The Russian invasion of Ukraine, and the flurry of punitive sanctions imposed on the former by the US and European nations, have the potential to cull India’s imports on one hand and also lead to input cost pressure on downstream companies in India Inc, warns a report.
The country’s exports to Russia stood at USD 2.55 billion in the first nine months of the current fiscal (0.8 percent of total imports), up 36.1 per cent from USD 1.87 billion in the same period last fiscal (0.9 per cent), a Crisil report said on Monday.
On the other hand, exports to Ukraine was only 0.2 per cent at USD 372 million during this period, up 18.8 per cent from USD 313 million or 0.1 per cent of the total outward shipments.
However, a few sectors such as steel and aluminum may benefit from rising prices, as per the report, which added that the impact on the country’s exim trade will be due to the crippling sanctions on Russia by the US and Europe.
The ongoing war has led to a spike in commodity prices, and if this is not passed on, it can increase input costs and squeeze the margins of downstream sectors, it noted.
Net-net, the impact of the ongoing war will vary by sectors. A clearer picture, including of credit quality of affected companies, will emerge only in due course after the geopolitical situation improves, Crisil added.
The price of Brent crude has skyrocketed above USD 125 a barrel from USD 97 before the Russian invasion began on February 24. Apart from oil marketing companies, this will also impact sectors such as chemicals and paints, which use crude oil-linked derivatives as their primary feedstock.
Other commodities will also see further cost inflation.
Steel and aluminum (Russia contributes 6 per cent of global primary aluminum production) prices, which shot up in recent times from their already-high levels, will have an upward bias.
While this will benefit domestic primary steel makers and aluminum smelters, it will cascade negatively for construction, realty, and auto sectors, it added.
Spot prices of natural gas, which are also linked to crude, can continue to climb. But this will not impact the downstream sectors as much. Urea makers, which use it as feedstock, can pass on the higher price.
But if the war prolongs, domestic availability of urea can become a bother for the farm sector because 8 per cent of the requirement is imported from Russia and Ukraine, the report said.
Similarly, city gas operators have favourable cost economics versus competing fuels, which can permit them to pass on the higher gas prices to downstream, at least to an extent.
Trade and banking-linked sanctions can also impact sectors sourcing key raw materials such as crude sunflower oil and rough diamonds.
Nearly 10 per cent of the domestic edible oil consumption is sunflower-based, of which 90 per cent is imported from Russia and Ukraine. An extended war can disrupt supplies to domestic oil mills, which typically carry an inventory of 30-45 days and have limited options to change their sourcing at short notice.
For diamond polishers, continued war can make roughs costlier, squeezing their margins.
Alrosa, Russia’s largest diamond miner, accounts for 30 per cent of the global production of roughs, the prices of which surged 21 per cent in 2021.
Auto sector is unlikely to get a respite from the ongoing semiconductor shortage because Russia and Ukraine produce 75 per cent of the neon gas used to manufacture such chips.
A protracted strife, and sanctions on Russia, will further cripple chips production, it noted.
The pharma sector may see only a marginal impact as its exports to Russia and Ukraine are currently exempt from sanctions. Besides, the exposure of domestic drugmakers to these geographies is only around 3 per cent of their total exports.
