Gujarat's dyes, intermediates units look to work around input cost hike

They plan to shorten contract cycles, hedge as rupee declines vs dollar; industry's exports stands at $18 bn a year, of which Gujarat's share is almost 80%

From shortening contract cycles to hedging amid depreciating rupee against dollar, the dyes, intermediates, organic and inorganic chemicals industry of Gujarat is taking multiple steps to mitigate impact of crude oil price hike and slackening export demand.

Along with agro chemicals, cosmetics and essential oils, the industry's annual exports stands at roughly $18 billion according to Chemexcil data, of which Gujarat contributes almost 80 per cent.

In a normal year, the dyes, intermediates and chemical industry enjoys an average earnings before interest, taxes, depreciation, and amortization (ebitda) of anywhere between 12 per cent and 18 per cent, depending on product mix and size of the company.

However, as an indirect impact of the Russia-Ukraine conflict coupled with the Covid pandemic led lockdown in certain markets, the industry has now seen a huge spike in raw material costs including over 100 per cent jump in certain cases in recent times. As a result, the industry has seen units face either compressed margins or even incur losses.

For instance, benzene prices have jumped from Rs 60-65 per kg to Rs 100 per kg and caustic soda is up from Rs 18 per kg to Rs 65 per kg while soda ash prices have risen from Rs 12 per kg to Rs 48 per kg and aniline from Rs 75 per kg to Rs 175 a kg.

"First of all, global demand has tapered down due to war sensitivity, especially in regions like Russia, Europe and even China. Secondly, with the crude oil price hike, the resultant chemicals and petrochemicals in the value chain have also seen a price hike, many of which form key raw materials for dyes, intermediates and chemicals industry. In addition, fuel prices such as natural gas and coal have also risen manifold leading to compressed margins," said Manish Kiri, managing director of Kiri Industries Limited.

The impact comes at a time when the industry had just begun witnessing a rise in exports early February 2022 on a month-on-month and year-on-year basis, according to Bhupendra Patel, regional chairman - Gujarat of Chemexcil. "While there was some impact on raw material and fuel prices in the last few months, exports were improving even as economies were opening up. But now, the industry is facing an average 30-40 per cent impact on margins. With the rising Covid cases in several countries including China and Europe, there is even more uncertainty," said Patel.

As a result, the industry is now resorting to shorter contracts even as it hedges rupee against dollar amid the former's depreciation which has come as a respite in exports. The Indian rupee has depreciated 3.5 per cent against the US dollar this year, hitting a record low of Rs 76.93 against the dollar.

"Earlier, the industry used to sign annual to six monthly contracts. Now, dyes, intermediates and chemical players are hesitating to sign contracts for even three months and are largely resorting to spot orders. Since these are international and external factors, there is not much that the industry can do except try to pass on as much input cost hike as it can to its consumers," Kiri added.

Meanwhile, being a major exporter of  to Russia, China and Europe, Gujarat is also facing logistics and shipment delays, taking a hit on fresh orders, said Ramesh Patel, president of the Gujarat Dyestuff Manufacturers Association (GDMA).

"Freight rates too have risen by 8-10 per cent in the last one month. Prominent among the fuel costs is the coal price that has risen amid the war and has impacted the industry since dyes and chemical manufacturers use the coal for operating their boilers," said Patel.