Soft commodity prices spell hope, the crown can be a spoiler for Motown

Chennai: Amid the slowdown that affects the auto industry, the drop in commodity prices has been a positive side.

Steel, aluminum and copper prices have been soft, allowing automotive and auxiliary companies to improve their margins by 30 basis points (100 basis points = 1%) at an average of 12%.

“All products from last year have been very benign. Steel decreased by around 15% in the last 12 months, aluminum and copper decreased between 10% and 15%, and lead also decreased, although it is not so soft. All companies have benefited from the soft prices of commodities that have helped manage the final result during the slowdown, ”said the procurement director of a conglomerate of parts for passenger vehicles.

The overall performance of the sector would have been much worse in the third quarter if it had not been for soft commodity prices. In its recent report, the brokerage firm Emkay says that automotive companies generally saw that third-quarter revenues decreased 5% year-on-year, although volumes fell 39% less year-on-year in medium and heavy commercial vehicles. national, 15% in two-wheelers, 6% in tractors and 1% in cars and SUVs. “The aggregate margins of EBITDA expanded by 30 bp/year to 12% due to the decrease in commodity prices (lower prices for steel, aluminum, copper, rubber and crude) and cost reduction efforts. The margins saw an expansion, after seeing a contraction for five quarters, the report said.

The elbow space of the raw material is significant, particularly in the case of central inputs such as steel.

“Almost 65% -70% of the cost of a vehicle is purchased in parts. Steel, copper, aluminum: globally, these prices have been low for a while and the auto companies have benefited from that and have been able to obtain a better cost of their components, even while spending more on the marketing side during the slowdown ”, Said the automotive consultant Rakesh Batra A compact car, for example, requires between 500 and 800 kg of steel, so a fall in prices is an important benefit. As for the impact of crude oil, it is mainly through the plastic component of 15% -16% of the vehicle. But although these input costs have dropped, electronic costs have increased, he added.

Of course, the benefits of lower input costs are restricted to high volume players. For smaller players, low sales could attract a penalty. “The reduction of raw material prices benefits those who have large volumes. For the supply of raw material there is a volume commitment and, if that is not fulfilled, a penalty clause applies, ”said the head of a niche car brand of MNC. However, the consultants believe that this margin in the prices of raw materials could disappear due to the interruption of the value chain due to the coronavirus. However, the consultants believe that this margin in the prices of raw materials could be at risk due to the interruption of the value chain due to the coronavirus.

“Until now, steel and aluminum prices have been in a downward trend due to a slowdown in demand for steel in China, a relatively flat world production of aluminum and a lower infusion of capital in the expansion of market capacity key. However, most Indian car companies get between 10% and 30% of their components from China. Any interruption of the value chain due to the coronavirus for those companies with significant exposure to China's supply will result in an increase in input costs, which will have a negative impact on the OEMs even in a price regime of relatively stable raw material, said Vinay Raghunath, head of the automotive sector, E&Y.