India: Will Q1 steel auto contracts be delayed?

• Auto OEMs in no hurry to come to negotiating table
  
  
• There can be shift to quarterly settlements
  
  
• Contracts may factor in coking coal costs
  
  

Morning Brief: Barely a fortnight is left for the first quarter (April-June) to end. And yet there is no green signal from steel mills and auto original equipment manufacturers (OEMs) on settling the prices for the current quarter.

By all indications, the first quarter (Q1) contracts will be delayed. As one senior mill official said, when asked when these could possibly close, "That is a million-dollar question!"

OEMs in slow motion on closing contracts
SteelMint learnt that OEMs are not in a hurry to close the contracts. As said a primary mill source, the auto OEMs will not come to the negotiating table, because they feel the longer the delay, the better for them to drive a bargain. In a falling market, they want to wait and watch.

An official from the plates division of an OEM said, "We are still in wait-and-watch mode. Two months back the spot prices were changing on a d-o-d basis. And so, we deferred purchases. Even now, after the 15% export duty, prices are volatile and we feel these have not yet corrected to their fullest extent. Therefore, I do not think the contracts will be signed very soon."

A third source corroborated that OEMs are not keen to sit and discuss at present while steel manufacturers have been insisting on closing the contracts soon. The OEMs are, of course, aware of the inventory pressure mills are feeling and are possibly in no hurry to lock in any contact at current prices. "They have another three months in hand to negotiate," concluded a source.

Material prices in automotive manufacturing comprise around 75% of the cost structure. Steel is a key component of this material cost.

OEMs steering towards quarterly settlements
But this Q1 is seeing a role reversal. Unlike Q4, FY2020-21 (Q4FY21) - when mills had opted for quarterly contracts, the shoe is now on the other foot. It is increasingly becoming evident that the OEMs are rooting for quarterly settlements.

As said an official from a leading automobile manufacturer: "We are pitching for quarterly contracts, since we expect price levels to correct looking at the present market scenario."

Another industry source working closely with the OEMs told SteelMint: "I had direct discussions with leading OEMs. Their preference is for quarterly contracts again."

"It seems the quarterly format would give flexibility to both the OEMs and steel producers to factor in the latest situations due to the present volatility," added the source.

A source at a leading primary mill also confirmed that OEMs want to settle the latest contract on a quarterly basis, seeing the spot market corrections happening so frequently.

However, SteelMint also understands that mills, given a chance, would opt to retain the half-yearly format so that prices can stay locked longer. "Settling auto contracts on a quarterly basis is difficult because of the complexities involved - vendor pricing etc," the mill official said.

Quarterly versus half yearly: Auto contracts were always settled on a half yearly basis. However, in Q4 of FY21 (January-March 2021), mills had taken an interim hike of INR 7,350/t ($94/t) in flats and INR 6,200/t ($79/t) in longs due to a sharp increase in steel prices. At that juncture, the quarterly request had originated from the mills. However, this time, it is from the OEMs.

Thereafter, in Q1FY22 CRCs were closed higher by INR 9,500/t ($122/t), HRCs by INR 7,500/t ($96/t) and longs by INR 5,950/t ($76/t).

Mills reverted to half yearly contracts in H2FY22 (October 2021-March 2022) with HRC closures higher by INR 3,800/t ($48/t) and CRCs by INR 4,000/t ($51/t).

It may be mentioned flats enjoy 80% of auto contacts' share.

Outlook
The wheel of fortune seems to be rotating in favour of OEMs at present.

"Mills may not refuse (quarterly contracts), if the OEMs give us the increase," said a source at a leading tier 1 mill. Some industry participants feel that contracts could close higher by INR 7,000/t for both HRCs and CRCs on the plea that coking coal prices have been riding high especially since March and mills would need to factor in this cost push while settling the contracts.

ISA delegation meets finance minister: Meanwhile, an Indian Steel Association (ISA)-led delegation met finance minister Nirmala Sitharaman yesterday, 16 June.

The market was abuzz that the meeting had been called mainly to discuss the recently imposed export duty on steel and related raw materials. However, when contacted by SteelMint, a high-ranking official from ISA said "it was a courtesy call... The steel sector is a very vibrant one and we generally discussed it..."