Crude, palm oil rates fall from record highs, but FMCG firms rule out price cuts

Packaged consumer goods makers said they will not slash prices despite the correction in two crucial commodities – crude and palm oil – but will instead slow the pace of price increases.

Palm oil is used in making products such as soaps, biscuits and noodles while crude is a key input for detergent and packaging, among others. Palm oil has dropped below $1,300 per metric tonne from highs of $1,800-1,900 while crude oil has retreated to less than $107 per barrel, down from a peak of about $130. These together account for more than half of companies’ input costs. While edible oil sellers have cut prices due to a reduction in import duties in the segment, food, home and personal care product makers said margins are still under pressure.

“The pace of price hikes will come down but there won’t be price cuts,” said Anil Chugh, president, consumer care business,

Consumer Care and Lighting, which sells brands such as Santoor. “We have been passing on just half the entire commodity inflation burden earlier and instead took a hit on margins and cut costs in operations.”

Household Budgets Impacted

The overall fast-moving consumer goods (FMCG) market fell 1% between February and April, according to Kantar. Analysts said the recent deflation is a good sign but it’s not clear whether this will be sustained.

“Macro events such as rate hikes, liquidity dry-up, and risk-off, further benefit the deflationary trend. Separately, competitive exports from Malaysia and Indonesia benefit Indian companies and consumers,” said Abneesh Roy, senior vice-president at wealth management and advisory firm

Securities.

Rising prices across products have impacted the overall household budget, leading to the calibrated consumption of non-essential products. Consumers paid 10% more per kg of FMCG products during the February-April period compared with a year ago while pack size was reduced by 15% on average.

“There will not be further price hike and package weight reduction which was in the offing since companies were taking gradual price hikes,” said Parle Products senior category head Mayank Shah, adding that margins will improve for most companies. “The price stability will also help in the recovery of the market, both urban and rural, since inflation and price hikes were a major concern.”

Nearly a dozen listed FMCG companies have seen a contraction in aggregate gross margin on average for the 10th consecutive quarter on a year-on-year basis as price hikes were offset by further increases in commodity rates.

However, companies are still hopeful of demand and margin recovery in the second half of the financial year on the expectations of a normal monsoon, elevated farm prices and fading inflationary pressures in the coming months.

managing director Harsha V Agarwal said the reduction in input costs will help but the company will wait for them to stabilise before taking action on prices.

“We have to assess the situation properly,” he said. “Any stability in prices is good for the industry, demand creation and consumers will also have more in hand which they can spend on discretionary items.”