Commodity Prices Hurting Economy!

Thu, 31 Dec Pre-Open

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Fall in commodity prices brings its own pros and cons for the economy as well as for the corporate sector. Commodities such as Brent crude have fallen to US$ 35 per barrel. In the last one month, the price of oil has fallen by around 15%. Indian imports 80% of its oil requirements. With crude touching new lows, oil marketing companies need to pay fewer dollars in order to buy oil.

Low oil prices also helps in maintaining fiscal deficit numbers at low levels. However, one should also keep in mind that in November 2014, petroleum products were India's largest exports at US$ 4.7 billion. Several Indian companies run oil refineries which refine crude oil and then export petroleum products. In the latest data published for exports, exports of petroleum products have reduced by 53.9% to US$ 2.2 billion as compared to November 2014. Hence, a fall in the crude prices also affects the exports of India in a huge way. Lower oil prices on one side benefits the economy by way of lower import bill and fiscal deficit; however on the other side it dents the exports of the country. This is quite evident from the recent data of exports in the month of November wherein the overall exports were down by 24.4%, led by a huge fall in exports from petroleum products.

Low commodity prices are also beneficial to certain companies as the raw material price reduces. The industry which benefits the most from low commodity prices is airlines, tyres, paints and Fast Moving Consumer Goods (FMCG). However, on the flip side, the entities in the commodities and capital goods space are facing the maximum brunt of the falling commodity prices in the form of lower realisations.

Take the steel industry for instance. Cheaper imports from China have hugely impacted the domestic steel industry. This has led to idle capacities, which in turn have deteriorated the return ratios of the steel majors. Further, steel prices have fallen to US$ 300 a tonne. At such low levels, steel players find it difficult to recover their cost of production. The sad state of commodity players has also impacted banks which have advanced loans in the commodity space. Infrastructure and iron & steel in itself have a share of about 80% of the total stressed loans.

To add to the woes, capital expenditure (capex) plans have also been delayed due to a fall in commodity prices. The cash flows have been impacted which in turn has delayed their expansion plans. Capex cycle needs to revive in order to achieve the projected growth rates.

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