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India's automakers, steel mills face deadlock over price, amid weak demand

India's automakers and steel mills are facing a deadlock over price negotiations as coronavirus induced demand destruction has led to a fall in production and consumption within the automobile industry, several auto market participants told S&P Global Platts July 15.


India produced 1.09 million vehicles in June, which nearly halved from 2.25 million vehicles manufactured in the year-ago month, data from the Society of Indian Automobile Manufacturers, or SIAM, showed.


India's vehicle output for April to June, which marks the first quarter of the financial year, collapsed 79.4% year on year to 1.49 million vehicles, SIAM data showed.


Price negotiations -- usually conducted bi-annually -- are agreed on the basis of price movement during the earlier six-month period. Hence, the prices for April–September 2020 period will be negotiated on the basis of flat steel prices over October 2019 to March 2020.


Spot prices of Platts assessed IS2062 2.5-10mm HRC delivered Mumbai increased 9.4% over October 2019 to March 2020. However, the mills and the auto companies -- even though half-way through the negotiation period -- have not been able to concur on the price.


PROLONGED NEGOTIATIONS


"No one will give an increase in this scenario. Let Maruti [Suzuki] negotiate first," a source with Mahindra & Mahindra said, referring to India's biggest carmaker. "This whole year will be spent in negotiations," the source added.


The reason for the lack of consensus is being attributed to the fact that while steel mills are insisting on an increase in prices, the auto majors are not in a position to afford an increase, sources said.


"We are deferring the discussions, [it is] usually to be done but I don't think any OEM will come forward," a source with Tata motors said. "When the market [had] dropped by Rupee 7.2/kg, they [mills] passed on only Rupee 6 per kg to the [auto] industry. So there is still Rupee 1.2 per kg left there with them," the source said.


June domestic sales of passenger vehicles were almost half at 105,617 units compared with 209,522 units in June 2019, due to the weak demand.


The passenger vehicle sales for the first quarter of the financial year stood at 53,734 units, a 78.4% fall from the corresponding quarter of 2019.


"Mills are insisting for increase but so far no serious talk. Mills are looking at [an] increase of Rupee 2-3/kg," said a source with Steel Strips & Wheels, a maker of automotive steel wheels.


The June data represents the first full month of economic activity since India imposed a nationwide lockdown to curb the coronavirus pandemic. The data also marks the first time SIAM has released vehicle data since the lockdown began in March and was eased in early June.


In addition to weak demand, disruption to the supply chains also resulted in the poor monthly and quarterly figures, Rajan Wadhera, president of SIAM, said July 14.


"The negotiations have not gathered pace yet even though we are clear that they [OEMs] will have to give an increase," said a mill source with Tata Steel, India's top steelmaker. "Activity over the last three months of April to June do not matter because there were no [steel] volumes delivered to auto companies," the source said.


A recovery in India's car industry is likely to be prolonged as the country deals with a fresh surge of coronavirus infections, according to market sources. India has 906,752 cases of the novel coronavirus with 28,498 new infections reported on June 14, data from the federal health ministry showed.


The International Monetary Fund on June 24 projected that India's GDP will contract 4.5% in 2020 but expand 6% in 2021 compared with a 4.2% growth in 2019, "following a longer period of lockdown and slower recovery than anticipated in April."


Source: S&P Platts

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