Electrical industry body the IEEMA (Indian Electrical and Electronics Manufacturers' Association) on Friday urged the industry to incorporate price variation clauses in all contracts consistently to safeguard interest of both buyers and suppliers.
"Fluctuation in raw material prices is a regular phenomenon and is cyclical in nature. Both supplier and purchaser cannot control the same. Therefore, price variation clauses are a tool to mitigate this risk and incorporation of uniform price variation clauses in the contract act as a shock absorber and dampens the effect of fluctuations in raw material prices. Use of it not only gives cushion to both supplier and purchaser but also safeguards their interest", said Vipul Ray, President, IEEMA.
The Indian economy is on the path of revival after passing through a difficult phase of 15-18 months due to COVID-19 pandemic. In a statement, IEEMA said that peaking up of power demand, increased consumer spending, growth in core sector manufacturing etc. are few indicators that underscore the green shoots and that the Indian electrical equipment industry is also witnessing signs of a U-turn in the growth story from increased award of projects and commitments of capex from public and private sectors. "However, the abnormal and unprecedented price rise of all major raw materials which are critical inputs in the manufacturing of electrical equipment has made the situation very challenging and it has become almost impossible to execute those contracts which are with fixed price stipulation or have restrictions in Price Variation (PV)," the statement said.
The prices of raw materials have risen in the range of 25 per cent to 90 per cent during the last one and half years. Aluminium has risen by 85 per cent while copper by 80 per cent, polymers by 50-90 per cent and steel in the range of 50-80 per cent.
"Though greenshoots of economic revivals are visible and we expect sustained improvement in the business in medium term; major issue being faced by the electrical industry is the shortage of major raw materials and components like CRGO, CRNGO, electronics items, plastics, polymers, etc. The supply chain disruption is likely to be seriously hamper the power transmission projects timelines. If this situation is allowed to persist for long, we are afraid that the country's power transmission plans will be adversely affected. The scarcity and uncertainty will also seriously impact the power distribution programs of the Ministry of Power, affecting the overall economy where electricity is the backbone," Ray said.
He said that the indirect benefits of using PV formulae are timely delivery of equipment, thereby, helping in controlling of project cost and ease of doing business due to this safeguarding tool. "Consistent use of PV formulae for the long-term period, evens out the effect of positive or negative variation and neutralises the effect of any advantage/disadvantage observed in short term. The price variation clauses and price/ indices attract greater focus whenever there is a slowdown or exorbitant surge in the market. This was evident when there was a continuous declining trend in major raw material prices from 2014 to 2019 which ultimately helped buyers in reducing their project costs. On the other hand, the trend has now reversed with an unprecedented rise of over 50 per cent in FY 2020-21 continued in FY2021-22," he said.
Suppliers and project builders are witnessing an exponential rise in input costs across the board and suppliers finding it extremely difficult to cope up with the same, he added.
IEEMA suggested that all purchasing organisations should incorporate price variation clauses in all future as well as existing contracts; at least for unfinished supplies and remove the ceiling on the positive side to keep the same open as in the case of negative price variation. "This will help in mitigating the price surge of raw materials and protect the financial health of suppliers, contractors and vendors in the long term," Ray added.
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