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Commodity prices, Indian pharma and more... - Views on News from Equitymaster
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  • May 13, 2008

    Commodity prices, Indian pharma and more...

    Commodity prices on an uptick
    Commodity prices continue to escalate and have turned out to be a major problem that the world has been facing after the subprime crisis, largely due to its impact on inflation. And dissecting these commodities further, what has been worrisome of late is the rising energy and food prices. The IMF has indicated several reasons why commodity prices have been charting an upward path. First is the demand generated by emerging economies for commodities, particularly oil. In the oil market, demand from China, India and the Middle East accounted for more than 56% of the growth in oil consumption during 2001-07 (Source: IMF). This surging demand for oil has been attributed to increasing ownership of vehicles following the rise in per capital incomes, and government policies, which involve subsiding prices at the retail level. The International Energy Agency has projected that oil consumption growth in emerging and developing economies would continue to outstrip such growth in advanced economies, increasing by about 3.5% a year during 2007-12, compared with the latter's 1%.

    The second factor which has wielded a strong influence on the soaring commodity prices and thereby inflation has been food. The trend of food prices have once again been determined by the rise in income levels consequently spurring demand for food as well as increased focus on biofuel production. For instance, IMF states that as emerging economies become more affluent, they are not only consuming more food but are shifting their diet toward high-protein foods such as meat, seafood, edible oils and fruits and vegetables. Further, emphasis on biodiesel production has been created anomalies in the availability of food thereby fuelling price hikes. To put things into perspective, 20% to 50% of feedstocks, especially corn and rapeseed, in major producing countries are being diverted from food to biofuels.

    Other factors that have contributed to the rise in commodity prices worldwide have been lower interest rates and the depreciating US dollar. Given that most of the commodities namely crude oil, metals and foodgrains are priced in US dollars, any depreciation in the latter makes commodities less expensive for countries outside the dollar area. Also, since there is a time lag before supply catches up with demand, firm commodity prices are expected to persist in the near term atleast, a situation that will keep governments around the world on their toes in a bid to contain inflation.

  • Read how inflation is hurting us

    Co-development for the future
    Ranbaxy's recent collaboration with Merck highlights the growing emphasis that domestic pharma companies are laying on co-development of new chemical entities (NCEs). For domestic companies, such an arrangement is to their advantage as it enables them to leverage on the expertise of the innovator and also share expenses against a backdrop of rising R&D costs. For innovator companies, shifting clinical trials in early stages to low cost destinations like India enhances the prospect of improving profitability, the latter being under a cloud due to ballooning R&D costs and less number of new product approvals. In recent times, domestic companies have been very proactive in inking collaboration deals with global innovators; Nicholas Piramal's agreement with Eli Lilly and Ranbaxy's collaboration with GSK Plc are some examples to be noted. Having said that, the impact of such deals will be negligible on those domestic companies, which are hiving or have hived off their R&D units into separate companies.

  • Read our view on pharma out-licensing



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