Russia’s invasion of Ukraine, and the flurry of punitive sanctions imposed on the former by the US and European nations, has the potential to impact India Inc in two ways.
One, the resultant spike in commodity prices, if not passed on, can increase input costs and squeeze the margins of downstream sectors.
Two, trade and banking sanctions can cull India’s export-import activity in the affected region until workarounds are found.
Many sectors may damage by ongoing conflict, but a few sectors such as steel and aluminium may benefit from rising prices. Net-net, the impact of the ongoing war will vary by sector. But a clearer picture, including of credit quality of affected companies, will emerge only in due course after the geopolitical situation improves.
Here are the sectors which are impacted due to the ongoing conflict between Russia and Ukraine:
Chemical and Paint
The price of Brent crude has skyrocketed above US$130/barrel from US$97/barrel before the Russian invasion began. Without a commensurate increase in retail fuel prices, oil marketing companies are already making losses. The impact of this is also being felt by sectors such as chemicals and paints which use crude oil-linked derivatives as their primary feedstock.
Raw material accounts for 55-60 per cent of input costs and directly impacts gross margins. Paint companies have been trying to pass on higher input costs to consumers through calibrated hikes. The prices of wood finish are hiked by 8 per cent from March 2022 by paint companies.
These sectors may see some margin squeeze that could extend well into the first quarter of the next fiscal, as inventories bought previously at lower prices run out.
Steel and aluminium
Other commodities will also see further cost inflation. Steel and aluminium (Russia contributes almost 6% of global primary aluminium production) prices, which had shot up in recent times from their already-high levels, will have an upward bias. While this would benefit domestic primary steel makers and aluminium smelters because their realization will rise, it would cascade negatively for the construction, real estate, and automobile sectors.
Domestic steel makers have raised the prices of hot-rolled coil (HRC) and TMT bars by up to ₹5,000 per tonne. After the price revision, a tonne of HRC would cost about ₹66,000
With the price of Brent crude jumped close to US$130/barrel. The power and fuel costs of major players — Ultratech, Ambuja and ACC — have jumped by 39%, 58% and 26% in the December quarter. Fuel prices will also affect the logistics costs of companies, which are struggling with lower demand.
Energy and logistics costs together are around 60% of the overall costs of cement makers. Raw material costs add up to around 13-15%. Logistics costs increased 4% annually to ₹1,229 a tonne. Raw material costs — fly ash and gypsum — increased 7% year-on-year (YoY) to ₹538 a tonne. Sales volume slipped slightly by 3% to 23.13 million tonne (MT).
Spot prices of natural gas, which are also linked to crude, could continue to climb. But this won’t impact the downstream sectors as much. Urea-makers, who use it as feedstock, can pass on the higher prices. But if the war prolongs, domestic availability of urea could become a bother for the farm sector because almost 8% of the requirement is imported from Russia and Ukraine.
The diamond industry of Surat, where about 85% of the world’s roughs are cut and polished, is trying to hold on to its sparkle as the war in Ukraine could dampen the chances of record sales this year.
About 40% of Indian diamonds are supplied from Russia. The overall gross export of cut and polished diamonds from India was $25.47 billion last financial year, and we have already touched $30 billion till February end in 2021-22.
Although an assurance has been given by Alrosa, the Russian mining giant partially owned by the government, about the smooth supply of diamonds to India.
For diamond polishers, continued disruption of trade can make roughs costlier, leading to a squeeze on their margins. Alrosa, Russia’s largest diamond miner, accounts for nearly 30% of the global production of roughs, the prices of which had surged 21% in 2021.
High gold imports may widen the Current account Deficit and Depreciate the value of the rupee. India imported 1,050 tonnes of gold in 2021, the most in a decade, and far more than 430 tonnes imported in 2020.
On March 07 2022, Indian gold prices are up by around Rs. 1000/10 grams. The 22-carat gold prices are quoted at Rs. 49,400/10 grams and the 24-carat gold rates are quoted at Rs. 53,890/10 grams.
The automobile sector is unlikely to get a respite from the ongoing semiconductor shortage. This is because Russia and Ukraine produce almost 75% of the neon gas which is used for several processes in the manufacturing of semiconductors like etching circuit designs into silicon wafers to create chips.
