Buyers must use price variation clauses to absorb impact of commodity price rise: Electrical industry body

The electrical equipment market in India comprises generation equipment such as boilers, turbines, and generators; transmission and distribution (T&D), and allied equipment such as like transformers, cables, transmission lines, etc. (Image: Pixabay)

Ease of Doing Business for MSMEs: The abnormal and unprecedented price rise of all major raw materials, which are critical inputs in the manufacturing of electrical equipment, has made it almost impossible (for manufacturers many of which are MSMEs) to execute contracts that are with fixed price stipulation or have restrictions in price variation (PV) said industry body Indian Electrical & Electronics Manufacturers’ Association (IEEMA). Hence, to mitigate the impact, the electrical industry representative body IEEMA has now called for incorporating price variation clauses (PVC) in all contracts consistently to safeguard the interests of both buyers and suppliers. 

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The prices of raw materials have jumped by 25 per cent to 90 per cent in the past one-and-a-half years. For instance, Aluminium has increased 85 per cent, while Copper has jumped 80 per cent. Steel also has grown in prices by 50-80 per cent while Polymers has witnessed a rise by 50-90 per cent. Transformer Oil has also increased 25 per cent, according to IEEMA. 

“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 is 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 in a statement. 

Ray added that if the current situation is allowed to persist for long, India’s power transmission plans will be adversely affected along with the impact on the power distribution programmes of the Ministry of Power, affecting the overall economy where electricity is the backbone. He urged buyers to use the IEEMA PVC to mitigate the shocks brought on by the surge of raw material prices. 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, he said.

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The electrical equipment market in India comprises generation equipment such as boilers, turbines, and generators; transmission and distribution (T&D), and allied equipment such as like transformers, cables, transmission lines, switchgear, capacitors, energy meters, insulators, and more. 

“The price impact is very high in terms of plastics or metals or even the electronic components in comparison to pre-Covid. And unfortunately, MSMEs are not able to pass on this cost to customers. Steel and aluminum, copper, etc., have almost doubled. So is the situation in plastics. Polyamide and polycarbonate have also doubled,” Ray had last month told Financial Express Online. The government is looking at the Indian electronics manufacturing sector to be worth around $300 billion in size by 2024-25, PTI had reported last month citing Minister of State for Electronics and IT Rajeev Chandrasekhar.