Steel set to get costlier by 10-20% for auto manufacturers amid recovery

Steel is set to become costlier by 10-20 per cent for auto manufacturers as steel producers conclude contracts with them.

JSW Steel has already finalised some contracts and some are still in the pipeline. The company's Joint Managing Director and group Chief Financial Officer, Seshagiri Rao, said, prices would ne reset from October 1. “The average of the last six months will be the price for the coming months,” he said, while indicating a price increase of 10-15 per cent.

Tata Steel has concluded contracts with most auto companies and has increased prices by 15-20 per cent. While AM/NS India too, will increase prices by 10-15 per cent from October, Posco India concluded discussions for the April to September period last month.

Negotiations for auto contracts have stretched for the longest this time due to the Covid-19 pandemic. Prices for the contracts – that are half-yearly – were supposed to be revised from April, but discussions were stalled as the country went into lockdown. Negotiations finally gathered momentum from July-August.

Though steel companies had to wait to finalise prices, the wait may have proved advantageous for them. Prices have been on an upswing since the country started unlocking. On a cumulative basis, steel mills have hiked prices of hot rolled coil – a benchmark for flat steel – by Rs 7,000-7,500 since July.

The pick-up in demand for passenger vehicles have has also come as a surprise and is better than anticipated.

Ranjan Dhar, chief marketing officer, AMNS India, said, the auto sector had seen a V-shaped recovery. “One reason is the pent-up demand. Then BS-IV stocks were depleted till March and auto companies started building stocks from July-August, so sales from OEMs to dealers saw a sharp increase. But at the same time, retail sales have also been good,” he said.

The pick up in the auto sector has come after a while. Rao said that the sector had recovered to almost 80 per cent of its best quarter which was the fourth quarter of 2018.

In the second half of last year, steel companies had dropped prices by 11-14 per cent to support automobile companies as sales were in the slow lane. In absolute terms, between November 2019 and March 2020, steel prices increased more than Rs 5,000 a tonne, while steelmakers dropped prices by Rs 6,000 a tonne for H2FY20. The contracts got over in March.

The roughly 10-million tonne automotive steel demand is largely met by Tata Steel, Tata Steel BSL, JSW Steel, AMNS India, Posco and some product producers. Steel accounts for about 50 per cent of a car’s weight. On an average, a car uses about 700kg of steel, which is around 10 per cent of the total cost of an entry-level car.

Apart from the auto sector, companies are also finalising contracts with appliance makers. Rao indicated that the increase there too, could be 10-15 per cent.

Dhar said that the appliances segment was seeing the same trend. Appliance contracts are typically quarterly and prices would be effective October.

While the recovery in steel, as for many other industries started with rural, other segments – like automotive, consumer durables and other white goods – have seen an uptick in the last few months.

Price Rise

- Most steel companies have concluded half-yearly contracts with auto manufacturers 

- The price increase is between 10 and 20 per cent effective October

- Typically, a car uses about 700kg of steel, which is around 10 per cent of the total cost of an entry-level car