Steel firms, OEMs may renegotiate prices

Steelmakers which had managed to secure an average hike of Rs1,000 per tonne from long-term customers last month may have to renegotiate these contracts as steel prices have fallen in the spot market.

Prices of iron ore, the key input in steelmaking, have crashed globally by almost $60 per tonne, or 30%, in the last 45 days, taking down the domestic spot prices of steel.
As this may prompt OEMs

to source from the cheaper spot market, there is a possibility
of renegotiation of long-term contract for the December quarter.
OEMs are the most valued set of customers of steel companies as they buy large quantities of the metal, and due to the long-term nature of contracts they are shielded from erratic price movements.

As raw material prices were high, some steel companies had insisted and got a price rise for the December quarter contract.
“Essar and JSW Steel had insisted for an `3,000 increase of hot-rolled products under long-term contracts, but after much deliberation the price was raised by `1,000,” said a leading long-term buyer of these two companies.

SAIL and Tata Steel, due to their extent of backward integration, did not see much impact of high raw material prices and rolled over the price of last quarter, while other companies could not, and passed on the rise in costs to their clients, he said.

Ramesh Iyer, vice-president, NCDEX, a leading commodity exchange, said, “In the last 45 days spot prices of steel has come down by almost `2,000 per tonne and going forward the prices are expected to remain subdued. Therefore, it is not surprising if companies opt for spot pur-chases.”

Some of the OEMs now say that even the December contract could come back to the negotiation table.

“I don’t think the high price of December contract is sustainable,” Soli N Mullan, head of corporate steel sourcing at Godrej & Boyce, a leading steel appliances and furniture maker, told DNA Money at a steel conference organised by mjunction.

He said currently the contract prices were higher than the spot prices by 5-7% and were expected to come down if the current situation persisted.

Godrej & Boyce sources close to 1 lakh tonne of steel annually, out of which 85% is from the domestic market itself.

“Usually, companies and long-term customers sit together every time there is an erratic price movement in the mid of quarter and many a times companies have renegotiated prices whenever spot prices have moved 10% up or down against the contract prices,” he said.

In fact some companies which have monthly contracts have seen their contract prices being reduced for November.

“Companies had increased the price of various products in October but rolled back the hike for November. We expect no further reduction for December,” said Anantha Reddy, managing director of Pennar Steel.

Analysts said while this will be good for equipment manufacturers, for steel companies it could be negative as it could once again hit their topline, which was already under pressure last quarter due to forex loss.