Importers stuck as deals go haywire after sudden and sharp fall in rupee

Metal traders face double whammy of high global prices and a low rupee, leading to a multiple cost-push effect

The sharp fall in the rupee against the dollar in the past few weeks, along with the rebound in metal and crude oil prices, has spoiled the trade game of many importers who now face huge losses. Several small- and medium-sized units depend on imported metals, scrap, polymers (raw materials for plastic), petrochemicals (synthetic textiles raw materials and other chemicals, solvents), which have seen a spurt in import prices due to rising crude oil prices and a falling rupee.

During the past six weeks, the rupee has fallen more than five per cent, while crude prices were up 23 per cent. All petrochemical and polymer prices have also risen during the period. Those who entered import contracts against letters of credit in mid-August have to pay in dollars at current prices and at the current exchange rates, which will lead to huge losses for them.

Metal prices on the London Metal Exchange (LME) have surged by over five per cent on average during the past six week, with some commodities such as copper and zinc up a staggering eight to 18 per cent. Prior to the recovery, all metals were looking bearish. So it comes as a surprise for many Indian importers, who are facing the double whammy of high global prices and a low rupee, leading to multiple cost-push effects.

Hemant Parekh, former president of the Bombay Metal Exchange says, “Importers using letters of credit (LCs) have to pay in dollars at the current (exchange) rate, which is much higher than the rate of around Rs 69 per dollar when they booked their orders. Hence their costing has gone haywire and the importers now have to incur losses.”

LME prices are also rising, making costing difficult. Local prices of metals are determined based on rupee and LME prices. However, domestic consumers are showing lagging effect and according to Parekh, key metals are said to be selling at an 8-10 per cent discount to the landed cost.

Janak Ladhani, director, Sonkamal Enterprise, a Mumbai-based importer, says imports have reduced and are even on standstill in some commodities. At the current high price, the user class is in a fix and is buying only bare minimum requirements.

As far as petrochemicals like acetone and phenol are concerned, a local manufacturer's project was coming to stream a few months ago and many preferred not to import. Now that the anticipated additional capacities is not operating, there is a sudden and huge scarcity. These chemicals are among others widely used by plywood laminators, several of whose units are now operating at very low capacities, as they aren't able to pass the price hike to their customers, explained Ladhani.

Plastic goods makers, synthetic textiles processors and other users of chemicals are facing a similar situation.

However, edible oil importers aren't as anxious because of their tendency to hedge. But it is the oilseed crushing units that have really gained. A few months back, the rupee was quoted at 65 to the dollar, compared with around Rs 74 currently. This raises the cost of import and brings down the demand for edible oil sourced from abroad.

B V Mehta, executive director, Solvent Extractors Association, says, “Import duties are very high and a falling rupee has made imports even costlier. India’s veg oil import is likely to fall to 14.5 million tonnes this oil year (November to October) from 15.4 million tonnes last year.” What is interesting according to him is that domestic crushing units will be able to earn more by selling by-products of crushing like oil meal.

POINTERS

• Importing again LCs turn loss making business
• Jump in crude oil hit polymers and petrochemical consumers
• Edible oil crushing units see better viability as they get more in by-products export and import competition reducing
• Metals, like copper selling at a discount to imports