The volatility in commodity prices is likely to affect only 10-12 per cent of traders if prices continue to fluctuate sharply over the medium term, said rating firm Crisil in its latest report. It is unlikely to impact materially the credit quality of traders rated by Crisil, the report added.
Flexible business models and adequate risk cover will continue to help traders absorb sharp fluctuations in commodity prices in the medium term. The rating firm conducted a study on 298 trading entities rated by it, to assess the entities’ ability to withstand fluctuations in the prices of goods sold by them. Most of these entities trade in steel products, agri commodities or metals. Price volatility has a bearing on traders’ profitability and constitutes a key credit risk for these entities, given that 40 per cent of their capital is employed to fund inventory.
“Key commodities’ prices such as steel, copper and gold have been highly volatile between 2009 and 2011. Traders have, nevertheless, maintained stable operating margins of 2.5-3 per cent during this period, supported by their flexible business models,” said Gurpreet Chhatwal, director of Crisil Ratings.
About 90 per cent of traders’ asset bases comprise current assets that can be increased or reduced in line with changes in the business. Also, current assets are funded largely by short-term debt, which moves in line with the traders’ operations. Much of the traders’ debt is, therefore, self-liquidating in nature, and gives them significant flexibility to adjust to changes in the business.
