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Crude shock: Autos see impact on sales

Published on Wed, Jun 04, 2008 at 13:17 | Source : CNBC-TV18

Updated at Thu, Jun 05, 2008 at 16:33

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The government has finally bit the bullet and raised fuel prices to bail out cash-starved oil marketing companies, or OMCs. Earlier, Oil Minister Murli Deora announced that petrol and diesel prices have been hiked by Rs 5 and Rs 3 respectively, effective midnight today.

What do auto majors think of the price hike? Do they see a fall in demand? Do they see a shift in consumer preference to smaller and more fuel-efficient cars?

Tata Motors said the price hike would impact the auto industry. This view was shared by Honda Siel which felt that sales will be impacted.

However, Honda is confident that it will pull through because of its fuel-efficient range of cars.

The auto industry expects the consumers to diesel, smaller and more fuel-efficient cars. Hyundai said the price hike is a dampner for customers. "It is likely to effect the sales of bigger cars. There could be some shift to diesel vehicles."

Maruti said the price hike would have a negative effect initially. It feels people will start opting for smaller fuel-efficient cars.

What do large commercial vehicle makers make of this government move?

Ashok Leyland is of the view that the price hike will impact the entire industry including cars, trucks, and two-wheelers. It will result in higher inflation and demand for more fuel-efficient vehicles.

Will freight cost rise?

Vineet Agarwal, ED, TCI , said freight cost could rise by 5%, but because this is a season of low demand, the expected increase would be between 2-3%. "The overall cost of fuel to operate a truck is around 50-60% in the freight bill. Usually, the impact comes immediate. On February 8, the first increase of Rs 1 happened on diesel. Now, the increase is Rs 3. This would essentially mean that fuel prices are up about 10-11%. The earlier increase was not really factored in because it was very small, but we expect the overall increase to be 5% on freight. However, because this is a season of low demand, the expected increase would be between 2-3%."

He feels commodity companies like cement, and steel would definitely feel the pinch. "The first quarter of the financial year is a low season because of low demand and due to the onset of monsoons. So, the impact is lesser. However, with freight price moving up, commodity companies like cement, steel etc would definitely feel the pinch. The hike can be easily passed on to contract customers immediately, however for the retail customers the hike happens a little bit more slowly."

According to Nachiket Kelkar and Vivin Mathew , the increase in fuel prices means that transportation costs are going to go up substantially. Transporters are looking at increasing prices by as much as 25%.

It's going to be a rough ride for many industries that transport goods by road.

Input costs have been rising these past few months and the fuel price hike on Wednesday came as the final blow. So far, transporters have been absorbing the increased costs. But not any more. The fuel price hike is expected to trigger a 25% hike in transportation rates.

"Tyre prices have gone up, spare parts prices have also gone up. Therefore, all that adds up to this large increase in costs," Malkit Singh, Bombay Goods Transporters Association.

And this price hike will spill over to allied industries like logistics too. The overall increase in freight will be 5% but since we are in the low demand season right now, expected overall will be 2-3%.

This hike is likely to first impact commodity prices like cement and steel and then trickle down to other industries.

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