The rising oil prices, coupled with a tight supply and expectations of the US Federal Reserve ending its rate hikes, are likely to increase input costs for paint manufacturing companies. Recent concerns over supply constraints in Libya and Nigeria, along with the possibility of the US Fed halting its rate hike campaign due to lower-than-expected retail inflation in June, have driven Brent crude futures to a three-month high of $81.57 per barrel. The weakening US dollar has also contributed to the positive sentiment, particularly for non-US purchasers. Read More Business News on our website.
Cost of Paint Industry Raw Material Rise After Recent Surge In Oil Prices
Additionally, Saudi Arabia and Russia, the two largest oil exporters, have agreed to further reduce their oil production, which has been in effect since November of the previous year. As a result, Brent crude futures have surged by 8 percent in July. Since paint production heavily relies on crude-based derivatives as raw materials, manufacturing costs are directly impacted by crude oil prices. Analysts estimate that crude oil derivatives account for approximately 40 percent of the overall raw materials used by paint companies.
When crude oil prices rise, it creates upward pressure on input costs for paint manufacturers, ultimately squeezing their profit margins. While some brokerages anticipate a margin recovery for paint companies in the April-June quarter due to a reduction in input costs during that period, this recovery may be short-lived if oil prices, especially for decorative paints that generate high margins, continue to rise.
Furthermore, the paint industry is already facing challenges from increased competition, with major players like Grasim entering the market. Moreover, sluggish demand in rural areas is expected to further dampen the sector’s prospects. Jefferies, a global broking and research firm, described Grasim Industries’ entry into the paint segment with an investment of Rs 10,000 crore as a pivotal moment for the industry, akin to the impact Jio had on the telecom sector.
When considering these factors collectively, the medium-term growth outlook for paint companies appears to be affected. This sentiment is reflected in the recent stock performance of major paint companies such as Asian Paints, Berger Paints India, Shalimar Paints, Kansai Nerolac Paints, and Indigo Paints, which have seen returns ranging from -2 to 4 percent in the past months, despite the overall market reaching new all-time highs.