India's Firms Prepare for Price Hikes as West Asia Conflict Rises

Indian firms are gearing up for the possibility of price hikes as manufacturing and freight costs are likely to shoot up in the wake of the West Asia conflict and the closure of the Strait of Hormuz, a key shipping corridor. Experts say that shipping activities, which were carried out in the Red Sea and Strait of Hormuz , will likely be routed through the Cape of Good Hope in South Africa, causing shipment delays of at least 15-20 days for companies. Freight rates are also likely to jump by at least 15-20% as a result of the change in shipping routes for now. Crude oil has already firmed nearly 10% in recent sessions, rising from around $65 per barrel to $72-73 per barrel. More importantly, the volatility in the Gulf region comes just as urban demand conditions in the domestic fast-moving consumer goods (FMCG) were improving following income tax and GST -led price cuts initiated last year as well as easing of interest rates. The spectre of price hikes, which had reduced in the last few quarters as inflation was benign, will increase inflationary pressure on consumers, slowing down the process of urban revival that had begun in recent months, experts said. Executives that FE spoke to said they were expecting a sharp spike in crude oil prices following the rapidly escalating war in the Middle East. This is likely to hurt a cross-spectrum of sectors that use crude-linked derivatives as their inputs including FMCG, paints, auto, infrastructure and fertilisers among others. “There will be a short-term impact as crude prices will likely firm up in response to the latest tensions in the region. But the bigger worry is if this war gets prolonged then the impact on supply-chains will be wider. Companies may have to factor in this uncertainty over the medium term,” Mohit Malhotra, global CEO, Dabur , said. “There is a sense of caution among consumer firms with the conflict growing in the Middle East,” Tarun Arora, CEO, Zydus Wellness, said. “Crude-linked inflation has been benign for some time now. The volatility in the crude-linked basket of commodities may compel firms to consider price hikes,” he said. For FMCG companies, linear alkyl benzene (LAB), a petroleum derivative, which is used in making detergents, constitutes almost 60-70% of the latter’s input cost. And high-density polyethylene (HDPE) is used in packaging material for all essential consumer items from soaps to detergents, hair oils, creams, shampoos and toothpastes. For paint companies, on the other hand, as much as 55-60% of their input costs consist of crude-linked derivatives, including solvents and resins. In a recent call with analysts, Asian Paints MD & CEO Amit Syngle said that the company was keeping a close watch on titanium dioxide, a crude-linked derivative used in paints, in view of the heightened volatility in the region. “The whole price environment seems volatile today. With the current geopolitical situation, the crude impact could come in fast,” he said. Ajay Sahai, director general and CEO, Federation of Indian Export Organisations, said the escalation in the West Asia conflict could have a cascading impact on business, ranging from higher crude oil prices to regional instability to an increase in shipping costs and shipment delays. For India’s auto sector, meanwhile, the growing West Asia conflict translates into rising input costs including plastics, rubber, aviation fuel, and longer logistics cycles that will erode margins, experts said.