Other recent positives give hope, though analysts still unsure of supply dynamics.
After the slowdown blues over the past few months, Indian companies are breathing easy — courtesy declining commodity prices over the last three months.
The Reuters CRB index of commodities has fallen 4.34 per cent in three months — 2.5 per cent in June itself — when ending of quantitative easing (QE2) in the United States became evident.
Analysts say the margin pressure India Inc has faced over recent quarters will ease considerably as raw materials account for two-third of the total costs of manufacturing companies. Even a slight fall can have a significant impact, they say.
In the last quarter, prices of some important commodities such as nickel, tin, steel, rubber and cotton fell 10-20 per cent, while crude oil is down 3.5 per cent.
Some say the decline is still not steep enough. In the past year, the Reuters CRB index of 24 commodities has risen 31 per cent.
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Some commodities rose much higher. But even then, there is hope in the air, as most in India Inc believe the worst is over. The idiom has changed from ‘how much more?’ to ‘will it fall further?’
However, no one is expecting the fall in commodity prices to have an immediate impact on corporate numbers. “The sentiment is turning positive due to the fall in prices. We believe interest rates may not go up further. But corporate results will reflect this in the October-December quarter more decisively with increase in earnings,” said Mahesh Vyas, MD and CEO, CMIE.
Marico CMD Harsh Mariwala, also president of Ficci, agrees. “Things have started looking better, selectively. Exports are improving, the current account deficit is falling, foreign investments have gone up and the food inflation rate is declining. However, we have to wait and watch whether the fall in commodity prices is sustainable.” His bullishness also stems from expectations that the government will take important decisions on manufacturing policy and foreign direct investment in the retail sector.
| WINDS OF CHANGE International prices of key commodities and their returns | |||||
| Current value | Since June* | 3 months* | 1 year* | ||
| Commodities Index | CRB Reuters US Spot All Commodities Index | 550.30 | -2.52 | -4.34 | 31.37 |
| Metal ($/Tonne) | LME Lead | 2,655.00 | 4.82 | -2.39 | 57.10 |
| LME Zinc | 2,343.00 | 4.13 | 1.06 | 35.43 | |
| LME Copper | 9,411.00 | 2.02 | 0.12 | 44.45 | |
| LME Nickel | 23,100.00 | -0.24 | -11.43 | 18.89 | |
| Steel-HRC | 718.00 | -1.37 | -6.63 | 21.08 | |
| LME Aluminium | 2,460.50 | -7.12 | -5.37 | 27.88 | |
| LME Tin | 25,640.00 | -8.41 | -18.96 | 46.72 | |
| Agri commodity ($/Tonne) | Cotton no.2-NYBOT futures | 3,567.10 | 1.97 | -19.19 | 95.89 |
| Rubber-TOCOM futures | 4,732.60 | -8.45 | -11.99 | 22.01 | |
| Palm oil Malaysia FOB | 1,075.00 | -11.7 | -9.47 | 36.08 | |
| Energy | Brent Crude ($/bbl) | 111.23 | -4.71 | -5.13 | 50.58 |
| Source: Bloomberg; Compiled by BS Research Bureau * % change | |||||
Jayant Manglik, president, Religare Commodities, said, “The undertone in the commodity markets is still positive because any further fall will be met by demand at lower levels.”
What could help is the tight money situation after the ending of QE2. Suzanne Smith, MD and analytical manager, corporate ratings (commodities), Asia Pacific region, Standard and Poor’s, believes the monetary tightening in India and China could dampen demand.
“In China, there is already an oversupply of steel, but this is not the case in India. Underlying supply/demand balance is still good in aluminum, copper, zinc and nickel because we don’t see any oversupply in the short term and the demand is still growing. This could support prices of these commodities in the short term,” said Smith.
Though coal prices are still high, most expect a gradual easing in few months. That will help many companies running coal-based plants curtail costs. Even banks are not in a hurry to curtail credit growth targets and expect the good times to return soon. Most lenders, except State Bank of India, are refusing to cut their credit growth target for the current financial year, in spite of slow demand for advances amid rising rates. Bankers would prefer to wait till September-end before revising their loan growth targets. “We’re sticking to our target of 20-22 per cent growth and will review our growth targets only after September,” said Union Bank of India CMD M V Nair.