Your favourite toothpaste or detergent bar could cost more if crude oil prices continue to rally the way they have in the past month. Crude has touched nearly $93 to a barrel, rising close to 8% in a month and 27% in three months, data from Bloomberg shows.
This could become a point of concern, top fast-moving consumer goods (FMCG) companies say, as it will result in a spike in crude-linked derivatives, forcing firms to consider price hikes to protect margins.
Linear alkyl benzene (LAB) is used in making detergents and constitutes almost 60-70% of the latter’s input cost. HDPE is used in packaging material for all essential consumer items from soaps to detergents, hair oils, creams, shampoos and toothpastes. Packaging costs of these products constitute 15-20% of overall production cost for companies. Titanium dioxide, also a crude-linked derivative, has been falling over the last few months. But LAB has increased by 1.19% in the last one month and 3.67% in the last three months, Bloomberg data shows. It is likely to firm up in the months ahead, experts tracking the market said, as crude rallies.
An increase in price of these inputs, says G Chokkalingam, founder, Equinomics Research & Advisory, will hurt margins of companies going forward. “Coming when rural areas have not recovered yet and continue to show signs of stress, companies may be forced to absorb input cost pressures as crude spikes further. This will hurt margins as companies get into the festive season,” Chokkalingam says.
For now, both Saudi Arabia and Russia have indicated that they will extend their voluntary oil production cuts through the end of the 2023 calendar year, trimming 1.3 million barrels of crude out of the global market and boosting energy prices.
The July-September period, which began well for domestic FMCG companies thanks to moderating inflation and good rainfall in July, has since shown signs of stress, with August emerging the driest month in over a century and rainfall being erratic in September.
While food-linked inflation has remained a concern for FMCGs, especially, food companies due to weather uncertainty, crude-linked inflation is likely to add to pressure.
Commodity experts said that the dual announcements from Riyadh and Moscow this week pushed benchmark Brent crude above $90 a barrel, a price unseen in the market since November last year.
FMCG companies, meanwhile, are watching the scenario unfold carefully. On Tuesday, India’s retail inflation eased to 6.83% in August from 7.44% in July as vegetable prices cooled compared to the previous month, the National Statistical Office (NSO) data showed.
A spike in crude prices, says Mayank Shah, senior category head, Parle Products, will have a cascading impact on consumer goods.
“For us, the bigger concern is wheat and sugar prices. Crude prices affect us from a packaging and freight perspective. But yes, if crude rallies, it does have a cascading impact on most consumer goods. So, FMCG companies will be watching how crude will move in the future,” he adds.