Rising raw material prices to eat into Q3 revenues of automobile companies

It is not only the demonetisation that is expected to eat into the automobile sector's earnings third quarter ended December 31, 2016, but rising raw material prices will also make its impact felt.
 
Prices of rubber had increased by almost 40% since September 2016, while copper prices were up by 30% during the same period and aluminum increased by 10%. Even steel prices had risen marginally during this period.

Rising cost of steel, aluminum and lead had caused a strain on the automobile industry. While many companies bore the brunt of it for sometime, they decided to pass it on to consumers in the form of a hike in prices effective January 1, 2017.

Source: tradingeconomics.com

Major car markers such as Maruti Suzuki, Hyundai, Nissan and Tata Motors announced a hike in prices from the start of January.
 

While Maruti Suzuki and Hyundai hiked up their prices by nearly Rs 1 lakh from January 2017, Nissan increased its prices by up to Rs 30,000 and Tata Motors between Rs 5,000 to Rs 25,000 per unit in its passenger vehicle portfolio.

Rubber prices have been heading northward in recent few months. Rubber prices have jumped from Rs 108 per kg (Cochin) on January 1 to Rs 160 per kg. In fact, rubber prices have grown to Rs 160 per kg from a low of Rs 91 per kg at the same time last year.

The reason why this sudden rise in rubber prices is due to a fall in production in key rubber producing countries as well as the increasing crude oil prices. Production in rubber producing nations such as Thailand, Malaysia and Indonesia has declined due to extreme climatic conditions and regulatory clamp down.

“Further, we expect rising costs of steel, aluminium and lead to result in gross margins contracting across the board for the industry. Prices of key raw materials have risen sharply YoY, as Q3FY16 saw major commodities witnessing multi-year lows,” said an IDBI Capital Research report.