In this article, we will be discussing which sectors in Indian Market are highly affected by rising crude oil prices. Also, we will discuss the impact of possible sanctions on oil imports by Western countries. So, let’s get started.
3 Sectors affected by High Crude Oil Prices:
1) Paint Sector:
- The Raw Material cost accounts for 50%-60% of the total cost for the Paint Industry.
- Raw Materials used in the production of paints are crude oil derivatives.
- The increase in the price of raw materials by around 100% will certainly have a major impact on the margins and profitability of the paint companies, especially for the short term.
2) Tyre Industry:
Tyre Industry: Inputs Mix % of Crude Oil Derivatives
- Another industry that can remain under the pressure of rising crude oil prices is the Tyre Industry, where 50% of the raw material cost accounts for crude oil derivatives.
- Raw Materials used in the tyre industry are Carbon Black, Synthetic Rubber, Nylon Tyre Cord Fabric which are derivatives of crude oil.
- The tyre industry witnesses demand in 2 ways: Replacement Demand and New Demand from Original Equipment Manufacturers (OEMs).
- Now, due to the geopolitical tensions between Russia and Ukraine which leads to some kind of uncertainty, there could be some cooling down in demand for new vehicles.
- The increase in the price of raw materials i.e., crude oil by around 100% will certainly hit big on the margins and profitability of the tyre companies, especially for the short term.
3) Aviation Sector:
- For the Aviation sector, things were looking normal as the air traffic was coming back to pre-covid level, but with the ongoing rise in crude oil prices there will be an adverse impact on prices of Aviation Turbine Fuel (ATF)
- Fuel Cost Accounts for a total of 40% of the Total Cost of the Airlines Industry, but with the rise in fuel cost the airline’s company can’t immediately raise fares in line with the rising Fuel Cost which will directly impact the company’s sales, and further its margins and profitability.
Paint Companies- Operating Margins Peer Comparison
- Asian Paints was having Operating Margins of around 24% in FY21 which has fallen to 18% in December 2021. Still, the margins of Asian Paints are better than its peers by around 5%.
- All other companies like Berger Paints, Kansai Nerolac, etc. are having margins of around 15%-18% in the same period.
- During such an inflationary period, a big company like Asian Paints could take a hit on their margins to gain market share and utilize its operating leverage.
European Union’s Dependency on Russian Natural Gas:
- The Western World especially Europe has warned that it can impose a ban on oil and gas imports from Russia. In response to this, Russia has also said a word that, if such sanctions are imposed on Russia, then the country will stop exporting to European countries which can be a big issue for the European countries as the 40% of Total Gas Consumed by the European Union is fulfilled by Russia.
- Total Natural Gas Imported from Russia is around 155 billion cubic metres (bcm) for the year 2021 by Europe.
- Import of Natural Gas from Russia in 2021 by Europe:
- 380 million cubic metres (mcm) per Day
- Around 140 billion cubic metres (bcm) for the year 2021
- Around 15 billion cubic metres (bcm) was delivered in the form of liquefied natural gas (LNG)
- The Deputy Prime Minister, Alexander Novak has warned that it could ban the export of oil to European countries and could direct the volumes to another nation, which in turn can take the crude oil price to much higher levels.
Nord Stream Gas Pipelines – Russia to Germany
- Russia warns to impose an embargo on gas pumping through the Nord Stream 1 gas pipeline (Red Line) from March 7, 2022.
- Germany halts the Certification of Nord Stream 2 (Blue Line) Gas Pipeline on February 22, 2022
Alarming India’s Oil Import Bill:
- India’s Oil Import Bill To Witness Steep Rise in FY22. In 9MFY22, the oil import bill of India was around $82 billion or Rs. 6.15 Lakh Cr. which is expected to rise in the range of $110-$120 billion.
What should Investors Do?
All the factors discussed and their impact on the various sectors might be for a very short period but will have a certain impact on the performances and operations of the company in the current quarter. Among the sectors discussed, the aviation sector can suffer the most from high crude oil prices, as the sector has already witnessed bad phased due to Covid-19.