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Rising steel prices not to impact auto costs in the near term

NetScribes/Mahesh Shetty

Analysts tracking the automobile sector believe that the recent hike in international steel prices will not affect auto production costs at least for the next 6-9 months.

Hot rolled (HR) steel prices in the overseas markets have risen by more than $20 over the last month to settle at $200 a tonne. Four major integrated mills in the US have recently announced intentions to raise prices on HR by $40 a tonne and those on cold rolled (CR) coils by $30 a tonne starting March 1, 2001. CR coils find a significant application in automobiles.

"Steel prices here are not going to follow the overseas trend," said Bobby Surendranath, fund manager at Zurich India Mutual Fund.

"This hardening of prices is actually just a short-term rally; I don't expect it to hold for too long. Most of this rise is coming from overseas hedge fund interest," he added.

The current price rise in steel products is unlikely to be sustained as the continuing slowdown in US markets is expected to exert pressure on surplus steel exported from other countries. The US market accounts for over a quarter of global steel consumption.

Also, in the steel industry, there is always a lag between movements in international and domestic prices. Domestic prices always have a distinct lag before they follow any up or down trend in international prices. "I don't see domestic steel following the bullish trends abroad for the next couple of quarters at least," said an auto analyst at a leading European investment bank.

Which leads up to the next factor in favour of auto manufacturers: long-term contracts. Traditionally, domestic automakers have had long-term contracts of 6-9 months for their steel requirements and, as such, they are insulated from any volatility in the international market.

Moreover, the domestic market for flat steel is currently facing a supply surplus situation.

So, auto companies, which sourced a large component of their steel requirements from abroad, now have a domestic choice.

Manufacturers like Tisco have started moving up the value chain and are taking more exposure to the specialised requirements of the large but fragmented domestic market.

Earlier last month, the company kicked off discussions with auto majors like Ford, Telco and Maruti Udyog to supply CR steel from its new, Rs 16-billion plant at Jamshedpur.

In an already depressed market, automobile manufactures cannot afford any further increase in input costs.

"We don't believe this (rise in international prices) is going to spill over into the domestic scene. But that still doesn't mean we're on easy street," said a senior manager at Telco's commercial vehicle arm.

"It's (rise in domestic prices) something we are always vulnerable to and given the depressed conditions here, it's the last thing we need right now," he added.

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