Facebook Pixel Code

Auto firms look to lock in steel prices

Auto companies are looking to lock in steel prices that are at a two-year-low through six-month sourcing contracts in a bid to cap raw material expenses.

Auto companies are looking to lock in steel prices that are at a two-year-low through six-month sourcing contracts in a bid to cap raw material expenses. The move will help boost margins at a time when consumer demand for new vehicles is sluggish and cost reduction is the top priority. Steel represents 60-70% of the input cost of every vehicle.

A Maruti Suzuki official told FE that steel sourcing negotiations started this April and which are almost finished now, it has gone for six-monthly contracts from both domestic and global suppliers, instead of a quarterly contract. ?We have always had six-monthly contracts for global steel suppliers like Posco and JFE, but since the last year and half we are pushing for a similar contracts from domestic suppliers like Tata Steel, Bhushan and Essar as well,? the official said. Maruti sources steel at R45-52 per kg, the variation accounting for the different grades it uses for different parts of the car.

Rakesh Arora, MD and head of research, Macquarie Capital Securities, said, ?Most auto firms may be trying to shift to long-term contracts, but steel companies will try to resist because they are not sure of coking coal prices. Steel makers like Tata Steel, who have captive iron ore and coal, can offer long-term contracts.?

Average steel prices this year have touched R34,500 per tonne, down from the average of R36,500 per tonne in FY13. According to Macquarie, the low is comparable to January 2011, when the prices were below R34,000 per tonne.

Steel makers are exploring to rejig their product portfolio to protect margins. The sector weighs heavily on the auto industry for its revenues ?the sector accounts for between 10% and as high as 40% of total sales depending on the steel maker.

Nitin Johari, CFO, Bhushan Steel, said, ?Our total exposure to the auto sector is about 35-40% of our total sales. There has been some kind of slowdown in the recent past. But we are hopeful that there will be a spurt in demand from the auto sector in near future.?

Essar Steel, which has a exposure of about 20-25% towards the sector, said that there is a pressure on spot contracts. While prices are around $550/tonne today, volumes are very low since most of the auto companies are also going slow on their planned production.

An Essar Steel official further said the benchmark hot rolled coil price of steel has witnessed a fall of R1,000-1,200 per tonne over last one year and is expected to fall further in coming months putting pressure on the margins of companies that will get further eroded if government went ahead with its plan to increase royalty on iron ore from 10% ad valorem level to 15%.

Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.

First published on: 05-08-2013 at 05:43 IST
Market Data
Market Data
Today’s Most Popular Stories ×