Steel shortage add to car makers woes, market may see 15-20% lower production

At a time when the inventory at automobile dealerships is at a record low, a significant shortage of steel supplies and higher price of the key raw material have led to a sharp revision in the production schedules for the fourth quarter at leading carmakers.

The production schedules for the ongoing fiscal Q4 are being revised downward by 15-20%, which could potentially mean a loss of over 1.5 lakh units in the January to March quarter for the industry.

Maruti Suzuki has revised its tentative production plan from 5.5 lakh units estimated in November to 4.97 lakh units in January. The country's largest carmaker has also cut shift timings by two hours for some days at its plants.

Mahindra & Mahindra and component maker Bosch had already warned of lower production in the first couple of quarters in 2021 due to a shortage of semiconductors. The shortage of steel will add to the problems.

This means automakers may not be able to take advantage of the upside in demand, as the high cost of sourcing steel could suppress their margin.

While this affects two-wheeler and commercial vehicle segments as well, the impact may not be as pronounced as in passenger vehicles, as the demand-supply scenario is much more relaxed.

An email sent to Maruti Suzuki did not elicit any response till press time Tuesday.

Already the major associations of automotive manufacturers, auto component manufacturers and construction equipment makers have written to the steel and commerce ministry to intervene and facilitate local supplies or open up low-cost imports.

Domestic steel prices have reached an all-time high of Rs 57,250 per tonnes, up 60% year on year. The pace of appreciation has been alarming since October 2020, as inventories plunged the world over. Domestic prices are now higher than import prices from countries with which India has free-trade agreements, and more than the import parity prices from China.

The auto sector accounts for 15-17% of the total steel consumption of India. Flat steel accounts for about half of total steel production, and about one-third of this is consumed by the auto sector.

Raw material cost accounts for 65-75% of the sale price for automakers and, out of this, metals cost 15-45% depending upon the vehicle.

According to an ETIG analysis, there is an impact of 14-15 basis points on margin for every 1% change in metal prices. As a result, the margins of the automakers could shrink by 90-250 basis points in Q3 and Q4 of FY-21, if they are unable to pass on the higher cost of steel to consumers.

Associations knock at Ministry’s door to intervene

The Society of Indian Automotive Manufacturers (SIAM) told the steel ministry in a note that the shortage might become more acute in the coming quarter and lead to further price increases.

"Shortage and price increase are creating a huge impact on production of automobile companies. The domestic steel mills are therefore committing only 60% to 70% of the orders given by the automobile OEMs," SIAM director-general Rajesh Menon wrote to the steel ministry.

Higher export of finished steel is also leading to depletion of inventories and due to low allocation to vehicle manufacturers, it is becoming difficult for them to meet their demand, claims the industry body.

Due to several new procedures imposed for the import of steel, it is becoming challenging to import some special application steels used in automobile production in a short notice, according to the automotive industry.

Due to strong global recovery in demand, inventory levels are low and relying on imports is a constraint.

The auto companies have already provided for price hikes in the second half of FY-21. However, due to an increase in iron ore prices, steel companies are seeking yet another price hike in Q4, even though current contracts are valid till March of 2021.

The Automotive Component Manufacturers Association in a note to the commerce ministry said there has been a 40% increase in steel prices over five months and that there is uncertainty over its availability, which has put a strain on them to commit smooth supplies to the customers.

"The Tier-1s are not able to pass on these price increases, as there is a huge gap in customer/OEM prices and the prevailing market prices," Vinnie Mehta, director general of the ACMA, wrote to the ministry.

The apex association of construction equipment sector - ICEMA says not only there has been an abnormal increase in domestic steel prices by 26-31%, but there is significant shortage in domestic supplies.

Due to shortage, MSME have been compelled to buy from the spot market at higher prices and they are unable to pass on the price increase.

ICEMA claims that steel prices in India are 14-18% higher than the Chinese and Korean markets, making sourcing domestically expensive.

In order to meet demand, the CE industry may be compelled to import steel. ICEMA has requested the Steel Ministry to allow duty free imports into India sans ADD and safeguard duty.

And it has requested the ministry to advise industry to normalise price and ensure availability.

Is there a Cartel at work?

Nitin Gadkari, the minister for small and medium enterprises, has accused cement and steel makers of cartelisation.

Steel makers, however, claimed that there was “no question” of cartelisation and that the prices have been directly linked to global price hikes and rising iron ore rates.

When prices globally fell, it did in India too; now that the prices have spiked all over the globe, they have increased in India as well, according to steel makers.

JSW Steel joint managing director Seshagiri Rao said there is “no cartel” and that if there were any, steel companies would not have reported losses during the first quarter of fiscal 2021.

“Prices have moved up to $740 per tonne in China, $1,050 per tonne in the US and $850 per tonne in the EU; the Indian prices are still at a discount,” added Rao.

According to a Crisil report, the domestic prices are still 6-8% below global landed prices.

JSPL MD VR Sharma said: "Scrap today is $515 CFR per tonne; it used to be $350. Pig iron is around $540 … that means the raw material for steel has also gone up drastically. Unless the iron ore prices stabilise, there is no respite."