 18% of the country’s tea exports. Given the importance of the Russian market for Indian tea exports, Given that Iran shipments continue to be plagued by payment troubles, which has resulted in a sharp drop in export volumes, the Russian market is critical for Indian tea exports.
Hostilities between Russia and Ukraine are projected to put pressure on India’s agriculture industry, raising costs and limiting availability of potash, a vital component used in fertiliser production.
Belarus and Russia are now the world’s leading suppliers of potash. India, on the other hand, is a large importer of potash, which is utilised in fertiliser production. Russia, Ukraine, and Belarus account for ten percent to twelve percent of India’s total fertiliser imports. . With already-high prices, the government’s subsidy expenditure, which would be necessary to maintain an acceptable retail price for farmers, will skyrocket.
If Russia and Ukraine do not reach an agreement quickly, there is a risk that the war may spread beyond the area. This would be disastrous for businesses. Regardless of whether the battle continues or ends soon, it is likely to result in soaring inflation, which will affect a variety of industries.