Globally, lead prices have been on a roll for almost 18 months, and India is no exception. At $2,327 per tonne now, it is 52% up since January 2016 and about 33% higher since April 2016. But while it may be raining fortunes for miners and producers, it is certainly bad news for user industries such as battery manufacturers.

Lead comprises nearly two-thirds of the total cost of making a battery. Hence, a price rise of this magnitude is hard to pass on entirely to the consumers, and is sure to impact profit margins of manufacturers. Dealers of automotive batteries indicate that the price of batteries in the replacement market is up by around 10-12% since November. And it’s likely that a part of the cost increase is passed on to the original equipment manufacturers too.

Brokerage firms’ forecasts for the two leading battery makers in the listed universe, Exide Industries Ltd and Amara Raja Batteries Ltd, have pencilled in a 70-100 basis point dip in operating margin for the June quarter. A basis point is one-hundredth of a percentage point. This is in spite of moderate single-digit revenue growth, which may be a reflection of higher lead prices rather than volumes.

The quarter in consideration also had its challenges on the sales front. Dealers say that while demonetization had an adverse effect on battery sales in the replacement market until a couple of months back, the transition to the goods and services tax will hurt sales in the June quarter. Also, sales growth was tempered partly because of weakness in demand for telecom batteries and also low demand for inverters, due to the early onset of the monsoon.

In fact, both Exide Industries’ and Amara Raja’s shares have been range-bound for some time. Operating margins of these firms had retraced by 150-300 basis points during the March quarter too. This is in spite of battery firms recycling lead through their own smelters.

However, the shares powered up for a few weeks recently, when the lead price receded slightly. This may have been a temporary blip. In its June media release, the International Lead and Zinc Study Group says, “Provisional data shows that the world refined lead metal demand exceeded supply by 68 kilotonne during the first four months of 2017." Explaining the demand scenario, the release says this was due to an apparent increase of 22.8% in US demand. There was also a strong rise in Chinese usage. European demand rose by a more modest 1.5%, with overall global demand up by 11.15%.

Given that domestic lead prices follow the international trend, prices on the home turf have surged similarly. The only silver lining is the buoyancy in the auto industry, which comprises almost half the revenue of these two listed battery manufacturers.

That said, like for all commodities, the cycle will turn, but the question is when. Lead has played spoilsport for battery firms just when the automotive industry (a large end user) is witnessing demand growth.