Rising cost of raw materials spells troubles in 2021

Many auto and consumer appliance companies have announced price hikes for their products from January 2021 as a result of lingering supply-side concerns. Will this wreck India’s fragile economic recovery, in the wake of the pandemic? Mint takes a deep dive.

What items are going to become dearer?

For cars and commercial vehicles, on average, prices are likely to go up between 1% to 4% from January. Price hike on two-wheelers would be toward the lower end of this spectrum as it is a price-sensitive segment of the market. Prices of farm equipment, such as tractors, will rise too. Consumer appliances companies, meanwhile, could upwardly revise the cost of their products such as televisions, refrigerators, and washing machines, by as much as 10%. There is no word yet from the stressed real estate sector. However, homes could also get more expensive in the first half of 2021.

What is the key reason for these price hikes?

The cost of production has shot up for most manufacturers because of higher input costs, particularly raw materials such as steel. The metal constitutes almost 70% of overall raw material consumption in sectors such as automobiles. The wholesale price of hot-rolled coil is 40% higher now than in July 2020. Besides, exporters have to pay more in freight charges as the maritime supply-chain is stressed because of rising international demand and a shortage of containers. The price hikes are also partly a result of higher fixed costs, lower capacity utilization and overheads such as expenses related to covid safety protocols.

Why have the steel prices been shooting up of late?

Prices of iron ore, a key input for manufacturing steel, have soared globally because of greater demand from China and other countries that have made a quick turnaround since the global lockdown wreaked trade. Demand for steel within India has also recovered, but mining of ore in some states remained subdued.

Will higher prices stall the economic revival?

Consumers could possibly hold back on discretionary spending, scuttling India’s recovery in Q4 or even till the first half of 2021. If the prices of steel do not moderate, infrastructure projects are likely to slow down. This would limit both job creation and consumption of metals and non-metals. India’s micro and small businesses are more prone to price fluctuations as most of these firms cannot pass on the hikes to corporate customers. As such, the MSMEs, which work on wafer-thin margins, might find it difficult to absorb the costs.

What is the way, going ahead?

Industry bodies have asked the government to clampdown iron ore exports, regulate steel prices, and allow liberal import of steel. Some experts say that as major Indian steel producers run their own iron ore mines, where the cost of production hasn’t risen, the government could intervene to freeze prices to avoid a hit on the infrastructure sector. Some of the larger manufacturers have started planning for long haul, changing sourcing strategies even while establishing processes that allow for more real-time scenario plans.