Steel mills and auto manufacturers have locked horns over the current quarter’s contracts on two counts. One is what the auto original equipment manufacturers (OEMs) deem as too steep a hike in the offers mills are making. Second is the clamour for quarterly contracts from the steel mills.
SteelMint has learnt from reliable sources that the mills have sought a whopping INR 10,000-11,000/tonne increase in their offers to the auto makers, for the Apr-Jun ’21 quarter on a pro rata basis.
The last time the mills had negotiated an interim hike of around INR 7,350/tonne ($102) in flats and INR 6,200/tonne ($86) in longs on their bi-annual contracts was for the quarter ending Mar ’21. This hike had been an interim adjustment and an additional payment for the Jan-Mar ’21 quarter on the half yearly contract prices. Auto makers had agreed to this hike too since mills had said they needed to factor in the surge in domestic steel prices at that juncture.
In Apr ’21, the steel mills again sought an increase in the contract prices by INR 6,000-8,000/tonne from the OEMs and component makers under the long-term contracts. However, this price hike had pertained only to long alloy steels required in auto manufacturing.
‘Demand high’
Leading automakers have told SteelMint that the current demand from the steel mills is high and not in keeping with the budget earmarked for such procurements.
Another auto manufacturer said that demand from the mills is “unjustified” and “not a true reflection of the settlements”.
“Cannot comment on whether this is going to be agreed upon but it is highly unlikely. The budget allocation is absolutely not in line with what mills are asking. This is not okay for long-term contracts,” said another auto industry source.
Clamour for quarterly contracts
Importantly, the steel mills want these bi-annual contracts to be converted into quarterly ones. However, the auto makers strongly oppose this, backing the existing half-yearly agreements.
The contracts cover both long and flat products and were due for a relook in Apr ’20. However, due to the pandemic-induced lockdown last year, negotiations could not be held between the mills and automakers and the prices got rolled over. Post lockdown negotiations led to a price hike of around 12% for the period Oct ’20 till Mar ’21. However, the sharp rise in domestic and global steel prices forced the mills to return to the negotiating table for an interim price hike for Jan-Mar ’21, despite the existing contracts being effective half yearly.
Why mills back quarterly contracts?
The mills perhaps have their own reasons for rooting for quarterly contracts. Runaway increase in iron ore prices and robust global demand gave the mills enough headroom to increase steel prices since last year. Long-term contracts can stifle pricing dynamics.
Flat steel categories like HRCs and CRCs are mainly required in automobile manufacturing. This week, Indian steel mills again sharply raised HRC and CRC prices by around INR 3,000-4,000/t for June deliveries to reduce the gap between international and domestic pricing. Recent offers from major mills for HRCs stand at INR 70,000-70,500/t, and for CRCs at INR 85,000-87,000/t, exy-Mumbai, excluding GST @ 18%. In Jul ’20, these were at around INR 36,000/t and INR 41,000/t respectively.
Short-term outlook
At present, neither the mills nor the auto makers are ready to blink first. There is no clarity on whether this demand from the mills would be accepted by the OEMs.
Auto industry sources say the second Covid wave dealt a harsh blow to OEMs. Dealerships were closed and sales were down. Such a steep price hike against this backdrop will not be viable, they add.
~ Madhumita Mookerji
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