For Indian policy makers, the war in Ukraine has prepped up the battleground in India for a different struggle — against a looming commodity crisis that threatens to drag the country’s 1.3 billion people into a quagmire of ‘stagflation’.
In stagflation, prices rise to such a level that they start strangling demand, slowing down the economy, resulting in lower purchasing power and widespread job losses. From there on, it is a vicious cycle of low demand fuelling low production fuelling high prices fuelling lower demand.
Even though Russia is a marginal trade partner for India, accounting for just 1.4% of our imports and 0.9% of exports, Moscow still holds the key to India’s economic well-being due to its dominant role in supply of natural resources which have already been badly disrupted.
Boardroom honchos faced with supply disruptions, soaring prices and artificial shortage of commodities are responding with value added products, lower inventory and re-jigging fuel mix — besides the inevitable price hike in finished products.
Russia’s Commodity Spiral
Though Russia accounts for just 1.77% of global GDP, the world relies heavily on its natural resources. In 2021, it supplied 42% of global ammonium nitrate (key raw material for fertilisers), 21% of global wheat, 43% of palladium, 14% of platinum, 11% of nickel and 6% of aluminium. Coupled with Ukraine, it accounts for 40-50% of global neon production, says a report by Switzerland-based LGT Private Bank.
In 2021, Russia was the largest natural gas exporter, second-largest crude oil and condensate exporting country after Saudi Arabia and third-largest coal exporter after Indonesia and Australia. Russia is also the second-largest aluminium exporter. Around 11% of seaborne global steel exports come from Ukraine and Russia. It earned $235 billion from energy exports in 2021, half of its export revenue, according to the Institute of International Finance.
Supply disruptions and surge in prices of these commodities have delivered another blow to the global economy that was already reeling from the impact of Covid-19 and rising inflation, forcing companies to adopt varied strategies to manage the situation.
Impact On Corporates
India’s commodity imports face two challenges. First, most commodities are quoted and traded in U.S. dollar, which causes a strain due to exchange rate fluctuations and depletion of forex reserves. Second, though India is a big commodity consumer, on pricing, it is at the mercy of global trading houses which set prices on exchanges. Prices are discovered on global commodity exchanges like London Metal Exchange (LME) and Chicago Mercantile Exchange. Between April and January 2022, India imported petroleum products worth $114 billion, twice of last year’s imports.
Some of the commodities that have seen a sharp price surge are important inputs in many industries. Besides petrol and diesel, crude oil is crucial for manufacturing plastic, paints, lubricants, chemicals and personal care products. A rise in plastic prices impacts almost all consumer-facing companies.
On the other hand, coal is crucial for industries like steel, cement, power and aluminium, among others. In FY21, India imported 215 million tonnes (MT) of coal. In the first nine months of the current fiscal, the number was 161 MT.
More than 90% of sunflower oil imported by India is from Ukraine and Russia. Around 60% of NPK (Nitrogen, Phosphorus and Potassium) fertiliser and 17% of MOP (Muriate of Potash) fertiliser are also sourced from Russia. India provides fertiliser at a subsidised rate to farmers. Although the country’s dependence on Russia for mineral fuels (crude and coal) is only about 2.8%, its indirect exposure as a net commodity importer is very high.
The global upsurge in prices has led to demand destruction in many cases. A research report by Coal Trader International dated March 10 says Australian coal cargoes that were initially meant for India were redirected to Europe as Indian buyers were unwilling to pay high prices.