The cost pressure on automobile makers is expected to ease following softening steel prices and duty cuts by central and state governments on fuel, which would bring down the cost of ownership of vehicles. This may lead to a recovery in gross margins of automakers, which contracted by over 500 basis points in the past 15 months as prices of raw materials, particularly steel, doubled, ET reported.
A two-wheeler, a passenger car, and a heavy commercial vehicle, on average, weigh about 110, 800, and 3,000 kg of steel, respectively.
Every 10% drop in steel prices potentially expands automakers’ margins by 60-200 basis points. The trend of softening steel prices may continue with the Union Government’s decision.
On Saturday, in an attempt to improve domestic steel availability and reign in steel prices, the Union government imposed a 15% export duty on a range of finished steel products. In other steel categories, an export duty of 15% has also been levied on pig iron. On the raw material side, the Government has increased the export duty by 58% and above Fe grade iron ore fines and lumps from 30% to 50%.
Import duties on some raw materials, such as PCI and coking coal, have been reduced from 2.5% to zero, while those on met coal, coke, and semi-coke have been reduced from 5% to zero.
Analysts believe that these duty cuts will aid demand recovery and lower the cost of vehicle ownership going forward.
During the quarterly analyst calls, automakers guided for a price increase of 1–2% in the middle of the June quarter after raising prices by a similar magnitude at the beginning of the quarter.
Original equipment manufacturers (OEMs) in the domestic market have already hiked the prices of their vehicles at least once in 2022.
According to media reports, Maruti Suzuki has taken four price hikes totalling almost 9% due to a rise in input costs since January.
Automakers in other segments like Audi and BMW, Tata Motors CV, and Hero MotoCorp have already announced a price hike in April.
However, analysts expect that if automakers decide to take advantage of cheaper steel prices, it will boost their gross profits.
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