Auto components industry reels under steel price (The Hindu Business Line 22th Feb 2008)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.More
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.More
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