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Companies shy away from long-term supply contracts

BS Reporters  |  New Delhi 

Prefer buying raw materials from spot markets and in small quantities to keep inventories low.

The sharp fall in commodity prices, global economic uncertainty and worsening liquidity crunch at home have almost overnight changed the way Indian purchase their raw material.

Instead of locking themselves into long-term contracts, are buying from the spot markets and that too in small quantities in order to keep their inventories as low as possible.

At least half a dozen told Business Standard that they had taken recourse to short-term purchases of raw material. Commodity prices have fallen off their record peaks in the last few months on account of a demand slowdown, especially from China. Analysts expect commodity prices the world over to soften further.

“We have moved in the direction of minimum stocks, keeping in mind the price and availability of commodities,” said DCM Shriram Consolidated Chairman and Senior Managing Director Ajay Shriram. Thus, DSCL has moved to spot purchases of key raw material like coal, charcoal and limestone which it uses to make cement and calcium carbide, and generate power. At the same time, according to Shriram, most of his customers for PVC too have moved to spot purchases.

Arvind Parakh, Director (strategy and business development) with JSL, said the company had deferred some raw material purchases. “Today, everybody wants to buy only that much which is enough to meet the daily requirements of the factory. The sentiment is shaken because of the current crisis,” he said.

JSL, which used to be called Jindal Stainless, is the country’s largest producer of stainless steel. It buys manganese and chrome in India and imports nickel and stainless steel scrap.

“The demand from China has come down after the Olympics and fear of a possible slowdown in the US and Europe would mean lower demand for most industrial commodities. In such a volatile situation, all commodity users should hedge to cover their losses,” said National Commodity and Derivatives Exchange Chief Economist Madan Sabnavis.

Purchases in small lots and lower inventories also reduce the debt burden of companies at a time when interest rates are on the rise.

Thus, a large public sector company is learnt to have retracted the tender it had floated recently for purchase of raw material for three months. With commodity prices on the decline, the company’s management did not want to bind itself to high prices and invite the wrath of the auditors.

Commodity Price as on September 1 As on
October 10
HR Coil Rs 46,000/tonne 42,000 8.69
Indian iron ore* $124/tonne 90 27.41
Australian coking coal* $400/tonne 375 6.25
Cotton (Shankar -6) Rs 28,000/candy of 355.62 kgs 23,500 16.00
Crude palm oil** $810/tonne 570 29.62
*export price   **(landed cost)

“Most textile mills are adopting a day-to-day buying strategy as far as cotton is concerned, since there is anticipation of a further drop in prices. We do not want our inventories to pile up since there is a lot of volatility in prices,” said an executive with Vardhaman Textiles.

Edible oil processors, too, are treading cautiously to avoid losses since crude palm oil prices have been falling after touching an all-time high in May this year. “There is temptation to buy long-term, since the prices of crude palm oil, our main raw material, are close to a two-month low. However, we are buying only as much as we are able to sell after processing,” said Aditya Agarwal, Group Director with Emami, which entered the edible oil market earlier this year.

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First Published: Sun, October 12 2008. 00:00 IST