HomeIndustry TrendsWill the cost inflation escalation puncture the recovery?

Will the cost inflation escalation puncture the recovery?

It has been a swift and sharp recovery season for the building materials and home décor industries which have come out of the lockdown blues much faster than they did last year. Though for cement sector it’s a dull quarter due to Monsoon rains, others have all the reasons to be happy and optimistic about the future. The plastic pipes category continues to outperform with robust revenue growth though helped by a low base, strong volume recovery supported by industry consolidation, inventory gains and rising operating leverage.  The wood panel industry too is witnessing solid revenue growth again aided by rising industry consolidation and strong demand. Tiles sector is aided by double digit volume growth. All these sectors are expected to register 25-50% revenue growth in the second quarter and there are enough signs to indicate that the growth will spill over to the third quarter too.

Rising cost of chemicals is worrisome

However, what is worrying the industry is the spiralling raw material cost – especially of chemicals used in various industries. Of course, rising crude oil price is not helping their cause either.

Recently, Chinese chemical producers have had to curtail their production on account of power shortages driven by shortages of coal supplies and stringent environmental norms. This has resulted in sharp price increases in some of the basic chemicals, which should directly benefit the Indian basic chemical manufacturers but at the expense of user industries.

For example, Toluene Diisocyanate (TDI), mainly used in making of flexible foams, prices have gone up by 13% MoM mainly due to demand improvement and increase in the cost of materials. Refrigerant gas prices have gone up by 3.5-7% month on month basis. Paste PVC price has gone up by Rs 15/kg to Rs 240/kg from the beginning of the month.  Phenol spreads have gone up by 3.3% to $807/MT. In fact, phenol prices have gone up by 130% year on year basis nullifying some of the volume growth benefits enjoyed by the wood panel industry. The price of Vinyl Acetate Monomer, used by the adhesive manufacturers, has shot up by 130% year on year basis.

Recent spurt in prices unexpected

After the April-June quarter, there were signs of material prices moderating but the recent series of events like coal shortage in China and spiralling crude oil prices have taken the industry by surprise. “We are definitely expecting a further moderation from this level. But currently, world over, global chemical prices are displaying such volatility, so we are keeping our fingers crossed. But yes, we don’t see $1,400, $1,500 as a sustainable level. Last year at one point in time, it was even $700. It won’t come back to that. But we do believe that it will moderate further from the $1,500 levels,” Bharat Puri, MD Pidilite Industries had said (about VAM prices) in August. But now it seems, it may take much longer for the prices to moderate than was expected a few months ago.

Analysts say spurt in price to be short lived 

However, some analysts are of the opinion that this power shortage induced price spike in chemicals is unlikely to continue for long. China has already started importing coal from Kazakhstan and even from Australia which is likely to improve the power position in that country in the coming weeks. This in turn may help to cool down the prices of some of the basic chemicals.

However, same thing may not be said about the crude oil price which may remain at the elevated level for much longer period than one had anticipated. Also, USA expects to face El Nina effect which means more hurricanes in turn more disruptions on supply side. Also, harsh winter may keep the energy demand at higher levels further delaying the crude oil price correction. So, there is a sort uncertainty on raw material front which may dampen the spirit of building materials and home décor sectors in the coming months.

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