Falling commodity prices take sheen off margins

Producers, consumer industry in tug of war to protect interest

With prices of most commodities, especially crude oil, metals and iron ore, falling, producing and consuming companies are in a tug of war to maintain margins.

Consuming companies want to lock part of their raw material costs by entering into medium-term supply contracts, which producing companies are resisting as much as they can.

Metal producers have benefited from rising prices over the past year. Even in the January-March period, prices of most metals were strong. However, this week has seen prices falling as global issues resurfaced. The elections in France and a possible exit from the EU, a slowdown in Chinese manufacturing and the impending interest hike in the US have all contributed to the price decline.

While most companies Business Standard spoke to said they could not comment either because they were in the silent period or because it was a sensitive issue, an exclusive with a domestic metal giant said, “Consumers want to lock part of their raw material requirements at current prices as it is still the beginning of the financial year. We are not too keen to enter into such contracts as prices have dropped. While it is difficult to say prices will not fall further, usually in a falling market buyers’ pressure prevails.”

This is the case for most base metal producers.

Gold prices recovered marginally from a two-month low of $1,225.7 an ounce to trade at $1,221.6 on Friday, while silver is trading around a four-month low of $16.3 per ounce in international markets. Copper is trading at $5,560 per tonne on the London Metal Exchange, at a fivemonth low, while zinc at $2,571 a tonne is at a one-month low.

For metal consuming companies, it is a good time to lock in supplies, say analysts.

A senior executive with a consuming company said, “We are talking to our copper suppliers to lock prices. While they assure us of supply, they prefer monthly price revisions based on average prices on the LME.”

Iron ore has lost about 12 per cent this week in Singapore, its sharpest fall since November, on concerns of China's demand for steel. Iron ore, which was $94.8 per tonne on February 21, has declined to $61.7, its lowest since October. Last year, China bought 1 billion tonnes of ore and several mines in Australia, Brazil and other producing countries resumed or increased production, which is exerting pressure now.

An executive with a steel major said, “The iron ore cost in India has not fallen like in the international market, but imports are still not viable. However, we have faced pressure of high coking coal prices, which we want to pass on.” A year ago, Australian coking coal was below $100 a tonne, it is $211 now. The price was above $300 a month ago, adding to pressures on input costs and margins of steel makers. State-owned iron ore major NMDC has not raised prices after March. “Even for the month of May, we have retained prices as demand is still comfortable. We maintain prices in line with imports,” said an NMDC executive.

The fall in commodities is led by crude oil, which has given up all its gains after a production cut by the Organisation of the Petroleum Exporting Countries in November. In the last two days Brent crude oil prices fell 4.5 per cent to trade at $47.8 a barrel. However, prices saw a marginal increase on strong US jobs data on Friday.

There are expectations that oil producing countries may not honour their agreement. Brent crude oil prices are at their lowest since November and have fallen from a high of $57-58 per barrel. Indian refineries and processors of derivatives are relieved with the fall in crude oil prices. Some private sector refineries are hedging their crude oil requirements. Public sector refineries usually stay away from hedging.

“Private sector refineries are quite active in hedging in overseas over-the-counter derivatives. What we understand is that refineries have increased hedging at lower crude oil prices,” said a commodities market expert. Domestic jewellery manufacturers have a different hedge. “There are facilities like the gold metal loan, which helps manufacturers and retailers completely derisk the gold price,” said Sanjeev Agarwal, chairman, gems and jewellery committee, Federation of Indian Chambers of Commerce and Industry.