scorecardresearchSectors most likely to benefit from low crude prices
During Russian-Ukraine War, Crude oil prices shot up by $140 per barrel. 

Sectors most likely to benefit from low crude prices

Updated: 21 Jul 2022, 12:21 PM IST
TL;DR.
For paint companies, the fall in crude oil prices will be beneficial as crude oil derivatives are used as inputs for paints. Tyre, aviation, cement, and textile industries will also gain from low crude prices.

Crude oil prices have been falling for the last couple of weeks due to concerns over the recession and high inflation in major economies. Both WTI and Brent are back to $100 levels. China's very strict COVID policies also fuelled a fall in oil prices. The fall in oil prices gave much-needed relief to the Indian economy as it would help in reducing inflation. 

Due to the fall in crude oil prices, the government on Tuesday cut windfall taxes on fuel exports and on other fuels less than three weeks after they were imposed, Bloomberg reported.

In the last one month Brent crude oil prices have corrected by 4.54%.
In the last one month Brent crude oil prices have corrected by 4.54%.

Further, industries which use crude oil as a raw material have seen their margins eroded in the March 2022 quarter. But as crude oil prices are inching down slowly, it will likely benefit these companies.

The following are some of the sectors which are likely to benefit from the fall in crude prices:

Tyre

The tyre industry is one such industry that is heavily reliant on crude oil. Due to rising RM costs, tyre companies have raised prices multiple times in 2022.

Crude oil derivatives such as carbon black, synthetic rubber and nylon tyre cord fabric together make up nearly half the cost of producing a tyre.

Due to high input cost pressure, the profits of all major tyre companies fell by 60-80% in the March quarter.

MRF Ltd reported a 50.26 per cent drop in consolidated net profit at 165.23 crore in Q4 FY22. Ceat reported an 84 per cent drop in consolidated net profit to Rs. 25 crore.

Similarly, tyre major JK Tyre & Industries reported an 80 per cent decline in consolidated net profit at 40.2 crore for the fourth quarter ended March 31, 2022.

However, the recent fall in crude prices has given some relief to the industry. Going forward, the decline in crude oil prices will likely benefit the gross margins of tyre companies (Revenue – Cost of raw materials).

Meanwhile, tyre stocks have outperformed the BSE Sensex, with their shares gaining 12–35 per cent in the last one month. Ceat rallied 33.45 per cent, followed by Apollo tyres (up 20.99%), JK Tyre (up 16.92%), and Goodyear India (up 12.33%).

Textiles

Synthetic textile manufacturers are set to benefit due to a sharp fall in the price of crude oil, the key raw material used extensively to produce industrial inputs like man-made fibre, yarn, fabric and textiles.

Crude oil is the major raw material for synthetic textile manufacturing. Prices of man-made fibre (MMF), yarn and fabric move in tandem with the movement in crude prices.

Volatility in crude has impacted the financial performance of synthetic textile manufacturers in the March quarter.

JBF Industries posted a standalone net loss of 1,098.27 crore in the March 2022 quarter as against a net profit of 27 crore during the previous quarter ended in March 2021.

Similarly, the net profit of Indo Rama Synthetics declined 16.73% to 107.13 crore in the March 2022 quarter as against 128.65 crore during the March 2021 quarter.

Paints

For paint companies, the fall in crude oil prices will be beneficial as crude oil derivatives are used as inputs for paints.

Due to the surge in raw material prices, the cost of production has increased and has impacted the gross margins of paint companies in the March 2022 quarter.

For instance, Due to raw material inflation across the RM basket, Asian Paints' gross margins fell by 450 basis points year on year to 38.7 per cent.

Of the total raw material costs incurred by paint manufacturers, 50%–60% are due to crude oil and its derivatives. In recent months, many Indian paint companies have raised their prices numerous times to protect their margins.

Going forward, the softening of crude oil prices will reduce the cost of producing items such as titanium dioxide, a key ingredient for paint.

Aviation

The airline industry is very sensitive to the movement of crude oil prices. If oil prices rise, it will lead to an increase in the price of aviation turbine fuel (ATF).

According to reports, jet fuel accounts for 50-55 per cent of total airline costs. So any increase in oil prices will have a direct impact on the company's profitability.

Aviation companies have reportedly lost thousands of crores of rupees due to high jet fuel prices. In the March quarter, Interglobe Aviation reported a consolidated net loss of 1,682 crore.

However, with the recent correction in crude oil prices, OMC's slashed aviation turbine fuel (ATF) prices by 2.1 per cent on Monday, CNBC TV18 reported.

ATF prices are revised twice monthly, on the 1st and 16th, according to benchmark international oil rates.

Cement

Most of the cement companies have enhanced their fuel mix in favour of pet coke and currently using over 80 per cent of pet coke as fuel. Petcoke prices move in tandem with crude prices. Hence, a fall in crude prices is beneficial for all cement companies. Further, Higher crude prices may lead to a rise in diesel prices, which will lead to higher freight costs.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

Commodity prices and stock market
Commodity prices and stock market