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It is becoming increasingly difficult for Indian companies to remain competitive vis-à-vis their global peers amid a sharp fall in global commodity prices.
Firms in many markets have benefited from a sharp decline in prices of commodities used as inputs for their products.
However, the 4.5 per cent decline of the Indian rupee against the US dollar since the start of 2012 has prevented Indian companies from realising significant cost savings from falling global commodity prices.
Prices of most base metals on the London Metal Exchange (LME) have witnessed a correction in dollar terms. But prices in rupee terms have barely declined or even risen.
For instance, primary aluminium lost 6.6 per cent and copper shed 0.7 per cent in the last six months. But for importing Indian companies, due to rupee depreciation, primary aluminium prices have only declined by 1.8 per cent, while copper prices have gone up by 4.4 per cent!
A similar situation was seen with nickel and zinc too. Nickel prices have declined by 14 per cent since the start of the year, though zinc has gained in dollar terms. In rupee terms, the cost of nickel has only reduced by 9.6 per cent, while the price of zinc has risen by 5.9 per cent.
Steel prices have also undergone a moderation in global markets, but in India, the key infrastructure-building input now costs more than it did six months ago. Dollar prices of hot-rolled steel have cooled by 3.9 per cent in global markets, but are up by 4.1 per cent translated into rupees.
Similarly, cold-rolled coils have lost 4.9 per cent overseas, but the rupee cost has gone up by three per cent.
The fall in international prices of crude oil, another driver of the Indian economy, has also not benefited India much. Compared to an 8.7 per cent decline in dollar prices, the cost of dated Brent has fallen just four per cent in rupee terms. Prices of most industrial inputs have fallen in response to the sluggish economic outlook for Europe and worries about lower imports by China.
In the case of other industrial raw materials, global prices have fallen sharply enough to yield benefits to Indian users. But the decline in rupee terms is still much smaller.
A 20.3-per-cent decline in prices of benchmark Newcastle Active Monthly Contracts for coal translates into a 16.3-per-cent fall for Indian power producers importing it. In the case of the Indonesian eco-coal benchmark, prices have declined by 12.5 per cent in dollar terms, but only 8.6 per cent in rupee terms.
Plastic producers too have been hit by rupee depreciation. While the cost of ethylene FOB Korea has fallen by 21.1 per cent in dollar terms, it has reduced only by 17.5 per cent in rupee terms.
On the other hand, propylene FOB Korea has gained 5.5 per cent in dollar terms since the start of the year, but now costs 10.3 per cent more in rupee terms. Import duties and freight rates too add to costs of imports, reducing the competitiveness of Indian companies.
That Indian companies have not reaped much savings on the raw material front is evident from the recent set of quarterly results. Material costs as a proportion of sales for manufacturing companies stood at 52.3 per cent in the March 2012 quarter.
That was not much changed from 52.9 per cent in December 2011 and was actually higher than 52 per cent a year ago.
>arvind.jayaram@thehindu.co.in
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