Auto companies may see sharp increase in prices for steel contracts

Some have temporarily shut down units in the wake of rising Covid cases, but at least three major suppliers to the auto industry said the move was unlikely to impact negotiations

Auto companies may face a sharp increase in prices in the contracts with steel companies that are expected to be concluded early next month.

Companies such as JSW Steel and Tata Steel had increased prices for the January-March period in the wake of runaway steel prices. Now, the contracts under discussions are likely to be for April to September, though for some, it could even be quarterly.

Some automotive manufacturers have announced a temporary shutdown in the wake of rising Covid cases, but at least, three major suppliers to the automotive industry said that it was unlikely to impact negotiations.

“There is general alignment that auto contract prices in India is far below international price levels,” said one of the major producers. The price increase being discussed is in the range of Rs 9,000-Rs 12,000 a tonne.

Jayant Acharya, director – commercial & marketing, JSW Steel, didn’t comment on the quantum of increase, but said, “Automotive contractual prices are under negotiation. At present, it is at a substantial discount to both the domestic as well as international prices.”

He pointed out that the domestic prices for cold rolled steel in USA are at the levels of $1,700 per MT (metric tonne) and at levels of $1300 per MT in Europe. “The domestic monthly prices of cold rolled in India are at much lower levels, at a discount of 30-35 per cent to global prices,” he added.

Ranjan Dhar, chief marketing officer, ArcelorMittal Nippon Steel India (AM/NS India), said that in the last six months, prices of cold rolled increased by Rs 20,000 a tonne and hot rolled (HR) by 12,000-14,000 tonne.

Except for a brief slowdown from mid-January, steel prices have been on an uptrend since the unlocking in India.

Average hot rolled coil (HRC) prices rose by over Rs 9,000 per tonne from October 2020 to March 2021, according to CRISIL Research. But HRC prices saw a rise of only Rs 1,500 during the period January-March 2021 as February 2021 saw some correction before rising up again; prices increased by another Rs 5,000-6,000 per tonne in the month of April 2021, it said.

Isha Chaudhary, director, CRISIL Research, said there was strong demand recovery in H2FY21. “Rise in global landed prices and increase in iron ore cost are key drivers for the price rally.”

The global rally in steel prices was largely led by a strong recovery in China’s demand. Other consuming economies are rebounding leading to a surge in demand, said Chaudhary.

Acharya explained that steel demand globally has picked up and in many countries are at pre-Covid levels.

“The investment in infrastructure by various governments and improvement in manufacturing activities have supported the growth in steel demand. However, supply is still lagging demand as some of the capacities, globally, post sporadic lockdowns, have not recovered fully, coupled with steel production control in some areas in China to control carbon emissions,” he said.

Further, Acharya pointed out, in the last few years, post the global financial crises, the subdued market and margins was not conducive for investing in capacities for steelmakers globally.

Additionally, China has revoked its export rebate and dropped import fees on key raw materials effective May 1 in a move to reign in domestic (Chinese) prices and reduce costs for steelmaking.

“While, this is likely to reduce prices in China, it will have an adverse effect on global prices as supply will only get tighter with fall in Chinese exports,” explained Chaudhary.

Frontline steel stocks rallied to fresh 52-week high during trading hours on the Bombay Stock Exchange (BSE) with Tata Steel at Rs 1,037, JSW Steel at Rs 728.80, Jindal Steel & Power at Rs 459.35 and Steel Authority of India Ltd at Rs 113.45.
 

An ICICI Direct Research report said that domestic steel players were currently in a sweet spot on the back of continued strength in steel prices both on the global and domestic front, healthy capacity utilisation levels on the back firm demand and balance sheet improvement on the back of debt repayment exercise undertaken by domestic players.

The only dampener, however, could be the surge in Covid cases. Acharya said, in India, while the pace of vaccinations pick-up is positive, the resurgence of Covid in many parts of the country is an area of concern.

PRICE RISE

• Steelmakers in discussion for quarterly/half-yearly contracts with auto companies
• Steel companies say that prices are at a substantial discount to domestic and international prices
• According to Crisil Research, HRC prices rose by over Rs 9,000 a tonne October 2020-March 2021 and by Rs 1,500 during January-March 2021; prices were up another Rs 5,000-6,000 a tonne in April 2021