Why Auto Sales Slowdown Will Ding Indian Steel Demand

There’s no doubt anymore about last year’s slowdown.

The Society of Indian Automobile Manufacturers recently announced that the cumulative production data for April-November 2012 showed a production growth of only 4.8 percent over same period last year. The industry produced 1,646,495 vehicles in November 2012 - against 1,816,977 in November 2011, a decline of over 9 percent.

The overall growth in domestic sales during April-November 2012 was 4.8 percent over the same period last year. However, in November 2012 overall sales grew only marginally by 1.8 percent over November 2011.

On the other side of this story are the steel producers. Tata Steel Processing and Distribution Ltd (TSPDL) has already hinted that the company may fall short of its sales forecast for the fiscal year because of poor demand from the auto sector, which constitutes the lion’s share of its total steel demand.

There it is. Flat growth in auto had started to affect steel off-take. To make things worse, at least for car buyers, some Indian auto manufacturers have also hiked up vehicle prices as of the start of 2013, due to the falling rupee and costly exports. Also, the 2 percent increase in excise duty last year, meant that auto manufacturers had hiked up their prices.

Despite the passenger car segment slowing down, one of the main reasons that Mahindra did comparatively better than other auto companies is its better-than-usual performance in the utility vehicle sector.

Is all of this a cause of worry for India’s steel sector, already buffeted by a global slowdown and high import prices of raw materials?

After all, the transportation sector is among the top five consumers of steel with over 11 million vehicles being manufactured annually.

Auto demand may be slightly down, but the chairman of the public company Steel Authority of India, C. S. Varma, does not see any great corresponding cause for concern for India’s steel sector. In an interview, he said India had registered steel production of 53.6 million tons, an increase of 3.6 percent, and growth in demand of 4.7 percent over the first 10 months of this year, .

India, he admitted, could not remain isolated from what had happened around the globe. But the degree of impact was not as great as it was in other countries, he said, expressing confidence that the steel sector and SAIL would see a fresh impetus for growth this year and beyond.

by Sohrab Darabshaw