Shares of firms that rely on crude derivatives for manufacturing, such as paints and tyre companies, took a beating in trade on Monday, June 23. This came as crude oil prices surged after the U.S. launched airstrikes on Iranian nuclear facilities over the weekend.
In a further escalation, Iran’s parliament backed a plan to shut the Strait of Hormuz, which a vital corridor that handles close to 20 percent of the world’s oil and LNG movement.
Following these developments, Brent crude rose by around two percent to approach $78 per barrel, while WTI crude gained 1.7 percent to reach approximately $75 per barrel, reflecting heightened geopolitical risk.
At 9.20 am, Asian Paints shares were down 0.8 percent at Rs 2,267.9 on the NSE, while Kansai Nerolac sank over 1.3 percent to Rs 237.25. Tyre stocks also faced a similar fate. Shares of CEAT, Apollo Tyres, MRF and JK Tyres were all in the red.
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Crude oil prices affect the decorative paint business more than any other because it is a raw material-intensive industry. The manufacture of paint requires more than 300 items, most being petroleum-based. Raw material accounts for 55-60 percent of input costs and directly impacts gross margins.
Brent crude is also a major source of synthetic rubber and other petrochemical products used in tyre manufacturing. As crude prices rise, the cost of these raw materials gains, increasing production costs for tyre companies. With lower raw material costs, tyre manufacturers can enjoy improved profit margins.
Rising crude oil rates also increases the cost of producing items such as titanium dioxide, a key ingredient for white paint. A rise in crude prices will negatively paint manufacturers as that bumps up their input costs and gives them less leeway to generate higher margins.
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