InvestorQ : Is it true that auto companies are gaining from lower steel prices?
Crowny Pinto made post

Is it true that auto companies are gaining from lower steel prices?

3 weeks ago

Falling steel prices, a key input for auto companies, has come as a blessing in disguise. Auto companies have seen their input costs down sharply by almost 20% from the highs of April 2022. In the first week of June 2022 itself, the price of steel fell 8.95%. Since the start of June, the price of steel has fallen from Rs69,300 per tonne to Rs63,100 per tonne. What has led this fall in steel prices?

The first trigger for the fall in steel prices was that global prices of steel have been falling. In addition, the fall in steel prices was also because the government levied export duty on steel effective 22 May. This made more steel available domestically and toned down the prices. Thirdly, the lower import duties on steel inputs, especially coking coal, led to a sharp fall in the price of steel. That is directly benefiting the auto industry, being a major user of steel.

Let us look at some of the impact numbers. Typically, a fall of 20% in steel prices (the fall from the April peak) translates into sharply higher auto margins. As per estimates, for every 1% fall in steel price the improvement in gross margin is about 20 basis points on an average, across various classes of automobiles. Logically, the 20% drop in steel prices translates into an improvement in operating margins of 400 to 500 basis points for the auto companies. To add to the impact, prices of aluminium and other inputs have also fallen.

Actually, many things are falling in place for auto stocks. Input costs are falling and there is a lot of replacement demand coming from the ecommerce segment. These are some of the big benefits. In addition, the semiconductor shortage is finally getting addressed and it is hoped that in the next 2 quarters, things should almost revert back to normal in terms of auto demand and output. A solid kharif would mean good demand for two wheelers. Not surprisingly, auto finds itself in a sweep spot.