With the easing of raw material prices, including that of steel, the margins of automakers, including Maruti, may improve in the second half of 2012-13.
Experts say the cooling down of input costs will bring respite to the domestic car makers at a time when their profitability is under considerable pressure from the heavy discounting undertaken to push the sales in a slow market.
Car market leader Maruti Suzuki expects to negotiate 5-6% lower prices with both domestic and global steel suppliers under a new six-month price contract applicable retrospectively from September, 2012 and going up to March, 2013. The new contract is expected to be signed this December. Maruti currently pays about R46-47 for a kg of steel on average under half-yearly contracts.
?For the last three to four months, steel prices are consistently showing a downward trend. We can expect 1.5-2% improvement in margins from the new contract, if discounting does not go up and product mix remains the same. We have a 5% annual cost savings target in overall purchasing,? a Maruti official told FE.
Prices for hot-rolled steel coils have fallen by $116 per mt to $654 per mt in the second quarter ended September, compared with $770 in same period last year, steel industry sources said.
With over 60% of a car consisting of various grades of steel, prices of the metal is probably the most important for the profitability in the auto sector. Other materials used include copper, aluminium, plastics and precious metals such as platinum, rhodium and palladium.
?Other metals are also moving downwards, but are operating in a close range. For aluminium, we have a monthly bid process among suppliers, while copper prices are fixed as per the National Metal Exchange,? the Maruti official said.
Maruti wields a significant advantage in its price negotiations with steel companies because of the large volumes it commands ? along with its component vendors, it uses about 500,00 mt of steel a year. For internal usage, it imports half of this, while its vendors is mostly source at home.
Domestic steel suppliers include Tata Steel, Essar and Bhushan.
But lower input costs on a whole is very important at a time when aggressive competition is leading to price wars across segments. Discounting, combined with rising wage costs and adverse forex movement, has led Maruti?s net profit margins to reduce to 2.81% in Q2, FY13, from 3.23% in the same quarter last year.
Asked if lower steel prices will also help Tata Motors improve its margins, a spokesperson said that the positive impact will only be felt after a period of time. ?We have not yet seen an appreciable fall in steel prices, so gains on the margins will take some time,? a Tata Motors official said.