Steelmakers press for higher auto contract prices after three quarters

Spot steel prices have been rising both globally and at home since December; a hike of over 12% in the domestic market would have been the basis of negotiations for the upcoming contracts

Cost to automakers is set to go up with steel companies pressing for an increase in contract prices after about three quarters. But, it remains to be seen if the automakers pass on this hike to customers. Most carmakers have already announced a hike in prices which will come into effect from April.

Steel accounts for about eight per cent of the raw material cost for cars and utility vehicles, seven per cent in two wheelers and nine per cent in commercial vehicles.

Major steel companies – Tata Steel, JSW Steel and ArcelorMittal Nippon Steel India (AM/NS India) – have initiated discussions with auto original equipment manufacturers (OEMs) for the April to June contract in the backdrop of firming up of steel prices.

The negotiation comes on the heels of a rash of announcements on price hikes by vehicle manufacturers.

“Steel prices have moved up globally reflecting higher cost structure over December 2022. So, directionally, there would be an increase in auto contract prices,” Jayant Acharya, deputy managing director, JSW Steel, said.

Ranjan Dhar, chief marketing officer, AM/NS India, confirmed that discussions have started for the contracts.

“The last three quarters have seen a drop in prices. But steel prices have increased since the end of December on account of rising input costs, which would reflect in the negotiations. Typically, the average of the last three/six months forms the basis for discussion,” Dhar said.

Tata Steel, JSW Steel, and AM/NS India supply about 90 per cent of the steel requirements of auto companies. Tata Steel is also believed to be seeking an increase in prices, sources said.

Since December, spot steel prices have moved up globally -- in the US by about 49 per cent and in Europe by 22 per cent till March. The domestic market followed with a more than 12 per cent hike, which would be the basis of negotiations for the upcoming contracts.

Typically, contracts for auto were for six months, but volatility in steel prices led by supply disruptions in the aftermath of the Covid-19 pandemic prompted companies to move to quarterly contracts.

Vehicle prices have been increasing since January to offset past rise in costs coupled with the compliance cost of new emission norms effective April 1.

On Thursday, the country’s largest passenger vehicle maker Maruti Suzuki India (MSIL), indicated that it would hike prices of its models come April, the extent is not known.

Maruti joins rival Tata Motors and two-wheeler maker Hero Motocorp, who said that they would raise prices by 5 percent and 2 percent respectively, as they grapple with increased costs to meet new emission norms. 

Commodity prices had soared till about April last year and thereafter tumbled. Contract prices for steel dropped by about Rs 15,500 a tonne over three quarters, at least one of the steel suppliers to auto said. Since the end of December, however, prices started moving up.

Even as prices had cooled, auto majors such as, Maruti Suzuki, Tata Motors, Hero MotoCorp and Kia India continued to hike prices in the last several months to recover the earlier spike in raw material costs and to prepare for the incoming real driving emission (RDE) norms. With the opening up of China, the vehicle manufacturers are now wary about an uptrend in commodity prices.

“Commodity pricing outlook is speculative. The one thing we are waiting to see right now is what happens to China after opening up,” said Rajesh Jejurikar, executive director of Mahindra and Mahindra, during the third quarter earnings call. 

Another senior executive from the auto industry said, while the changing norms impacted diesel vehicles more, one would have to keep a close watch on input costs.

“Commodity prices had shown some signs of softening around December-January, but were still high compared to what it was two years back. The rise in vehicle prices have not been proportional to the rise in commodity prices as no manufacturer had the will to pass it on to the consumer in a Covid-19 hit demand disruption. Therefore, chances of price hikes remain, but we have to be very cautious,” the executive said.

MOVING UP

* Contract prices of steel for auto headed for an increase in April-June quarter after three quarters 

* Tata Steel, JSW Steel, and AM/NS India are major suppliers of requirements to auto companies

* Steel accounts for 8 per cent of the raw material cost for cars and utility vehicles, 7 per cent in two wheelers and 9 per cent in commercial vehicles