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JSW Steel has approached auto companies for an increase in contract prices in the wake of a widening gap between spot and contract prices.
Half-yearly contracts for auto companies were renewed in October. Though prices started increasing after unlocking in July, the major surge came post October.
“Given the increase that happened globally in October, November and December, we approached some of the auto companies in January and made a request to give us part of the increase that will come in April from January,” said JSW Steel joint managing director and group chief financial officer, Seshagiri Rao.
“We are just seeking a part of the increase due in April from January. The balance can come later, so, overall the increase will remain the same,” added Rao.
Normally, an average of six months’ prices is taken for arriving at contract prices.
After protracted negotiations due to the Covid-19 pandemic, contracts for H2 were signed in October at a 10-12 per cent higher rate than H1FY21. However, industry sources pointed that the difference between spot and contract prices till January was about Rs 17,000 a tonne.
Domestic steel prices reached an all-time high in December 2020 with an uptick in demand and surge in international prices. It was in line with the global trend as between April and December, prices increased by about 80 per cent in China, 119 per cent in the US and 84 per cent in Europe. Indian steel prices went up to Rs 53,000 in December, an increase of 51 per cent during the same period.
Industry sources pointed out that the revision in contract prices were due from April, but auto companies had sought a rollover due to the pandemic. In line, prices were rolled over by steel companies.
However, six months prior to that steel prices for auto companies had been reduced by about Rs 6,000 a tonne. From October 1, 2019 to March 2020, the entire benefit has gone to the auto industry when prices were going up, pointed out an industry official.
However, while steel is on half-yearly contracts, not all input materials are 100 per cent on contracts for auto companies; the rising commodity prices prompted some car makers to increase prices effective January.
According to CRISIL Research, steel accounts for about eight per cent of raw material cost in cars and utility vehicles, seven per cent in two wheelers and nine per cent in commercial vehicles (as per estimates of FY20).
For steel companies, however, it’s not just auto that’s on contracts. About 30 per cent of JSW Steel’s domestic sales is on contracts, that’s spread across monthly, quarterly and half-yearly. For appliance makers, who are on quarterly contracts, JSW Steel is not looking at an increase ahead of contract renewal.
Minding the gap
. Steel companies sign contracts in October at a higher rate of 10-12 per cent
. Between contract prices and spot in January, difference is about Rs 17,000-Rs 18,000 a tonne
. HRC prices rallied to about Rs 58,000 a tonne in the first week of January 2021
