Automakers' woes of slow sales this year may get compounded with Essar Steel, one of the largest suppliers to the sector, expected to increase prices from September-end.
While the Tata Nano, for which Essar is a major supplier of steel, may find it tough to be cost-competitive on low volumes, nearly all carmakers, including Maruti Suzuki and Hyundai, are likely to face margin pressure. A Tata Motors official declined to comment.
“The (steel) contracts are on till end-September, so the new prices will be effective from October. The negotiations will happen through September and the price rise will depend on the individual contracts with the automaker,” Mr Vikram Amin, Essar Steel's Executive Director for Strategy and Business Development, told
Around 20 per cent of Essar Steel's supply is to automakers, based on quarterly or half-yearly contracts. The company meets about 35 per cent of the overall steel demand of the domestic auto industry.
Rise in costs
The scheduled increase in steel prices follows a rise in production costs for Essar Steel after it was forced to change its energy (natural gas) supplier to Shell's Hazira LNG terminal from Reliance's KG-D6 basin. In May, Reliance was mandated by the Ministry of Petroleum and Natural Gas to stop supply of KG-D6 gas to non-priority consumers.
Essar now pays $12 per Million British Thermal Unit (MBTU), up from about $5 MBTU it paid Reliance. With the festival season round the corner, carmakers would find it tough to raise model prices because of increased competition and a negative market sentiment on the back of rising interest rates and fuel prices.