The second quarter (Q2) is drawing to a close and there is urgency on the part of the steel mills to close their long-term contracts with the auto original equipment makers (OEMs). These negotiations will seal the deals for Q2. However, both parties have been huddled in long-drawn discussions since Jul’21 with no resolution in sight. No wonder, mills are now keen to close the deals but OEMs are not in a hurry.
Only one automaker, Bajaj Auto, had closed the Q2 deals, around a month back, at INR 4,700/tonne (t) for long products, INR 9,000/t for HRCs and INR 11,000/t for CRCs.
A market source informed SteelMint that, “Mills are willing to settle at INR 10,000-12,000/tonne levels, which is more or less Bajaj’s range…” However, the source was quick to observe that with markets softening, steel mills may settle for less than INR 9,000-10,000/t but we will have to wait and watch.”
Another source said mills want to settle the contracts fast but OEMs are holding back as the market seems to be slowing down, leading to a glut in cold rolled (CR) products, less demand, and sliding prices.
Sources at a leading primary mill told SteelMint that the Q2 contracts have not yet been finalised, but the expectation is that these will be in line with the prices Bajaj Auto had closed at.
SteelMint also learnt from market sources that a leading flat steel specialist could close in the range of INR 9,000-10,000/t.
Ranjan Dhar, Chief Marketing Officer, AM/NS India, informed that the increase in prices is approximately INR 15,000/t for hot rolled (HR) steel and INR 20,000/t for cold rolled, as per the Society of Indian Automobile Manufacturers (SIAM) Index. “Therefore, there is no dispute with regard to the prices as far as increase is concerned. We are just discussing how much to do in Q2 and how much in H2,” Dhar further informed SteelMint.
Mills under pressure
Mills too are under pressure. Trade level prices are languishing, narrowing the key flat products spread. HRC rates dipped to INR 65,000-65,500/t but CRC prices dropped more sharply w-o-w to INR 1,000-2,000/t to INR 72,000-73,000/t levels. Prices are exclusive of 18% GST.
Auto cos in slow-mo under supply pressures
Auto companies are in slow motion at present, under the pressure of supply challenges. Commenting on the Aug’21 sales data, Rajesh Menon, Director General, SIAM, said: “The Indian automobile industry is reeling under pressure due to supply chain challenges. The global semi-conductor shortage continues and now it is having an acute impact on output across the auto industry. In addition, high commodity prices are increasing the cost of production.”
Cumulative auto sales from Apr-Aug’21 are still below the level of FY’17. Two-wheeler sales are still lower than the levels seen in FY’12, and the three-wheeler segment is behind by many years, as per SIAM.
A source at a leading eastern India-based auto maker indicated: “There is no update, the stalemate continues. We are already struggling in the market due to production cuts because of chip shortage”
Chip shortage is adding to the production cuts which are again affecting the profit and loss books of automakers and they say they are not in a position to absorb the hike.
MSIL likely to scale up production: India’s leading automaker, Maruti Suzuki, had opted for an almost 60% production cut in the current month. However, it is heard, MSIL has issued a revised schedules to vendors for the rest of the festival season. In the upcoming two months, Oct and Nov’21 the automaker is planning to manufacture 1.8 lakhs and 1.6 lakhs units respectively. The automaker has informed its vendors that they will recover lost volumes in the next 3-4 months.
On Q2 contracts, a source at MSIL said, “Yes, mills are pushing to close at INR 9,000-10,000 /t, essentially because Q2 is coming to an end. But we cannot comment on anything as of now”.
Short-term outlook
The auto contracts are likely to be concluded soon, probably in October. Meanwhile, with MSIL looking at higher production volumes in October and November, this may augur well for mills although globally the chip shortage sustains and automakers are in back gear.
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