The oil and gas supply disruptions were triggered by the prolonged closure of the Strait of Hormuz as Iran attacked ships attempting to pass through, as part of its retaliation against the military strikes by Israel and US that killed its supreme leader Ayatollah Khamenei earlier this month.
How Middle East war impacts Indian auto companies
The rising escalations in the Middle East war and the resulting closure of the Strait of Hormuz impact Indian auto companies in several ways. Firstly, rising oil and gas prices impacts production of key raw materials. For example, rising oil prices may bear an impact on paint prices, and gas shortages overall affect industrial production. Additionally, rising oil prices also weigh down on demand expectations.Siddhartha Khemka, Head of Research of Wealth Management at Motilal Oswal Financial Services, recently said that the auto sector faces multiple headwinds, including higher raw material costs and persistent supply chain challenges, particularly semiconductor shortages affecting production.
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Gas crisis impact
Nomura in its latest note on Indian autos highlighted that natural gas supplies to India have been sharply impacted amid the ongoing war in the oil-rich Middle East. “India has an LNG contract with Qatar Energy; with LNG now unavailable, and along with curtailed LNG supplies from UAE puts around 48% of India’s LNG import volumes at risk. Industrial customers consume around 60% of the imported LNG and are likely to face LNG shortages,” the international brokerage said.
In this backdrop, the Indian government introduced the Natural Gas Supply order, which mandates companies to prioritise gas supply to manufacturing and other industrial consumers among other sectors, supplied through the national gas grid.Nomura analysts said that gas commands a meaningful share in the energy usage in manufacturing processes of auto companies under its coverage. “Our checks across companies highlight that gas usage is significantly higher in paint shops (which usually operate at full capacity), followed by furnaces for forging, casting and various heat treatment processes for metal components. Hence, in the short term, it may not be possible to shift to alternative energy sources like electricity as it would involve changes in the machinery,” it said.
However, as gas quotas are reviewed on a daily basis, companies can operate plants during holidays to partly mitigate the impact, according to Nomura, which added that the companies might also consider diverting the gas used in their canteens for production processes.
“Overall, OEMs operating at high capacity utilisation levels and have limited vehicle inventory could be at a higher risk of some production loss. However, we believe all the companies in our coverage (OEMs and suppliers) appear vulnerable, because even if one supplier (whether Tier-2 or Tier-3) faces LNG supply constraints, the production line will halt,” Nomura said.
Maruti Suzuki India, Mahindra & Mahindra (M&M), Ashok Leyland, Tata Motors Commercial Vehicles and Eicher Motors are likely operating at near peak levels in March and have lower-than-normal inventory levels, as per Normura.
Listing out stocks likely be more exposed to gas shortages and higher spot gas prices in case they consume more than their daily allocation, Nomura named Maruti Suzuki India, TVS Motor Company and Bajaj Auto among the OEMs, along with Balkrishna Industries, Apollo Tyres, Uno Monida and Bharat Forge.
“Tyre companies also use feedstock for energy and can manage lower gas supplies to some extent, we think. While, so far, the stocks in our coverage have not reacted to this risk, we believe investors should watch out for any production impact which might be visible over the next one week in case LNG supplies fall short,” the international brokerage said.
Sai Giridhar of Federation of Automobile Dealers Associations however said that the gas shortage hasn’t yet shown any impact on OEM production. “If this thing prolongs, then there might be some disruptions in the supply chain. But as of date, we don’t see any supply disruption,” he told ET Now.
The Nifty Auto index has crashed around 12% in the past one month, with Maruti Suzuki, Tata Motors Passenger Vehicles and Ashok Leyland shares declining nearly 15%, M&M falling 16%, Eicher Motors and TVS Motor Company dropping 12%, and Bajaj Auto falling 7%.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)