Raw materials are the most important component for the FMCG industry. Hence, commodity prices are an important element in determining FMCG strategies. In today’s edition, we discuss recent trends in raw material prices and their impact on companies and end-users.
According to market insights firm Nielsen, the FMCG industry recovered on a sequential basis in the last quarter. The industry registered a growth of 1.6% YoY, following a 19% YoY decline in the June quarter.
The resurgence of demand signifies positivity in the macroeconomic scenario. FMCG stock prices have reacted with upside momentum.
The fortunes of FMCG stocks will depend on the price of the raw materials. It plays a crucial part in the industry. The margins often fluctuate based on the pricing of key ingredients that goes into the product.
Raw materials fall into two categories: 1) Agri commodity and 2) Oil-based commodities. Any change in raw material prices is often passed on to the consumer.
What’s the recent trend?
1) Agri commodities:
The latest data in Agri commodities points at a deflationary trend in October. Yet, the drop is only moderate as compared to a steady rise during the September quarter.
Milk prices were down 8% in October after a steady rise in the September quarter. A similar trend was seen in domestic tea prices which fell by 18%. Yet, tea prices are still ~70% higher in the past six months. Coffee prices came down from 5-9% MoM in October as demand in key international markets remains affected.
Sugar and wheat prices were stable for the month (down 1% MoM). Maize saw sharp inflationary pressure (up 12% mom).
2) Oil commodities:
Opposite to the agri commodities, oil commodities are reflecting an inflationary trend. Crude prices have seen a steady rise in the past six months. It also gained 2% during October. But, crude is still 32% down YoY from October last year.
Most of the agri-oils were also in the inflationary trend in October. Palm oil and Palm Fatty Acid Distillate (PFAD) prices continued to rise. They are now up 43-55% on a YoY basis. Copra and coconut oil saw 2- 5% MoM rise while groundnut oil was up 3% MoM. Rice bran oil was down 1% MoM but is up 27% YoY.
Other commodities are also in the inflationary trend. Vinyl acetate monomer (used in adhesives, coatings, paints) prices were up 4-5% MoM in October. Styrene monomer (RM for decorative paints emulsions) prices were up 7% MoM. Caustic soda and soda ash prices were up 4-8% MoM.
The impact of a raw material’s price depends on it’s exposure to a company’s products.
Lower tea prices should provide some relief to Hindustan Unilever and TATA buyers. But, tea prices are still steep from year-ago levels and need to come down further. Lower milk prices should help Nestle and Britannia due to high exposure to the food category.
Higher prices for monomers and VAM are negative for paint companies and Pidilite. Higher Palm Fatty Acid Distillate (PFAD) and caustic soda prices are likely to hurt Hindustan Unilever and Godrej buyers. Inflation in Copra, LLP (Light liquid paraffin oil), Rice Bran would weigh on edible oil and hair oil player like Marico.
Impact at a consumer level:
The majority of personal care products are affected by a fluctuation in raw material prices. There has been a price increase in soaps, face wash, shampoo, skincare, men’s grooming, and feminine hygiene categories. Hair oil prices have remained stable but a price rise is imminent given the inflationary trend in Copra and LLP prices.
The food category has been the worst affected during October. Edible oils- Saffola (Marcio) and Sundrop (Agrotech) – have seen a price increase of 7-18%. Tea prices have increased by 13-30% due to a sharp fall in supply.
In dairy, Britannia has increased prices of cheese by 5-13%. Dabur has increased the price of select juices by 4-5%; Nestle has increased the price of Cerelac baby food by 3-9% and 2-4% for Maggi.