Consumer, tyre companies wait for crude derivative prices to ease

The firms also say that while crude oil prices have cooled off, they must sustain at current levels for actual impact to be seen on manufacturing operations

Crude oil prices have come off their peaks, but consumer and tyre companies are still wary as crude derivative prices are yet to cool off.

Also, companies say that spot crude should sustain at the current levels for the actual impact to be seen in the form of a reduction in fuel prices by the government. That is when the impact will be felt by Indian companies.

“While crude prices have come off (their peaks), they are yet to have an impact on packaging material prices, and that is not a big component for us. Freight has not come off yet as the government is yet to reduce fuel prices,” Angshu Mallick, MD and CEO, Adani Wilmar, told Business Standard. He said once the government passes on lower fuel prices, a positive impact will be seen.

“Volatility is still there in crude oil and if prices sustain at this level, some impact can start coming in. But it takes time before the derivatives of crude like plastic and other products start to fall. It is too early to say,” said Mayank Shah, senior category head at Parle Products. Shah also said crude may not fall substantially from these levels due to the revival of production in China.

However, Tarun Arora, CEO at Zydus Wellness said that packaging costs have come off from their peaks. “While plastics climbed up again in the past 2-3 months, (this time) it's cyclical and not at the peak. Freight costs have also stabilised. I believe that a new level has been established.” 

“The big problem was inflation, which moved up from 2020 till 2022 and we could not keep pace. But that is not the case now. Some inflation is normal,” he explained.

Kumar Subbiah, CFO and executive director, Ceat, said as of now, there is no certainty on whether prices of petrochemical derivatives that go into the making of tyres would drop in the months ahead even as crude prices have shown signs of softening. “Prices of butadiene, which goes into the making of synthetic rubber, have actually risen by almost 20 per cent since this January,” Subbiah said.

Prices of petrochemical derivatives used by tyre firms, such as butadiene and caprolactam, depend on the global demand-supply situation, and China is a major player here.

China consumes almost 40 per cent of natural rubber and is also a big consumer of synthetic rubber, since it is a major tyre manufacturer globally. “During December-January the Chinese were largely absent in the commodity market, but now its industrial production is picking up,” Subbiah said. While the ultimate feedstock for these raw materials is crude, petrochemical firms do not change prices unless they see that crude prices sustain at a certain level. Their decisions are also based on how they see demand playing out, he explained.

 Prices of petrochemical derivatives are typically set according to global spot market prices. Local suppliers at times offer prices for 15 days or a month. Indian tyre makers depend on local manufacturers for petrochemical derivatives; about 70 per cent is bought locally.