Likely reduction in steel prices to offer relief to auto, consumer durables

The impact will be seen with a lag and will help only partially

The government’s recent move to reduce the import duty on some key raw materials used in the manufacturing of steel while imposing a levy on the export of these inputs, has come as a relief for automakers and consumer durable firms. The move is likely to cool off steel prices in the months ahead. However, it is unlikely to boost demand in segments such as entry-level small cars, which have seen the overall affordability taking a hit due to incessant price hikes, said analysts.

A persistent inflationary trend in commodity prices including steel, copper, aluminium, plastics, among other inputs have led to  frequent hikes in prices of automobiles, refrigerators, washing machines, air-conditioners and other consumer durables since the beginning of 2021.

The weighted average on-road prices of compact car prices (entry level and premium) for instance have jacked up by 13 per cent at the end of FY22 compared to FY20, as per industry sources.

For automakers, commodity prices account for 75 per cent of net sales.

“Steel is a major material for auto manufacturing so a reduction in the steel prices will be a positive for the industry,” said Shashank Srivastava, executive director at car market leader Maruti Suzuki India.

The effect of changes in steel prices happens with a lag of a quarter as the contract prices are finalised for the next quarter taking into account the spot prices of the previous period. With the export duty going up it is expected that steel spot prices in the domestic market are expected to come down, stated Srivastava.

However, he added that even after the expected moderation in steel prices the prices will still be substantially higher than what they were a year and a half back . Hence the situation on the cost front will still be challenging.

Hemal N Thakkar, director at Crisil Research said that while the import duty cut will bring some succour to auto companies, segments such as two wheelers and small cars are unlikely to revive. “The affordability in these segments has been hit hard due to frequent price increments. The recent hikes in the policy rates that have firmed up the borrowing costs have also been a deterrent.” Unless the income levels improve and monsoon is favourable, revival looks tough, he added.  

“It’s a positive step and will help in controlling inflation. The high prices weren't in anyone’s interest and are highly unsustainable,” stated Vinod Aggarwal, managing director and CEO at Eicher Motors.

Following the changes in duty structure, changes announced by the government on Saturday will lower the cost for the domestic steel industry and cool off the steel prices by 5-10 per cent, said analysts.

The changes include a waiver on customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry, this is a move which will lower the cost for the domestic industry and reduce the prices.

While the import duty on ferronickel, coking coal, PCI coal has been cut from 2.5 per cent, the duty on coke and semi-coke has been slashed from 5 per cent to 'nil.'

Consumer durables that have seen input costs jump by almost 30 per cent since the beginning of 2021 till May, have taken a cumulative price hike of 15-16 per cent in the same period.  

Eric Braganza, president, The Consumer Electronics and Appliances Manufacturers Association (CEAMA) said, it's  too early to comment as it will depend on all future transactions. Consumer durable companies are still holding inventory which they purchased at the old price.

 B Thiagarajan, MD of Blue Star said the company "will not make an event based decision."  "We have material till July and have ordered material till September. Commodity is typically hedged. We will be reviewing our pricing decision in July depending on the price of the commodities and pricing action taken by competition," he said.

The recent step to rein in steel prices will help the consumer durable sector, said Atul Lall, managing director and vice-chairman, Dixon Technologies even as he remains sceptical of the extent to which the steel companies will pass on the reduced costs to the user industries.

IMPACT ON USER INDUSTRIES

• Steel prices expected to cool down by 5-10% in the coming months
• Prices of fridge, AC, washing machines up by 15% since Jan 2021
• Small car prices have gone up 13% in the last 2 years 
• Consumer durable companies to take pricing decision after a few months

“We are large users of steel and one has to still see the extent to which steel prices will cool down. Steel prices were high causing huge inflationary pressures. It will have an impact on washing machines, television and lighting where steel is heavily used,” he said.  

Deepak Shetty – CEO and MD of JCB India, the market leader in excavators, said the abnormal rise was not only increasing the input cost of finished products, but was also impacting the overall sentiment of the economy.

“The recent interventions towards lowering of customs duty on select raw materials, and the reduction of import duty on Iron ore are strong steps in the right direction,” said Shetty.

The reduction in input costs will help drive infrastructure projects, particularly in the rural areas, leading to a strong revival of the economy, he added.

But analysts tracking the constriction and capital goods sector said the impending monsoons may dampen the impact of the expected price cut for user industries such as infrastructure, construction and capital goods.  Demand from user industries for steel and cement typically comes down during the rainy season. Cutting prices with the monsoon season round-the-corner may not benefit infra and capital goods companies. Steel and cement constitute around 10-15 per cent of the cost of production for infra and construction companies.