Corporates Should Be Hedging Their Price Risk: CARE Ratings

Companies should be looking more closely at their costs and hedge price risk where possible to ensure that they are not buffeted by the rising commodity prices, CARE Ratings has said in a report.

"The pandemic had led to a global recession of sorts in 2020 with a slump in growth which also went along with a decline in commodity prices. The recovery witnessed since the beginning of 2021 in various economies especially after the introduction of the vaccine has led to a significant increase in demand for commodities.

As a result, commodity prices have started rising across all categories and are expected to do very well in 2021. A new cycle is being spoken of though according to the World Bank forecasts, prices would tend to stabilize in 2022. But this will not move away from the fact that the bull run in 2021 will continue. What does this mean for companies? It would evidently be a mixed baggage for companies depending on whether they are final sellers or users of these commodities," CARE Ratings has said.

According to it, the clue for the users will be how raw materials intensive they are and to what extent they can pass on the higher intermediate costs to the consumer.

"With inflation rising in most countries, this may not be very easy given that the crude oil impact has been felt everywhere and cannot be avoided given that it is globally driven. There will hence be a need for companies to look seriously at the hedging strategies. Hedging is important here especially because the direction of price movement is known. Some industries could have a natural hedge in terms of pass-on of costs. But given that demand conditions are unstable now, there will be limits to which this can be pushed," the ratings agency has said.