India: Steel mills and auto OEMs continue to negotiate contracts
The controversial auto contracts for Apr-Sept ’21, which should have been finalised at the beginning of the current fiscal, are still hanging fire with steel mills ...
The controversial auto contracts for Apr-Sept '21, which should have been finalised at the beginning of the current fiscal, are still hanging fire with steel mills and auto Original Equipment Manufacturers (OEMs) continuing to be at the negotiating table. The mills had sought INR 10,000-11,000/t increase in their offers to the auto makers for the first quarter on a pro rata basis.
Several automakers SteelMint spoke to said, the hike sought "is too steep", "not justified" and / or "unreasonable". A major auto OEM said, "Negotiations are underway. However, we cannot justify to our internal stakeholders to close the deal at price levels that mills are asking."
A leading steel mill also corroborated that, "the matter is still under discussion" while another large mill said, "There has been no agreement yet."
Steel mills unlikely to relent ?
An industry insider informed that auto customers are not settling for the prices for the first quarter (Q1) and that in such a scenario, Indian steel mills may take a hard stand on supplies to them. Many also feel that since the number of customised alloy steel producers is limited, auto makers may ultimately have to relent.
Ranjan Dhar, Chief Marketing Officer, AM/NS India, told SteelMint, "The auto contracts are driven by the change in the prices as determined by the steel index or the movement in the spot prices. These contracts are not based on perceptions, but on the real movements on the index. And the price swings, whether positive or negative, need to be captured in the auto contracts too."
Auto makers take contrarian route
However, the auto industry has driven into a contrarian lane: "Negotiations are going on. But these are not normal times. Auto manufacturing has been hit, markets were closed and it will take a month or so for manufacturing to return to normalcy. This is not the time for decision making," said an auto source.
Around 40 to 45% dealers across the country have opened shop as per reports and bookings have started. It is expected that supply will start rolling once demand resumes. The supply cycle is resuming and OEMs are gearing up. The lockdown curbs are easing. "But still scope of negotiations is limited at present and both sides will have to be cautious," added the source.
It should be noted that the mills and OEMs operate on a bi-annual contracts structure, although some mills/OEMs might want to convert these into quarterly ones due to high volatility. However, AM/NS India's Dhar said, "We are okay with half-yearly contracts or quarterly whatever is the choice of the customer as long as we follow a price logic."
Amicable settlement likely ?
However, a leading OEM said, "We don't feel the mills are going to correct in Q2, prices may remain stable. We are likely to see prices moving up in Q3 and Q4 because of seasonal demand and, in Q4 mills will be under pressure."Auto makers may resist the price hike initially but ultimately these contracts would get settled amicably, say some alloy long steel producers.
The mills had last negotiated an interim hike of around INR 7,500/t on their bi-annual contracts for the quarter ending Mar '21. Next month in April, the mills again sought an increase in the contract prices by INR 6,000-8,000/t under the existing agreements. However, this pertained only to long alloy steels required in auto.