by Aakash Athawasya
Like cement makers, steelmakers faced the brunt of high fuel costs in FY21. But unlike the cement industry, steelmakers acted quickly when fuel prices began to rebound in Q2FY21. Though the economy was limping back to normalcy and demand for steel hadn’t yet recovered, steelmakers hiked prices of finished steel and steel products. This negatively affected a key sector - automobile original equipment manufacturers (or auto OEMs)
India’s steelmakers use coking coal to produce steel, and steel products like steel coils, sheets, pipes, and use diesel and petrol for freight. For steelmakers, in addition to higher coal costs, the price of iron ore, the base mineral to make steel, rose in Q2FY21.
Steelmakers however, began hiking prices of finished steel and steel products in September 2020. Domestic demand was weak despite a strong monsoon season because of the slow pace of infrastructure projects in Q1 and Q2. However, international demand for steel remained strong as countries began bouncing back from the first Covid-19 wave, and economic activity recovered.
In Q3FY21, with economic activities recovering domestically, pent-up demand for automobiles and housing led to higher steel demand. This was when steelmakers began hiking prices for steel products. Take hot-rolled coil (HRC), a steel product used by automobile makers and infrastructure companies. In Q3FY21, the average price of HRC was Rs 47,000 per tonne, 29% higher on a QoQ basis. Due to continuing demand, HRC prices continued to rise.
Even with higher steel prices, demand from automobile, real estate, and infrastructure companies was robust. This led to steady growth in steel production for the top four steelmakers in the country - JSW Steel, Jindal Steel & Power, Tata Steel, and Steel Authority of India (SAIL).
Demand for passenger vehicles (PVs) and two-wheelers rose in Q3FY21 during the festive season. However, steel and copper prices (up 17% QoQ in Q3FY21) climbed higher as well. This forced auto OEMs led by PV makers like Maruti Suzuki India, Mahindra & Mahindra, Hyundai, MG, BMW, Renault, and Kia to hike prices from Q4FY21 by 2-3%. Bajaj Auto also hiked the prices of its two-wheelers in Q4FY21 by 1-3%.
In Q4FY21, input costs for auto OEMs continued to soar. The price of copper rose by 14% QoQ, and HRC prices jumped by 19%. What’s worse was that production levels began to drop due to the global shortage of semiconductor microchips. In Q4FY21, higher prices and lower volumes led to a tapering of auto OEMs’ revenue growth from Q3FY21.
In Q1FY22, there was still no let-up in commodity prices. This led to further price hikes by auto OEMs. Hero MotoCorp, TVS Motor Company, and Eicher Motors hiked prices of their two-wheelers as well in the quarter by 3-5%. Two-wheeler companies announced this set of hikes before the second Covid-19 wave forced state governments to enforce lockdowns. Higher input prices and production disruptions (due to the lockdown and semiconductor microchip shortage), will likely suppress demand for automobile OEMs in H2FY22. This is already seen in the retail numbers of auto OEMs in Q1FY22.
Auto OEMs will see some respite due to lower copper prices, down by 11% since May. Steel prices will continue to soar due to a shortage of supply from China, the world’s largest producer of steel. The Chinese government is aiming to reduce steel production, due to the environmental impact of its manufacture, which relies on coal as the primary fuel source. This will help steel producers worldwide, as steel and steel products’ price rises. Companies requiring steel for producing finished goods like automobiles will continue to see higher costs.
Steelmakers hiked prices early in FY21, and production was steady because of strong global demand. Due to the expected shortfall of steel from China, Indian steel demand in H1FY22 may fare well, leading to higher production volumes. The PV and two-wheeler demand scenario in H1FY22 looks bleak for the price hikes to lead to revenue growth as production volumes remain muted.
For automobile makers, the conundrum is whether to hike prices to shore up margins at the cost of demand recovery, or let higher input costs contract margins but ensure demand sustains. Either way, input cost pressures will weigh heavily on auto OEMs in the coming quarters, but steel makers’ proactive approach of FY21 will likely bear fruit in FY22.