SynopsisPrices of industrial commodities have shot up, and this has had a significant impact on many export-centric sectors. However, it may not be all bad news.
The world is witnessing the “great commodities boom of 2021”. Demand for commodities has shot up while supply remains constrained, leading to a spurt in prices of various key industrial commodities. These goods — mainly raw or partly refined primary goods whose value mainly reflects the cost of finding, gathering or harvesting them — remain the building blocks of various industrial processes, which makes them extremely necessary for an industrialising economy like India. Naturally, Indian exporting firms are especially feeling the impact.
The great commodities boom of 2021 — as experts are calling it — did not actually start in 2021. The Director-General & CEO of the Federation of Indian Export Organisations (FIEO), Ajay Sahai, says commodity prices started rising in 2020 and the trend has picked up pace now.
The World Bank’s Commodity Market Outlook, April 2021, stated that nearly all commodity prices rose in January-March 2021, after reaching their lows in 2020. This rally was supported by the global economic recovery, improved growth prospects and supply factors specific to crude oil, copper and some food commodities, it said. Metal prices would average 30% higher in 2021 than in 2020 on the back of strong demand, “before dropping back somewhat in 2022”. As metal prices are predominantly driven by demand shocks, metal price swings can amplify the impact of global downturns and recessions — or, conversely, upturns — for metal exporters, the report added.
The previous price upcycle in commodities was in 2011 on rising demand from emerging markets. This time, economists say, there is an unprecedented boom because of multiple factors. One obvious driver is the pent-up demand for commodities after a subdued period of economic activity due to the coronavirus. Experts also point to the rising appetite for commodities from China, the “world’s factory”, as economic activity in the country has picked up faster. In fact, China’s factory output was at a 20-month high in November last year. Various global manufacturing hotspots also saw a similar demand spike.
A Body Blow for Indian Sectors
The price rise has a significant bearing on export-dominated sectors. According to the PHD Chamber of Commerce and Industry (PHDCCI), it has made raw materials costlier by 50-100%. “The prices of five commodities for June 1, 2020, to June 1, 2021, including steel, copper, nickel, aluminium and crude oil, which are the necessities for the manufacturing industry, have skyrocketed when compared with last year,” says Sanjay Aggarwal, President of the chamber.
The prices of steel increased by 197%, copper by 90%, nickel by 46%, aluminium by 63% and crude oil by 74%, says Aggarwal. In June 2021, the average increase in five major benchmark industrial commodities prices was 94% when compared with that in June 2020, he added.
The rush by manufacturers across the world to acquire more natural resources, creating a commodity shortage, has had a crippling effect on several key sectors in India. The value-added exports and critical downstream segments are especially heavily dependent on an uninterrupted supply of key commodities.
The downstream industries, FIEO’s Sahai says, are hurting as manufacturers, especially exporters, are unable to convince buyers to pay more to compensate for the price rise. This has cast a cloud on the profitability of exports, which hit a record low recently, he says.
The Joint Secretary General of the Federation of Indian Mineral Industries (FIMI), BK Bhatia, has a ready example. “Steel-consuming sectors are worried that the continuous upsurge in raw material prices will increase the cost of projects, leading to a cascading effect on the end-users,” he says.
Auto companies such as Tata Motors, Maruti Suzuki, M&M and Hyundai have already increased prices on the back of costlier steel, aluminium and copper. The sector is a big foreign exchange earner as several models are exported.
FIMI points out that the Indian steel industry takes international prices as a base, whereas it gets high-grade iron ore comparatively cheaper, either from domestic sources or captive mines. The federation had complained to the government in January that domestic steel companies demand almost international prices though they are protected, get incentives and have a secured source.
This “artificial” price rise, FIMI says, is crushing MSME players. Downstream industries should get steel at a competitive price, it says, arguing for a price monitoring and regulation mechanism. Unsustainable prices keep the domestic per capita consumption at an abysmal 64.2 kg against the global average of 227.5 kg.
To rectify such anomalies, experts say policymakers should study to what extent the country can handle rising prices of copper, aluminium, steel and other metals. This can help design measures that can shield the industry, especially small manufacturers.
