India: Mills revert to half-yearly contracts with automakers; prices see a drop

Steel mills and auto manufacturers are switching back to half yearly contracts. As per exclusive information available with SteelMint, final contracts have been fixed as thus: For the July-Sept'21 second quarter (Q2) hot rolled coils (HRCs) have been fixed at INR 5,700/tonne (t) and for cold rolled coils (CRCs) at INR 6,000/t. For the second half (H2) of the fiscal (Oct-Mar '21) HRCs are at INR 3,800/t and CRCs, at INR 4,000/t.

"The auto flat steel price settlement process seems to be reaching some agreement point...," a source informed SteelMint.

Another source indicated that prices depend on the auto OEMs rather than mills. Usually, OEMs settle with one mill and expect others to follow. However, there could be minor differences in prices in some cases.

Reasons for the price drop

These latest prices are quite a drop from the proposed Q2 levels heard in the market so far, of INR 12,000-14,000/t for HRCs and INR 15,000-17,000/t for CRCs.

Of course, these proposals had been doing the rounds when coal costs and freight had been hitting new highs. Prices of the Australian HCC mid-vol rose from $161/t in Jan'21 to over $430/t in Oct'21, both have been moving downward. We are also seeing the global HRC market indicating a downwards trend, which is likely to keep domestic HRC-CRC prices under pressure and perhaps have influenced the Q2 final contracts. Capesize freights too have dropped from $30/t in Jul-Sep'21 to current levels of around $21/t.

Secondly, a global shortage in semiconductors, that are essential for vehicle electronics today, caused plant shutdowns and production delays that have reportedly led to lost sales of around 2 million vehicles this year. As a result, there is an oversupply of automotive-grade steels, leading to inventory build-up that is exerting downward pressure on steel prices.

Thirdly, global prices are in declining mode partly because of the above factors. For instance, China's steel prices in the first fortnight of November slid almost 5% w-o-w on low demand, slipping raw material costs and realty sector upheavals.

Back to half yearly format

More importantly, the mills have decided to return to the H2 format. Thus, H2 prices have also been revealed, which would stand till fiscal end. The last time this format had been followed was in H2FY'21. However, higher input costs and a global supply crunch amid scramble for new cars within the pandemic started pulling up global HRC and CRC prices which were reflected in the volatile domestic rates too from Jan '21. In such a scenario, mills opted for an interim arrangement of quarterly contracts from Jan'21 onwards as a safeguard against the fluctuations, which irked auto makers. Meanwhile, trade segment CRC prices breached record levels in Q1 and HRC in Q2, fuelled by cost push although these are showing signs of cooling off in November.

Past contract trends

Past contracts reveal, in H2FY'20 prices had dropped 11-13% and were rolled over in H1FY'21. H2FY'21 saw a sharp 12% hike while Q4FY'21 took another hike of 12-14% and Q1FY'22, still another increase of 10-16%.

Auto contracts have been a controversial area where neither the mills nor OEMs want to blink first. However, where both agree is the way they settle the prices, which are linked to an index. The Crisil index is followed by the Society of Indian Automobile Manufacturers (SIAM).

AM/NS India has sealed its H2 contracts. Ranjan Dhar, Chief Marketing Officer, AM/NS India, told SteelMint: "AM/NS India firmly believes in a symbiotic relationship with all its customers as the relationship is not spot but very long term in nature. We always settle long-term contracts on the basis of mutually accepted index/formula."