Auto industry anticipates steel prices to cool off post duty revisions

Representative image.

Close on the heels of the central government reducing import duties for raw material for steel and plastic products as well as increasing export duties on steel intermediates, auto industry representatives have turned optimistic, and are hopeful that steel prices would moderate in the domestic market.

The Engineering Export Promotion Council (EEPC) predicts that steel product prices, which were continuously rising in the domestic market, are expected to fall by 10-15 percent due to duty-related measures taken by the government. Similarly, ratings agency ICRA is hoping for a similar quantum of price correction in domestic steel prices in the coming months.

Rohan Kanwar Gupta, Vice President and Sector Head, Corporate Ratings, ICRA Limited, said, “Significant and unrelenting hardening in commodity prices over the past one year has been a major dampener for demand in the automotive industry, with OEMs across automotive segments forced to undertake multiple price hikes to pass on the inflationary pressures.” With the government now imposing export duty on the steel sector to reign in the elevated prices, domestic steel prices could potentially correct a bit in the coming few months. If that materializes, it would come as a relief for the automotive sector, preventing any major price hikes for vehicles, thus helping improve consumer sentiments.

The central government recently waived off customs duty on the import of raw materials such as ferronickel, used by the steel industry. Additionally, while export duty on the shipment of iron ores and concentrates have been hiked from 30 percent to 50 percent, for iron pellets a 45 percent duty has been imposed. The government hopes that such measures will benefit user industries (such as auto) and small-scale players (like auto component players) that were heavily reliant on steel as raw material for building their end products.

Steel as a commodity is extensively used in the automotive industry. This includes stainless steel, high-strength steel, high-carbon, low-carbon, and galvanized steel used for making body panels. Advanced high-strength steels (AHSS) now account for 60 percent of vehicle body structures and have gained much traction.

Mitul Shah, Head of Research, Reliance Securities, believes that the recent duty revision announced by the government would lead to price-cuts by steel makers, going forward, and would divert their production towards domestic consumption. “This would certainly benefit auto makers on their cost front. This may help them in better cost management, right-pricing to improve affordability and generate demand from consumers, and eventually margin expansion,” avers Shah.

 Industry players sound upbeat

While industry players are adopting a wait-and-watch approach for the final outcome of the decision, most of them have been unanimous in claiming that the cost pressure on Original Equipment Makers (OEMs) will ease following softening steel prices, which would ultimately bring down the cost of ownership of vehicles.

For vehicle-makers such as Maruti Suzuki, material cost (including steel) account for about 75 percent of the overall production cost and any changes in the input prices will affect its profitability.

As Shashank Srivastava, Senior Executive Director, Marketing & Sales, Maruti Suzuki India, puts it, “The effect of changes in steel prices takes place with a lag of a quarter, as contract prices are finalized for the next quarter taking into account spot prices of the previous period. With the export duty going up it is expected that steel spot prices are expected to come down.”

“Even after the expected cooling of steel prices they will still be substantially higher than what they were a year and a half back. Hence, the situation on the cost front will still be challenging,” he added.

Auto component industry body ACMA believes that measures to control the cost of input raw materials, especially steel, which accounts for over 60 percent of raw material cost in the component industry, is in line with the government’s agenda of encouraging local manufacturing and making it globally competitive.

Sunjay J. Kapur, President, ACMA & Chairman, Sona Comstar, told Moneycontrol.com, “The recent decisions by the government to reduce customs duty on input raw materials for steel and plastics as also slash excise duty on petrol and diesel are indeed very welcome and timely. Further, this is also a big relief for the MSMEs, where rising input costs can threaten the viability of a company. The auto component industry is largely dominated by such small enterprises."

National Engineering Industries Ltd, one of the country’s largest homegrown bearings manufacturers, believes the recent announcement to be a positive move for the auto manufacturing industry, as it might lead to recovery in gross margins.

“The margins had shrunk by almost 500 basis points in the last 15 months, as we noticed that raw material prices, particularly steel, had doubled. Raw material costs account for around 75-77 percent of an auto OEM’s total costs, and steel is a major component of that share,” pointed out Rohit Saboo, President and CEO, National Engineering Industries Ltd.