Blow to Exporting MSMEs
Within the MSMEs, it is the export-oriented sectors that are bearing the brunt of the price rise. The PHDCCI estimates about 40% of exports are from MSMEs. “Rising raw material prices are having a significant impact on profit margins. High fuel and power prices are also raising the industry’s input costs and reducing its competitiveness in the international markets,” says Aggarwal. The steep rise in steel prices has affected engineering exports of MSMEs, which were already reeling under the pandemic’s impact.
iStockRising iron and steel prices can have an adverse impact on MSME manufacturers.Sheets metal, machine manufacturing and construction & infrastructure industries use steel as basic raw materials, says Arun Shukla, the Managing Partner of Himachal Pradesh-based Vishwakarma Engineering. “Due to the steep rise in these steel prices, India is gradually losing its market in the value-added segments of engineering export.” Shukla, also a member of the executive committee of the Indian Pharma Machine Manufacturing Association, adds that he expects the exports of finished engineering goods to fall.
A significant number of MSMEs are involved in the production of pig iron, hot rolled coils and related products, says Arun Kumar Garodia, Vice-Chairman, Engineering Export Promotion Council (EEPC). But he also sees some relief on the horizon. “From July 2021, iron and steel prices are going down. In fact, prices have now been corrected by almost 10%.” If that trend holds, iron and steel prices should cool off.
There are two types of iron and steel producers in India: Primary players such as Jindal Steel, SAIL or Tata Steel and secondary players. With less wherewithal at disposal, secondary producers generally buy ores from mining facilities of the major producers. The bigger players call the shots as they have their own mining facilities, says Garodia. “The prices for hot rolled coils, for example, offered by major players have increased by over 100% lately. How can an Indian player compete in the global market when his raw material is this expensive?”
This imbalance can severely impact downstream industries, affecting growth.
The EEPC, Garodia says, had in consultation with the steel ministry come out with a scheme — Steel at Export Parity Price — to provide cheaper steel. But only a few players have so far enjoyed its benefits. Garodia says the government is yet to ease many procedural bottlenecks and compliances related issues.
Boom – A Mixed Bag
Copper is another metal of worry for exporters. India imports a huge amount of copper concentrate for its smelters. Global copper prices were nearly 50% higher in March 2021 against those at the end of 2019, says Bhatia. “Indian smelters are heavily dependent on the international market for copper concentrate. The price rise has affected manufacturers and exporters,” says the joint secretary of FIMI.
In iron ore, India is considered to be self-sufficient. In fact, the country is a primary iron ore supplier to China. Experts say a recent surge in iron ore exports largely reflected robust demand for steel production in China.
India has a win-win situation here. FIMI says Indian mines export low-grade ore, not used by domestic steel producers. “Over 150 million tonnes of unsold stockpile of low-grade iron ore is lying at the mine-heads in the country. Such export of low-grade iron ore will help in liquidating the non-moving stocks and also earn foreign exchange,” says Bhatia. “That is a positive impact on Indian exporters because of the commodities boom.”
During June 2021, domestic iron ore prices were cheaper by Rs 7,650 per tonne against international prices, Bhatia adds.
Skyrocketing commodity prices have been a blessing for agriculture, too. Though the pandemic crippled supply chains, India emerged as a reliable provider of food.
India’s agri-exports set new records in 2020-21, says M Angamuthu, Chairman, Agricultural and Processed Foods Exports Development Authority (APEDA). It rose 25.02% in dollar terms in FY21 from the previous period. Exports of basmati and non-basmati rice almost doubled to 17.7 million tonnes in the period. “There was enormous demand for other types of rice as well. Last year, we went beyond our traditional markets of the Middle East, the EU and US and exported rice to over 30+ plus African countries,” says Angamuthu. “Wheat and corn also saw an exponential growth in exports.” He is confident the trend will gain momentum.
iStockStrong commodity prices have propelled export of agri products from the country.In the midst of the global price rise, the industrial commodities that saw a significant export growth between 2019 and 2021 of April-June were copper and products (250.4%), iron and steel (156.6%), zinc and products (83.7%), aluminium and products (69.9%), tin and products (55.2%), and lead and products (43.4%), according to the PHDCCI.
But commodity exports can put an additional burden on logistics, says Sahai. In some cases, the same raw material is exported by one company and imported by another. We should avoid such issues. Sahai asserts India should also have a road map for value-added exports. “The government should encourage downstream industry in such sectors so that more domestic capabilities are created for manufacturing, processing and exports of products. With economies of scale, we can manufacture the end-product at a very competitive cost. As we move towards creation of larger production capabilities, we will be having more value-added exports and fewer exports of raw materials,” he adds.
Experts also say the government should devise a policy shield for industry to protect it from price volatility. FIMI says such intervention is particularly required in steel.
If the industry gets the right support, Indian companies would happily call the commodities boom of 2021 as great. Else, it would be a wasted opportunity.
(Editing by Ram Mohan. Illustrations by Sadhana Saxena)
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