Mumbai, March 7 (Agency) Russia’s invasion of Ukraine and the flurry of punitive sanctions imposed on the former by the West will result in a spike in input costs and also cull India’s export-import activity in the affected regions, says Crisil Ratings. According to the agency, while on one hand the spike in commodity prices, if not passed on, can increase input costs and squeeze the margins of downstream sectors, a few sectors such as steel and aluminum may benefit from rising prices.
The price of Brent crude has skyrocketed above $125 per barrel from $97 before the Russian invasion. “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,” Crisil said. It added that 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. Today, Russia contributes 6 pc of global primary aluminum production. Steel and aluminum 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 aluminum smelters because their realizations will rise, it would cascade negatively for the construction, real estate, and automobile sectors,” it said. 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, which use natural gas 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 8 per cent of the requirement is imported from Russia and Ukraine,” it noted. Similarly, city gas operators have favourable cost economics versus competing fuels, which could permit them to pass on the gas price inflation downstream — at least to an extent. Trade and banking-linked sanctions can also impact sectors sourcing key raw materials such as crude sunflower oil and rough diamonds. Also, 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. The automobile sector is unlikely to get a respite from the ongoing semiconductor shortage because Russia and Ukraine produce 75 per cent of the neon gas used to manufacture semiconductors. The pharmaceuticals sector may see only a marginal impact as its exports to the conflicting countries are exempt from sanctions. “Net-net, the impact of the ongoing war will vary by sector. A clearer picture, including of credit quality of affected companies, will emerge only in due course after the geopolitical situation improves,” the agency said.