India: Singed by coking coal, mills eye steep hike in auto contracts

• INR 15,000-20,000/t hike in flats and INR 25,000/t in longs expected
  
  
• Hike fuelled by uncertainty born of Russia-Ukraine war
  
  
• Raw material prices may not ease before August
  
  
• Auto makers on backfoot as global prices touch sky-high
  
  
• Prices may be steep for automakers.
  
  

Morning Brief: Singed by the too-hot-to-touch coking coal, steel mills are looking at a hefty hike of INR 15,000-20,000/tonne (t) ($196-262/t) on flat products and INR 25,000/t ($327/t) for longs in the auto contracts that will take effect from April, 2022. However, there is no date yet by when these contracts will be closed. Even if these get closed post-1 April, 2022, they will take effect with retrospective effect. Moreover, the jury is still out on whether these will be half yearly or quarterly contracts.

Why are mills looking at such hefty hikes?

Auto contracts, over the last few years, have been based on the Society of Indian Automobile Manufacturers' (SIAM's) price movements, and which are inferred from the general spot trends with a time lag. For instance, March's prices would be considered in February or May prices in April.

Auto contracts have also traditionally been determined on a half-yearly basis where the price movement from October till March is taken into consideration while deciding the April-September contracts.

However, in January 2021, these H1 and H2 price movements were contested and broken up into quarterly contracts for the first half of the current fiscal considering the steep price increase in the preceding year. However, the mills shifted back to half yearly contracts seeing that auto makers were not mentally prepared to accept quarterly contracts.

Now, the mills are again staring at a scenario similar to early calendar 2021. At that juncture, prices had shot up on the back of rising global steel prices. But, this time, the dynamics are entirely different. The present trigger is the raw material cost push, escalated by the Russia-Ukraine war, in a scenario where mills are struggling to procure raw material.

The Australian premium HCC has skyrocketed more than 272% from $161/t in January, 2021 to around $600/t so far in March and almost 50% since January 2022. On 23 Mar'22, prices had dropped a shade to $598/t, as supply worries persist.

Mills feel even if the war stops, there is no surety that the raw material availability issues will resolve.

Moreover, the sanctions on Russia will continue for a while even if the war stops and raw material prices will not come down soon, at least till end-July or August. "Prices may ease only from September-October. If that happens, we can take a relook at the H1 contracts or even opt for a quarterly contract. But, at this juncture, this doesn't seem so," added a mill source.

The price movement in the last six months have not been much to write home about, showing a moderate increase of INR 7,000-8,000/t. This will just not be viable, the mills say. "This is a force majeure situation. Now, mills will need to seek a hike of at least INR 15,000-20,000/t in flats. Auto requires special grades and not plain vanilla material. Today, auto-grade HRC prices are around INR 69,000/t while domestic HRC prices are currently at INR 74,500-75,000/t ($975-982/t). Add INR 5,000/t ($65/t) to that since this difference is always there in the delta for auto prices. Domestic HRC prices will soon touch around INR 76,000-78,000/t after another hike," said a source at a large mill.

"Therefore, mills will need to add at least INR 15,000/t to flats," said sources at another mill.

Moreover, automakers are unable to procure from overseas since prices are very high - cold rolled coils (CRCs) are at INR 94,000/t and hot rolled coils (HRC) at INR 80,000-82,000/t in rupee parity and are bracing for further hikes. "So, we are not wrong in seeking the hikes," reasoned a source at a large mill.

In longs, some mills, it seems, have already issued notice of an increase of around INR 25,000/t. However, this includes the price lag of INR 7,000-8,000/t that some major auto makers did not accept in the last negotiations due to a drop in commercial vehicles' sales performance. Thus, part of the last contract's overhang has entered the present contracts starting April. "Some of the auto makers have agreed to the INR 25,000/t longs increase due to the recovery in CV sales. However, two biggies are still negotiating," a source revealed to SteelMint.

"The April prices will have to be factored into the contracts. Whatever is the price increase anticipated in April, including the March contracts, will come to INR 15,000/t because the total price increase in March is INR 9,500/t," informed a source.

Will automakers accept?

Mills say if they increase by the said amounts, then they will be able to cover the next 3-4 months. Thereafter, they can take a relook at the contracts since auto makers are not mentally prepared for quarterly contracts/price increases.

In tonnage terms, auto sector consumes 8-9 mnt annually.

It will be difficult to ask the auto segment to accept the price hikes. But, if they do not, mills will have to take a tough stand, a source informed, since all costs have gone up, including vehicle prices.

"The faster they accept, the easier for mills, because exports bookings are high at present. Shutdowns are also round the corner, so a scenario should not arise where supply will become an issue," said a mill source.

However, automakers, on their part, are not so sure. One key carmaker said, prices of all other input metals, not just steel, have gone up. Moreover, with inflation rearing its head, demand for cars may see a drop in April-June, 2022 as consumers' purchasing power takes a hit. Consequently, auto players will only produce based on forward bookings to avoid inventory pile-up, since they are working with costly raw materials at present. This may lead to a drop in demand for automotive steel in Q1, though, hopefully, the scenario may turn bullish from Q2.

"We have not received any such proposals," said a high-profile Korean carmaker, adding: "Let's wait and watch. But this is too much of an expectation from the mills side."

"There has not been any such request yet," said a source at a home-grown carmaker.

"The war has created this situation... Mills are focusing on exports (especially to Europe) to realise better margins. As a result, local contracts are being dishonoured, with buyers being asked to reissue POs at higher prices or cancel the POs. However, so far, the auto industry has survived the October-March price contracts," said a source at a Japan-based steel trading outfit.

"Mills may target INR 8,000-10,000/t increase in Q1, but may face tough negotiations," warned another trading source.

Today, 90% of the auto-grade steel consumed is manufactured locally unlike the heavy dependency on imports a decade back.