Thursday January 27, 2022

More troubles ahead

December 30, 2020

LAHORE: Pakistani consumers are in for further price shocks this time in non-food products, as industrial inputs have registered a sharp increase in global markets. The high dollar value against rupee would further enhance the burden on consumers.

It is worth noting that despite the second wave of the new coronavirus, global metal rates have registered a sharp increase. Prices moved above the pre-Covid-19 levels mainly due to a sharp post-Covi-19 surge in China’s economy – the largest consumer of metals. This recovery has pushed up manufacturing costs for the rest of the world.

The rates of copper increased from $5,760/ton in October 2019 to $7,848/ton by December 2020. Aluminium was being traded at $1,770/ton in November 2019 and went down to $1,700/ton by May 2020. It has risen to $2,022/ton this month.

Smocked rubber Sheet No 3 (Singapore) was priced at $1.35 in May 2020 and was available at $1.5/kg in October 2019. In December, its rates shot up to $4.28/kg.

Iron ore, the basic raw material for steel products was traded at $84.98/ton in November 2019 and at $83.73/ton in April 2020. It is currently priced at $124.39/ton in the global market.

The increase in rates of these essential industrial materials has come at a time when almost the entire world is either in recession or recovering from the Covid-19 induced recession. Europe in fact is bracing for another recession as a new strain of the coronavirus has hit the continent.

Oil prices are also on the rise, while gas rates have impacted our economy badly due to delayed decisions to procure the commodity.

The high rates are going to hit the entire world but domestic consumers in Pakistan would be doubly impacted because of massive devaluation of rupee by the present regime. The devaluation impact was earlier shielded by low global commodity rates and lower demand due to the recession in Pakistan followed by global recession after a pandemic outbreak. The increase in most commodity rates has been driven by the resumption of Chinese economy in top gear.

A surge in the demand for raw materials like iron ore, aluminium, rubber, and copper, has pushed up prices of important materials worldwide. It has increased the cost of production in smaller regional markets, which import components for their products from China.

According to China Custom data, the import of steel and iron in various forms was hovering around just under $2 billion between January to December 2019. Imports hit a floor in January 2020 as industrial activity was halted in China as a result of strict lockdown.

After resumption of imports, the 2019 level was soon achieved once again. However, in June 2020 a sharp rise in import was observed and imports went up from approximately $2.2 billion in May 2020 to around $3.5 billion in June 2020.

The trend carried on and in September 2020 China imported $4.4 billion worth of iron and steel. This surge is steep by any standard.

Supply lines are stretched and are creaking. Similarly, imports of copper ores and concentrate in China increased to $3.35 billion in November 2020 from just over $2 billion mark in June 2020. Same is the case with aluminium, rubber, and many other industrial raw materials.

This increase in demand has drastically impacted input costs of several industries in the region. For example, hike in input costs has also hit the cost of Pakistan’s local manufacturing of goods like electronics and automotive parts that use these raw materials.

Price of cold rolled coils has increased by more than Rs40/kg during the January-December period, according to price lists issued by various steel mills. Such sudden surge in prices hits the vending industry the most, as with low holding power and a limited ability to pass on price differential immediately, they are forced to bear the brunt of a bad situation.

This increase in price of inputs finally does get translated into increase of price of finished products like refrigerators, A/Cs vehicles and other consumer products.

Sooner than later the retail consumers will have to foot the bill. This time around the government could claim that price increase was due to the global situation. Consumers already hit by high food inflation though would put the blame of higher rates of non-foods products on the state as well.

We have seen constant increase in the prices of vehicles and home appliances in recent months. Consumers must brace for more price hikes of these products as the impact of higher inputs would be fully passed on to them.

The government has some options to mitigate the woes of consumers. It could reduce the duties on the inputs to an extent to keep its revenues constant and forego the additional revenues that come with price hikes.

The trend of increasing prices is not limited to Pakistan only and rightly so because it is a global impact. Car rates in Pakistan have been constantly increasing with increase in input costs. The prices of cars and electronics are also increasing regularly in India, Malaysia, and Thailand.