Home / Industry / Manufacturing /  Steel firms struggle as auto makers turn to local parts

Mumbai: Indian steel companies are seeing high demand from auto makers owing to their indigenization drive and expect it to accelerate with economic growth seen to pick up pace after the general election next year.

Demand for automotive steel such as inner components and outer body parts comprises just 7-8 million tonnes (mt) a year out of India’s total production of about 78 mt, but is growing at 10-20% a year even as overall demand growth lags economic growth.

Little wonder then that top steel companies are increasing their manufacturing capacity to entrench themselves in this segment and several have roped in foreign partners for the high-technology products needed.

“Everybody has a programme to double the capacity," said Nittin Johari, whole-time director, finance, Bhushan Steel Ltd, which has been making auto-grade steel for the past 15 years. “This sector has been growing for the last so many years… The growth will accelerate after one year."

Johari said the outlook for 2014 is that the incoming government will spur economic growth and interest rates may drop, which could help recover demand for automobiles, and thus for auto steel as well.

Annual car sales in India, the second fastest expanding auto market after China, plunged to the lowest in a decade in April and is expected to remain depressed for the full fiscal year ending 31 March.

Car sales fell 8% to 142,849 units in November compared to a year ago, according to Society of Indian Automobile Manufacturers (Siam). Yet, demand for steel from auto companies rose fast as they choose to buy steel locally rather than import it to cut costs.

“Steel companies are aggressively targeting import substitution as it has become expensive to import steel owing to the weaker rupee," said Goutam Chakraborty, an analyst at Emkay Global Financial Services Ltd. The rupee has depreciated by 12% against the US dollar this year.

“Many foreign auto companies are comfortable buying from steel companies from their own countries in the local market—so that is another factor driving localization," Chakraborty added.

South Korean steel maker Posco sells steel imported from Korea but processed in India. Japan’s Nippon Steel and Sumitomo Metal Corp. has a joint venture with Tata Steel Ltd for manufacturing 600,000 tonnes of automotive cold-rolled sheets. Another Japanese company JFE Steel Corp. has a joint venture with JSW Steel Ltd to manufacture auto-grade steel.

Leading steel companies are not just doubling capacities, they are also coming up with more products.

“Tata Steel sells around 1mt of flat products to the automotive industry and we expect it to double in next five years," said a spokesperson from Tata Steel. “The company currently has a leading market share position and would like to maintain this position by enriching its product mix (skin or exposed auto body panels and high-tensile products)."

Tata Steel has invested in new technologies—for example, continuous annealing process line—to meet the growing needs of customers who were dependant on imports thus far.

Bhushan Steel sees its auto steel capacity rising to 4-4.5 mt in five-seven years from 2.2 mt now, Johari said.

Steel Authority of India Ltd (SAIL) supplies about 0.5 mt of steel to the auto sector and this is expected to double after modernization, its spokesperson said.

To get closer to their auto clients, companies are setting up processing plants in the auto plant hubs, top steel companies said.

“We are in the process of establishing more service centres near various auto hubs," SAIL’s spokesperson said.

JSW Steel is setting up four processing centres to meet demand for flat steel across India, a company official said.

As part of a larger strategy to pare costs, car market leader Maruti Suzuki India Ltd plans to reduce imports to $1.6 billion in fiscal 2015 from $2.5 billion in fiscal 2012, Mint reported in September 2012.

The key components targeted for localization are diesel engines and transmission components. Content sourced from local vendors makes up as much as 96% of Maruti Suzuki cars. But at least 30% of the content is imported by the vendors, who are compensated by Maruti for the adverse impact of any currency fluctuations.

Other firms, too, have set aggressive localization targets to pare costs.

Hero MotoCorp Ltd, India’s largest two-wheeler brand, has also launched a cost-saving drive, which, among other things, encourages vendors to source raw materials such as high-grade steel locally, according to a Pune-based supplier to the company, who did not want to be named.

To stave off the risk associated with currency fluctuation, car makers such as the local arm of Toyota Motor Corp., Honda Motor Co., and Nissan Motor Co. are also working on increased local sourcing.

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