India: Chip shortage may play role in Q2 auto contracts

The negotiations for the auto contracts for the second quarter (Q2), which had started in Jul’21, are still in a stalemate, SteelMint understands. While the mills’ negotiations with almost all the auto original equipment manufacturers (OEMs) are still ongoing, the only deal to have been sealed is with two-wheeler major Bajaj Auto. Sources inform that Bajaj Auto closed its Q2 contracts at INR 4,700/tonne (t) for long products, INR 9,000/t for HRCs and INR 11,000/t for CRCs.

SteelMint learnt that a leading western India-headquartered mill had proposed a hike of INR 12,000 - 14,000/t for HRCs and INR 15,000 - 17,000/t for CRCs in Q2. For longs, the ask is of around INR 7,000-8,000/t.

“Speaking to SteelMint on the impending closure of the contracts, Ranjan Dhar, Chief Marketing Officer, AM/NS India, said: “There is a way to arrive at the prices that we do and this is through the index. That is our understanding with our automaker clients. I do not think there is any disagreement with the auto industry on this in principle.”

Little room for steel price hike

A leading automaker operating out of eastern India, however, told SteelMint, any further rise would not be acceptable because it does not see steel prices increasing further in the short term since exports are a bother at present. Europe quotas have been exhausted, and exports to Vietnam and South East Asia are bleak at present because of the Covid second wave lockdown. “The export market, which was driving domestic steel prices, has crashed. From this perspective, there is no scope of further hike in auto contract prices. In a ripple effect, domestic steel prices are going to correct on the back of bearish exports,” feels the official.

Weak overseas demand has continued to remain weak, pulling down SteelMint’s HRC FoB index by $23/tonne w-o-w. On the domestic front, traders feel prices will correct and that mills may reduce their list prices or give trade-level discounts.

However, a leading mill said that although demand is sluggish, the export market looks good.

AM/NS India’s Dhar said, “Exports have not crashed in terms of prices, which did reduce a bit in July. But have recovered again in August. Indian steel prices have been perpetually at a huge discount to international prices, so a substantial price headroom still remains.”

Chip shortage

The global semi-conductor shortage is driving automakers to cut production. Against this backdrop, they say it will be tough to absorb a rise in input costs. India’s largest automaker, Maruti Suzuki India (MSIL), in a major announcement, said it will cut its Sept’21 production volume by 60% due to the severe semi-conductor shortage worldwide.

“If the largest automaker opts for a massive 60% production cut, the situation of the other comparatively smaller auto makers would be worse. Looking from a profit and loss (P&L) standpoint, automakers are not in a position to absorb a further increase in input costs,” said an auto company source.

An official at MSIL told SteelMint: “The semiconductor shortage is going to affect our profitability. Our business will get hit, we are in no position to accept a hike.”

Outlook

The contracts may get settled in the next few days. But it remains to be seen whether auto companies agree to the prices sought by the mills, despite Bajaj Auto closing the contracts.

An official said auto companies do not have the budget to accommodate the “mills unprecedented margins” at which they close auto contracts.

For the four-wheelers, production cuts would imply a possible decline in profitability. Semiconductor usage is less in two-wheelers. Top-end four-wheelers are more chip-dependent to run their features. Semi-conductor usage is less in two-wheelers. Top-end four-wheelers are more chip-dependent to run their features.

Prices as on 9:00 IST, 02 Sept. d-o-d changes indicated against closing price of 01 Sept.