Rising crude oil prices may pressure paints, tyre stocks amid escalating Israel-Iran conflict

As crude prices rise, the cost of these raw materials rises, increasing production costs for tyre and paint companies.

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Shares of paint and tyre firms might take a beating in trade on Monday, June 16, as prices of crude oil continue to climb amid escalating tensions in the Middle East between Israel and Iran.

Tensions between Israel and Iran escalated over the weekend, with both nations engaging in a series of retaliatory attacks. Iran also turned down a ceasefire proposal, sending the conflict into its fourth day.

Brent crude surged by up to 5.5 percent before retreating to around $75 a barrel, while WTI hovered near $74. The conflict intensified after Israel reportedly targeted Iran’s South Pars gas field, disrupting operations at a major production platform. This followed earlier strikes on Iranian nuclear and military sites.

While damage to Iran’s gas infrastructure is concerning, the greater threat to global oil markets lies in the potential disruption of the Strait of Hormuz, which is a vital channel through which about 20 percent of the world’s oil supply passes daily. Any move by Iran to restrict access could push prices significantly higher.

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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.

Over the past year, Asian Paints shares have sunk, falling around 24 percent. Berger Paints have performed slightly better, rising 13 percent during the same time, while Kansai Nerolac shares have fallen 13 percent during the same time period. In comparison, the frontline index Nifty 50 has risen five percent during the same time.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.