10/10/2012 (Daily News & Analysis) - A fall in the prices of key raw materials such as palm oil and crude may have given fast moving consumer goods (FMCG) makers some breathing space, but the benefit is unlikely to be passed on to end consumers in a hurry.

The price of palm oil, a key raw material for making soaps, is down around 20% compared with last year. In fact, this is the lowest soap makers are paying for it in three years.

On the other hand, crude prices have fallen nearly 11% in the last three months.

Crude oil derivatives such as linear alkyl benzene and light liquid paraffin are key ingredients in detergents, personal care items and cosmetics, and also play an important role in the packaging material. The price correction means the cost of both production and packaging will go down from here.

And that’s not all. The rupee has also started appreciating, lifting yet another cloud for the FMCG players.

The local currency has gained 5.07% vis-a-vis the dollar in the last three months.

This cuts down the import bill of FMCG companies, which import most of their raw materials and need to buy dollars to pay for them.

Still, the positive turn of events is unlikely to benefit consumers in the foreseeable future.

“Most of the raw materials are purchased on forward contracts and so, the benefit is going to start showing on the balance sheet of the companies only after 2-3 months. Therefore, one can rule out a price cut before that,” said an analyst with a leading brokerage house, requesting anonymity.

Besides, with demand holding firm right now, the companies have the leeway to hold prices, said V Srinivasan, research analyst at Angel Broking.

“Companies will slash prices only if there is any pressure on the volumes. Even in the quarter gone by, there was no significant slowdown in most of the product categories. Keeping that in mind, it is unlikely that companies are going to reduce prices and indulge the customers,” said Srinivasan.

Going by experts, the bigger companies will be on a wait-and-watch and bring down prices only when the regional players have blinked.

As such, most of the players will use this opportunity to offset the hit in margin that they had taken when the commodity prices held high, said Naveen Kulkarni, analyst at MF Global.

According to him, when the prices of raw materials were increasing, FMCGs chose to hike prices in a calibrated fashion rather than in fell swoops. “So, now, they are going to use this to improve their margins.”

A reduction in prices may, therefore, be out of the way.

If anything, consumers will benefit because companies may not increase prices as aggressively in the coming quarters.

To recall, the last quarter saw the likes of HUL, P&G, GSK, Nestle and Emami increase prices by up to 10-15%.