Steel, aluminium price rise hits auto makers

MUMBAI (Commodity Online):  India's car makers are caught in a situation as steel and aluminium prices soared to new heights this year.

Even as the prices of input materials rose to new levels, the car makers are not in a position to hike the prices due to the competition in the filed.

Prices of key raw materials like steel, rubber, aluminium and plastic have shot up sharply in recent months. Steel, used directly in a vehicle's body and indirectly through components and comprises 50% of the manufacturing costs, has seen a 25% price rise in one year.

Likewise, aluminium prices have risen 20% while natural rubber rates have leaped 150% in the same period.

Companies like Maruti Suzuki and Hero Honda, the new financial year has started with a bad note. Input costs could shave up to 200 basis points off the operating margins of automobile companies.

There is a pressure on commodity prices due to the very quick recovery in India and China.

Under normal circumstances, the way out would have been to raise vehicle prices. But auto companies fear that the move will boomerang in an increasingly competitive market, notably the compact car and motorcycle segments. Also, many companies already hiked prices by up to 3% in January and April. Companies are facing the dilemma of taking a hit on operating margins or gambling on flailing sales as a result of a price rise.

On an average, raw materials make up 65-70 % of total costs for an automobile company. A 20-30 % hike in steel and aluminium will mean profit margins of auto companies taking a 150-200 basis point hit quarter-on-quarte.

Auto parts makers are also clamouring for better prices. In the last three months, prices have been up 15-20 %. Some sections of the industry, however, have begun hiking prices. The tyre industry, which has seen a sharp spurt in rubber costs, was the first to bite the price bullet.

Automobile companies wary of price rises, meanwhile, are working on ways to cut costs and make production more efficient.

India's largest carmaker is also targeting economies of scale to gain advantage of lower costs.

Meanwhile, state-run National Aluminium Co Ltd has reduced prices of its aluminium products for the domestic market by Rs 3,000 per tonne to bring them in line with LME.

The basic price of standard aluminium ingots and standard aluminium sow ingots would now be Rs 114,700 per tonne, inclusive of flat discount, said the official who could not be named due to company policy.

NALCO is India's third-biggest aluminium maker and produced 431,000 tonnes of aluminium in the financial year ended in March.