JSW Steel to Levy Surcharge on OEM Customers
Indian steel companies are reeling under the onslaught of rising manufacturing costs. JSW Steel being one of the largest integrated steel producers in India, is no exception. Now JSW Steel has come up with an innovative idea of levying a surcharge on steel products sold. To begin with, this surcharge will only be levied on long term OEM customers.
The OEM customers or Original Equipment Manufacturers are the large institutional buyers of steel having long term contracts with JSW Steel. These include sectors like construction, automobiles etc. Since prices are decided in advance, this surcharge is a temporary method to offset some of the input cost spikes in recent times.
Some of the key inputs that go into manufacture of steel like ore and coking coal have gone up sharply. For example, coking coal accounts for 40% of the cost of steel production and India largely relies on imports for coking coal. However, the price of coking coal has rallied from $120/tonne to $400/tonne in the last one month.
Read: Steel in Demand
The net result is that the steel manufacturers have seen a spike of Rs.6,600 per tonne between July and September this year. In percentage terms, this translates into a cost spike of 19%. There is no way such cost spikes can be either absorbed or passed on to incremental buyers. That is why JSW is planning to levy surcharge on OEM customers.
Speaking on the subject, JSW Steel CFO Seshagiri Rao pointed out that the concept of surcharge may be novel in India but it is common across UK and Europe. Steel companies pass on higher cost in different forms like energy surcharge, transport surcharge etc. The bottom line is that even Indian steel companies have to rework prices in the current context.
Steel companies broadly cater to the retail market, export market and the OEM market. In the retail market, the prices fluctuate on a daily basis and surcharge would not be required. The export market is driven by global competitiveness.
The only market that is left is the OEM market where surcharge makes sense due to the long term nature of contracts. Steel is one more case of industries being squeezed by a spike in the cost of minerals, coal, coking coal etc. They really have no choice but to pass on the cost hikes.
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