The Hindu Business Line : Auto components industry reels under steel price hike

Problems galore
Automotive OEs may look towards China if prices of steel continue to head north.
Power shortage may also add to the industries costs as it nay have to rely expensive back-up power.

M. Ramesh
T. Murrali

Advertisement

Chennai, Feb. 21 Although all the industries that consume steel will be affected in varying degrees by the recent round of hikes in prices of steel, the auto components sector is likely to be among the worst hit.

This is because the sector is being hit on multiple fronts at the same time. Its margins on exports are under pressure due to the rising rupee (though, the let up in the appreciation seen in the last few days might be of some help). Two major segments of the automotive industry are in a bear hug — commercial vehicles and two wheelers. There is a growing threat of competition from China. And now, the increase in cost of steel.

The increase in costs will wipe out the auto components industry, fears Mr Vidyashankar Krishnan, President, Indian Forgings Association and Managing Director, M M Forgings Ltd.

He disagrees that the hike in steel prices is necessitated by increase in input costs for the steel industry. Input cost increases are only notional because many producers of primary steel have their own captive iron ore and coal mines. He feels that the steel companies have pegged their prices to the landed cost of steel imported from China. But then, the Chinese prices include a 25 per cent export tax!

China’s cost of production of steel works out to around Rs 25,000 a tonne, to which it adds the export tax and profits. Mr Krishnan says the Indian prices are at Rs 34,000 a tonne. Because China imposes a tax on export of steel and not on steel products, it is becoming cheaper to import products from China.

Automotive OEs would prefer to source locally because of advantages of proximity and the need to develop a long-term relationship with vendors. But this relationship will break if Chinese products are significantly lower.

M M Forgings has been supplying forgings to Ilgin Automotive, a Hyundai vendor in Chennai. If the M M Forgings increases its price further, Ilgin may look at sourcing from China, Mr Krishnan said.

The same situation prevails with overseas customers too. “So far, we have been able to get price increases, but we are reaching a stage where our customers might prefer to look at alternatives,” Mr Krishnan says.

Power crunch

And to add to the industry’s woes, the country is getting into a power shortage situation.

Come summer, power outages might become common, forcing manufacturers to rely on the expensive back up power.

Thus, for the auto components industry, which is under pressure on various fronts, the situation is already grim — a wrong time to be saddled with steel price hikes. “The ability to absorb these increasing costs through shop floor improvements is pretty thin. There will be opportunities to reduce costs through improved manufacturing practices, but it cannot offset the rate at which the steel prices are increasing at present,” says Mr Vijay Menon, Managing Director, Menon and Menon Pvt Ltd.

With the alternative of importing from China and Thailand looking attractive, the auto components industry fears it may not get any price increase from its customers. Even if it could, there is a time lag between the input price increase and the compensation received from customers, notes Mr V. Sankar, Chief Financial Officer, Ennore Foundries. “During the interim period, there is pressure on margins.”

More Stories on : Automobile Components | Steel | Forex

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page