Russia-Ukraine war: Auto sector braces against rising fuel and commodity prices

Just as India’s auto sector was recovering after the blow of the second and the third COVID-19 wave made worse by ongoing semiconductor crisis, things could get even worse as the Russia and Ukraine crisis escalates.  Experts believe that since the auto industry is dependent on essential commodities like copper and silicon, the crisis will have a short-term impact on the sector.

“The industry was hoping to recover from the pandemic-led demand suppression, as well as positive signs visible on the semiconductors issues, this prevailing situation may lead to some adverse effects in the short term,” Rajat Mahajan, Partner, Deloitte India said.

Mahajan adds that at a stage where the 2-wheeler sales is at record low and industry is trying to bounce back, any rise in oil prices will definitely dent consumer sentiments. “Any change in crude prices will likely have an impact on the demand in case the retail fuel prices follow the same trend, unless the prices are kept at the current levels which will impact the margin of oil marketing companies. Will need to see how this plays out,” he says.

"The current war between Russia and Ukrainian will add to the several headwinds already being encountered by the automotive sector. We are keenly observing the situation as it unfolds and are hopeful that things will normalise soon," Vinnie Mehta, Director General, ACMA said.

Navkendar Singh, Research Director at IDC India said, “Russia and Ukraine are important in the supply chain of components for semiconductor manufacturing. They produce important gases and rare earth metals, which are used in the lithography.”

As far as electric vehicles (EVs) are concerned, the industry may face some amount of headwinds, experts believe. “Overall, EV buyers may continue with their planned purchases unless input price increases are transferred which is unlikely in short term, but ICE 2-wheeler buyers may delay purchases if the fuel prices rise,” Mahajan adds.

Russia is one of the largest exporters of palladium which used in automotive exhaust system. “It may increase commodity prices especially in metals like Copper, Palladium and others, leading to higher costs for the OEMs,” he adds.

Experts say that since Russia is one of the largest producers of crude oil, the current crisis may lead to oil prices going above and beyond $100 per barrel in the new few days. “A spike in oil prices to $150 a barrel would reduce global GDP growth to just 0.9 per cent,” a JP Morgan analysis said.

Once crude oil prices start to increase, it will have a spillover impact of global GDP, analysts say. According to Hindustan Petroleum’s Chairman and Managing Director M K Surana, there is a shortage of 900,000 barrels per day and Russia-Ukraine crisis is one of the reasons affected crude oil prices.

Reports point out that over half of India’s gas needs are fulfilled with imports of liquified natural gas (LNG) from Ukraine and small part is also sourced from Russia. “Global oil and LNG prices are likely to see a sharp rise in the event of a Russia-Ukraine conflict, which would have negative implications for net energy importers,” Moody’s Investors Service said.