Protracted strife, and sanctions on Russia, would further curtail semiconductor production. Import dependence on palladium and platinum, which are used in catalytic converters, and nickel, which is used as a cathode in lithium-ion batteries, is relatively low and, hence, may have only a minimal impact on the automobile sector, according to the rating agency.
Palladium futures rose to above $3300 an ounce, a new all-time high. Russia accounts for 40% of the global production of palladium and the metal is always transported by planes. Due to the sanctions, airspace in many countries is closed for Russian planes.
Pharmaceutical products constitute one of the main exports from India to Ukraine. India is in fact the third-largest exporter of pharmaceuticals to Ukraine, followed by Germany and France.
India exported more than $181 million of pharmaceutical goods to Ukraine and about $591 million to Russia in 2021, nearly 44 per cent growth over the previous year.
India’s drug exports to Russia amount to 2.4 per cent of the total pharmaceutical exports, while exports to Ukraine have a share of 0.74 per cent. It is worth adding that India exported pharmaceuticals worth $24.5 billion in FY21.
The pharmaceuticals sector may see only a marginal impact as its exports to Russia and Ukraine are currently exempt from sanctions, and the exposure of Indian drug-makers to these geographies is low at almost 3% of their total exports.
Consumers will also have to brace for the unprecedented rise in prices of animal protein including poultry, dairy products and seafood.
Dairy industry leader Amul has increased retail milk prices by 4% starting 1st March in all-India markets. "This price rise is being done due to rising costs of energy, packaging, logistics, and cattle feeding costs. Thus, the overall cost of operation and production of milk has increased," said Amul in a release.
Milk brand Mother Dairy too announced a price hike of ₹2 from 6th March.
Wheat and Sunflower oil
Ukraine has long been known as Europe’s breadbasket. The country’s vast fertile plains of black soil made it, along with southwestern. Russia is one of the best places on the continent to grow wheat and other staple crops.
Russia and Ukraine account for about 29 per cent of global wheat exports, 19 per cent of corn exports and 80 per cent of exports of sunflower oil, which competes with soy oil.
Nearly 10% of India’s edible oil consumption is sunflower based, of which 90% is imported from Russia and Ukraine.
Continuing hostilities between Russia and Ukraine are set to impact the domestic selling prices of wheat and sunflower oil. Both countries produce massive quantities of wheat, while Ukraine is one of the world's largest sunflower seeds exporters. Though India is self-sufficient in wheat, it does import some quantities of high-grade grain, analysts said.
Moreover, the reduction in Russian and Ukrainian wheat in the international market will give an attractive opportunity for Indian exporters, thereby slightly pushing up domestic prices.
The prices of sunflower oil in the international market have increased by about 5% to 10% in 8-10 days.
The Russia-Ukraine conflict has dimmed any hopes of respite from high cooking oil prices for the consumers who have been paying historically high prices for close to two years.
An extended war could disrupt supplies to domestic oil mills, which typically carry an inventory of 30-45 days and have limited options to change their sourcing at short notice.
Chicken prices have jumped 25% since January and industry veterans expect a further increase of 10% to 50% in different parts of the country in March due to acute shortage of feed.
Exports of tea—incidentally called chai in both Russian and Ukrainian—may also face a challenge.
Russia is one of the biggest importers of Indian tea with a share of 18% in Indian tea exports. The Russian market is crucial for Indian tea exports, given the fact that Iran shipments continue to be plagued by payment issues which have resulted in a drastic fall in export volumes.
India's agriculture sector is expected to face the heat from hostilities between Russia and Ukraine which are expected to push up prices and availability of—Potash—a key component used in the manufacturing of fertilisers.
At present, Belarus and Russia are key suppliers of potash in the global market. On the other hand, India is a major importer of potash, which is used in the manufacture of fertilisers.
At an overall level, Russia, Ukraine and Belarus contribute 10%-12% of India's total fertiliser imports. With already elevated prices, the subsidy bill, that the government will have to foot to maintain a reasonable retail price for farmers, will also witness a sharp increase.
In case Russia and Ukraine do not arrive at a resolution soon, there is a possibility of the conflict spilling beyond the region. And that would be bad news for businesses. But whether or not the conflict prolongs or ceases quickly, it might lead to galloping inflation which will impact a number of sectors.