India’s integrated steel makers, looking to move up the value chain in the auto space, will have to gear up to become more competitive once the Comprehensive Economic Partnership Agreement (CEPA) between India and Japan kicks in.
“I don’t source my raw material from Japan because it’s not competitive today, but once CEPA is implemented, it will be. I will buy the material from Japan because I believe the difference in price will be around $50 a tonne,” one of the largest cold rollers and galvanised players in the country said.
Under CEPA, duties on some 90 per cent of the commodities traded between India and Japan will get eliminated in the next seven years, or so.
At present, steel — hot rolled, cold rolled, galvanized — attracts duties of around five per cent, which is likely to be zero by 2017.
With the automobile sector in India clocking in sales of 35-40 per cent, steel producers are moving up the ladder and creating capacity of higher auto grade steel.
“Technology for higher grade auto steel is just getting developed in India.
Producers will become capable of supplying higher grade steel. If the duty becomes zero, it means we have to become more competitive so that the market is able to absorb our technology,” JSW Steel director (sales & marketing), Jayant Acharya said. Around 10 per cent of JSW Steel’s output is auto grade steel.
For most of the integrated steel players, auto grade steel would account for 10-20 per cent of the total production.
Apart from improving efficiency, steel makers also feel that the government could help in making funds available at cheaper rates to mitigate the problems.
“There will be competition from CEPA. We are putting up capacities at an interest cost of 11-12 per cent here. The interest cost should be looked at,” Bhushan Steel MD Neeraj Singal said. Bhushan Steel supplies to automobile majors like Maruti, Tata Motors, and Mahindra & Mahindra.
During April 2009-March 2010, Japanese steel exports to India surged 40 per cent annually to 893,000 tonnes, most of which was focused on the automobile segment. While the technology for higher grade auto steel is now being created in India, Japan is known to be a quality supplier for auto steel.
A fact, acknowledged by Indian steel players, as some of the leading ones, have tied up with Japanese counterparts. JFE Holdings has struck a deal with JSW Steel, while Tata Steel is looking to partner Nippon Steel.
Car makers, on their part, are open to procuring more of their steel from Japanese steel makers, as the country’s booming automobile market could create a demand-supply mismatch going forward.
“In principle, Nissan prefers local parts due to less inventory (on sea). However, we will also be flexible and open for material sourcing in order to reduce cost, CEPA could be one of the opportunities,” a Nissan India spokesperson said.
But meeting the stringent, and often specific, requirements could pose a challenge for Indian steel companies as they will have to find a balance between price and quality.
“Normally, if a duty structure is changed, the benefit is passed on to the consumer, so we will have to see what happens. But typically, our (automobile) needs are different and we have very specific requirements. Availability and pricing will be important factors,” an official from Hyundai Motors said.
Tata Sons Director J J Irani remained confident that the steel produced in India for appropriate applications would not be impacted by CEPA.
