Steel producers are asking their auto clients to pay more on top of their biannual contracts or consider moving to shorter duration contracts as soaring prices of steel have widened the gap between spot and contract prices.
“Interim adjustments are being asked for and this is being discussed,” one senior industry member from a leading steel major said on the condition of anonymity. Another industry member said, the auto companies are being asked to consider shifting to “quarterly contracts” and negotiations are underway and price revision will happen from “Jan onwards”.
Steel producers and automobile companies last set the six-monthly contracts in the second half of Oct ’20. Since then, steel HRC prices have risen by approximately 36%, standing at INR 58,250/t (exy-Mumbai), excluding GST @18% on Friday.
Auto companies, rushing to meet surging demand, are not happy with the ask of their most important raw material suppliers.
“We can’t have a breach of contract,” said one executive in a large automobile company. “It is not as if paying more will get us additional supplies that we need as of now.” The auto company executive said that the steelmakers demand was a verbal one and no discussions are scheduled to take place.
Severe shortages both for steel and iron ore and a resurgence in demand for automobiles in the midst of the Coronavirus pandemic, is responsible for pushing steel prices to 12-year highs.
The lockdown at the end of March ’21 and the flight of the labour created production disruptions. But consumers bought more cars and two wheelers for social distancing as the lockdown eased.
Auto and steel companies don’t have any formula to set the six-monthly contacts. Rather, they look at many reference prices of the past months and negotiate to arrive at a price. Considering the volatility in the market auto majors may not be left with an option but to move to a quarterly contract arrangement with mills. We will have to closely monitor the developments.
Past contracts:
- H2 FY21 – Oct’20-Mar’21 – Price hike of around 12%
- H1 FY21 – Mar’20-Sep’20 – Prices rolled over
- H2 FY20 – Oct’19-Mar’20 – Prices decreased by 11-13%
Credit: Ruchira Singh
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