Paint companies to see huge hike in raw material costs as oil prices climbs high

Paint companies to see surge in raw material costs as oil prices climb

The rising oil prices have implications for paint manufacturing companies as they are expected to experience higher input costs. The recent increase in oil prices, as indicated by Brent crude futures reaching a three-month high of $81.57 per barrel, is attributed to concerns over tight supply caused by issues in Libya and Nigeria. Additionally, there are expectations that the US Federal Reserve may halt its rate hike campaign due to softer-than-expected US retail inflation in June.

The surge in oil prices impacts the cost of raw materials used in paint manufacturing, as oil derivatives are a crucial component in the production of paints and coatings. With higher oil prices, companies in the paint manufacturing sector are likely to face increased expenses for raw materials, potentially affecting their profit margins.

Moreover, the fall in the US dollar has contributed to the positive sentiment surrounding oil prices. A weaker US dollar is favorable for non-US dominated purchasers, as it makes oil and other commodities relatively cheaper when transacted in other currencies.

The combination of tight oil supply, expectations of a pause in US interest rate hikes, and a weaker US dollar has led to the recent surge in oil prices. These factors collectively impact the input costs for manufacturing companies, which need to closely monitor and manage their expenses to mitigate any adverse effects on their financial performance.

In addition to the previous factors mentioned, the recent decision by Saudi Arabia and Russia, the two largest oil exporters, to further reduce their oil production adds to the upward pressure on oil prices. These production cuts have been in effect since November of the previous year and are aimed at balancing the global oil market by curbing excess supply.

The reduction in oil production by these major exporters contributes to the tightening of global oil supply, reinforcing concerns about tight supply conditions. As a result, Brent crude futures have climbed 8 percent in July so far, indicating the impact of these production cuts on oil prices.

The manufacturing industry heavily relies on crude-based derivatives as key raw materials for their production processes. These derivatives, such as solvents and resins, are derived from crude oil and play a crucial role in formulating paints and coatings. As a result, the cost of manufacturing for companies is directly influenced by the price of crude oil.

Analysts suggest that crude oil derivatives account for approximately 40 percent of the overall raw material costs for companies. Therefore, any fluctuations in the price of crude oil directly impact the input costs for paint manufacturing, potentially affecting their profit margins and overall cost structure.

Given the significant reliance of paint companies on crude oil derivatives, they need to closely monitor and manage the impact of oil price changes on their raw material costs. This may involve implementing strategies such as hedging, cost optimization, or passing on the increased costs to customers through price adjustments.

The interdependence between oil prices and the manufacturing industry underscores the importance of monitoring global oil market dynamics and managing the associated risks to ensure a stable and profitable business operation.

When crude oil prices increase, it has a direct impact on the input costs for  companies, which in turn puts pressure on their profit margins. The rise in oil prices raises the cost of raw materials, particularly for decorative paints, which is a segment known for its higher profit margins. Therefore, an increase in oil prices negatively affects the profitability of manufacturers.

Despite the anticipation of a margin recovery for companies in the April-June quarter due to the easing of input costs during that period, the situation may soon reverse in the upcoming quarters if oil prices continue to rise. As oil is a key raw material for decorative paints, sustained increases in oil prices can lead to higher input costs for paint manufacturers, eroding their profit margins.

Brokerages and market analysts are closely monitoring the oil price movements and their potential impact on the industry. If oil prices continue their upward trend, it could offset any temporary relief in input costs and hinder the expected margin recovery for companies in the future quarters.

Managing input costs, including the prices of raw materials such as oil derivatives, becomes crucial for paint manufacturers. They may need to employ various strategies to mitigate the impact of rising oil prices, such as exploring alternative raw materials, implementing cost optimization measures, or passing on the increased costs to consumers through price adjustments.

The dynamic relationship between oil prices and the profitability of the companies underscores the need for continuous monitoring of market conditions and effective cost management strategies to ensure sustainable business performance in the face of fluctuating input costs.

The industry is facing multiple challenges that could impact its medium-term growth outlook. One significant concern is the increasing competition with the entry of big players like Grasim, which has announced its plans to invest Rs 10,000 crore to enter the paint segment. Jefferies, a global broking and research firm, described this development as the “Jio moment” for the industry, suggesting that it could lead to substantial disruption and upheaval with the entry of Grasim’s brands.

Additionally, the sector is also grappling with a slow uptake in rural demand, which further dampens sentiment for the paint industry. These headwinds, when combined, pose challenges to the growth prospects of companies in the medium term.

The concerns mentioned above have been reflected in the recent stock performance of companies. Shares of Asian Paints, Berger Paints India, Shalimar Paints, Kansai Nerolac Paints, and Indigo Paints have shown returns ranging from -2 percent to 4 percent over the past months, even as the broader market has soared to new all-time highs.

The performance of companies’ stocks indicates investor apprehensions and reflects the market’s reaction to the challenges faced by the industry. The entry of a major player like Grasim, coupled with slower rural demand, has contributed to a cautious outlook for the sector.

It’s important for paint companies to navigate these challenges effectively by focusing on differentiation, innovation, and customer-centric strategies to maintain their market position and drive future growth.