The hotter-than-expected August retail inflation jolted the stocks rally in India as investors expected cooling price pressures would prompt the Reserve Bank of India to moderate interest rate hikes. On Wednesday, US stocks suffered their worst rout since the pandemic first roiled global markets because of higher-than-expected inflation data.
The recent spike in coal prices and the consistent firmness in natural gas are being perceived by investors as serious threats to inflation and company earnings. Higher energy prices have, in turn, led to the curtailment of metal production capacities in Europe, which can lead to a spike in metal prices. “India’s inflation is likely to remain at an elevated level in the near term due to higher energy prices (oil and gas prices) and food prices," said Mitul Shah, head of research at Reliance Securities, who expects it to cool down towards the end of FY23.
While the pressure on profitability of steel makers due to higher coal prices now means steel prices can see a rise too, aluminium prices were also supported by the news that China’s Yunnan province ordered producers of electrolytic aluminium to reduce power usage this week, analysts said.
LME aluminium prices are up 3.31% in the last week.
According to Vikram Kasat, head of advisory at Prabhudas Lilladher, every $100 rise in coking coal prices per tonne results in approximately a $70-80 cost increase per tonne of steel for primary steelmakers.
Notably, the prices of coking coal, which is largely imported, have reached almost $300 per tonne after hitting a low of around $210 in the first week of August. This can lead to pressure on the production costs of most base metals and cement.
Gas prices, too, remain one of the key concerns, especially looking at expected hikes in domestic gas prices during the second half.
Gas prices in the US and Europe have more than doubled, while in the Asian market, spot prices have surged over 80%, experts said. Rising international gas prices mean that the Indian gas prices may also rise during the six-monthly review from the second half of FY23. In the first half of FY23, gas prices were at $6.1/mmBtu (million British Thermal Units), but that is expected to rise in the second half to about $9.5-10/mmBtu because of higher global prices. This would fuel inflation further.
While Brent crude fell almost a fifth from its March highs of above $123 a barrel, it’s risen to $94 from $86 on 7 September.
“The input price pressures are likely to sustain, keeping inflation sticky for the short term," said Naveen Mathur, director of commodities and currencies, Anand Rathi Share and Stock Brokers. Higher CNG prices can also push up transportation costs.
