Negotiations for auto contracts for the second quarter (Q2) of Jul-Sept’21 have begun. And, perhaps, the steel mills and auto original equipment manufacturers (OEMs) are bracing for another round of controversy-laced interactions. The mills have made fresh price proposals which are over and above those at which Q1 deals were closed.
The Q2 contracts are on a quarterly basis, indicating that mills are preferring to move away from half yearly agreements.
SteelMint learnt that a leading western India-headquartered mill has proposed a hike of INR 12,000 – 14,000/t for HRCs and INR 15,000 – 17,000/t for CRCs in Q2. For longs the ask is of around INR 7,000-8,000/t. “Looking at the cost of coal and increased freight cost” the hike is “justified”, commented a senior official.
When asked to comment on the Q2 auto contracts, Ranjan Dhar, Chief Marketing Officer, AM/NS India, told SteelMint: “Auto prices are not based on perception but actual movement of the index. We will settle based on the index only.”
Asked if the hikes are steep, Dhar replied, “Steep or not steep is always basis a reference. See the global steel prices and see the entire raw material basket. With reference to these, prices are still at a discount.”
Do auto OEMs support these hikes?
An official with a leading OEM corroborated that Q2 contracts are being negotiated but stated that the price proposals from the mills “is not justified”.
An official with another major vehicle manufacturer said the auto industry operates on a very thin margin of 4-5% and is not in a position to absorb the hikes or pass on to customers. “We need to keep some stability in vehicle prices or else brands will lose their credibility,” the official said.
About 60-70% of any vehicle is steel in the form of casting, forging, flat steel etc.
Another OEM official reasoned that mills are seeing a correction in trade prices on the back of tepid demand and thus are looking to make up in the long-term contracts.
SteelMint’s prices for the benchmark 2.5mm hot-rolled coils (HRCs) declined last week by INR 500-1,000/t to INR 64,000-65,000/t (exy-Mumbai), against INR 64,500-65,500/t seen the week before. Average monthly HRC prices are down from INR 67,000/t in Jun to INR 64,500/t till date in July. CRC prices are holding stable more or less.
Past contracts
The auto contracts for Q1 (Apr-Jun’21) were closed last month, after much negotiation. In Q1, a primary mill and a leading auto manufacturer sealed the flats deals at INR 9,500/t for CRCs and INR 7,500/t for HRCs. Deals for longs were closed between the same two parties at INR 5,950/t.
A major two-wheeler manufacturer closed Q1 at INR 7,500/t for HRCs and INR 9,500-9,800/t for CRCs while a leading two-and three-wheeler manufacturer sealed its longs contracts at around INR 6,900/t.
Vardhman Special Steels increased prices by INR 5,000- INR 6,000/t while Sunflag Iron and Steel concluded longs contracts at around INR 6,000/t.
As per a recent SIAM report, automobile production, domestic sales and exports in FY’21 over FY’20 were down 14%, 13% and 13% respectively.
Snapshot of Past Contracts –
- Q1 FY 22 – Flats deals at INR 9,500/tonne (t) CRC and INR 7,500/t HRC & Longs at INR 5,950/t.
- Q4 FY21 an interim hike of INR 7,350/t ($102)in flats and INR 6,200/t ($86)
- 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%
Outlook
Many said auto sales may come down since few consumers would want to buy at elevated prices. On the other hand, the Q1 contract hikes will reflect in mills’ Q2 balance sheets.
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