KARACHI: As the auto assemblers anticipate jump in vehicle prices on account of spiralling raw material prices on world markets, another cost pressure has emerged following removal of export tax rebate by China on 146 kinds of steel products from May 1, 2021.

At the analyst briefing held last week, Pak Suzuki Motor Company Ltd (PSMCL) and Indus Motor Company (IMC) cautioned about price hikes in vehicles.

Qazi Hadi at Topline Securities said Pak Suzuki informed analysts that with regards to rupee-dollar parity, the company may undertake price review. However, the potential impact of the ongoing third wave of Covid-19 is also under consideration.

Taha Madani at BMA Capital Management recalled that IMC said the appreciating rupee had offset the increasing commodity prices (steel, plastic resin, copper, aluminum, etc) in 9MFY21. However, if the commodity price fails to stabilise, IMC may increase vehicle prices to pass on cost.

Steel to cost 13pc more as China withdraws rebate on 146 products

On the contrary, the auto industry especially car and two-wheeler assemblers have so far ignored price cut in vehicles despite reduction in the cost of import of parts and accessories on rising rupee value against the dollar. One dollar now trades at Rs152-153 in interbank market versus Rs168.40 in the last week of August 2020.

When Dawn contacted IMC chief executive officer Ali Asghar Jamali to confirm possible increase in car prices, he said “we are watching the international raw material prices closely till now and we are bearing these high increases in input cost.”

A few days back Atlas Honda Ltd (AHL) raised the bike price by Rs1,600-3,000 which was the fourth jump in the current year without mentioning any reason. Chinese bike makers had also been frequently increasing the prices, citing rising raw material prices on the world markets.

Shankar Talreja, analyst at Topline Securities, said car prices rose by 2 to 7pc from August 2020 till to date.

The local assemblers had previously been so quick in pushing up prices of vehicles multiple times in a year on rupee depreciation against the dollar without revealing any details of raw material prices in world markets, freight charges, port issues, etc.

Commenting on raw material prices and rebate withdrawal on steel products by China, Chairman of Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) Abdul Rehman Aizaz said the price of steel products would rise by at least 13pc in near future. This will be in addition to the fact that local steel prices had already gone up by 50-60opc in the last one year.

Local steel producers (International Steel Ltd and Aisha Steel), following the international phenomenon have already increased the prices of cold rolled sheets and coils (CRC) by around Rs70 per kg in a short span of 10 months (July 2020 to April 2021).

London Metal Exchange Copper price has risen to $10,500 per tonne from $4,600 per tonne, aluminium prices have registered over 70pc increase while plastic and PVC items prices have almost doubled in the last one year because of worldwide supply chain disruptions due to Covid-19.

When asked whether the rupee’s rising strength against the dollar would offset the impact of a 13pc hike in steel prices after cut in rebate by China, he hoped that the powerful rupee would help to an extent in neutralising the impact on import of steel products.

Giving an example, he said “my supplier has refused to even honour the letter of credits (established in April for shipping in May) asking me to revise by 13pc or otherwise they will not ship the raw material”.

After removing rebates on steel products by China, other steel producers in the world may also raise prices, he feared.

He said reports regarding removal of additional customs duty (ACD) on raw materials and parts imports would help a lot in mitigating the Chinese government’s decision of removing rebate on steel products.

He noted that alongside the devaluation of rupee in the last three years further taxes like ACD up to 7pc on import of raw materials and components and imposition of FED in 2019-20 budget have also jacked up the prices of vehicles.

Presently, he said, 40pc of car price goes to the government in form of various taxes and any meaningful reduction in prices will require rationalisation of heavy taxes, specially the ACD and FED that were imposed in the last 2-3 years.

KCCI slams auto assemblers

Meanwhile, Karachi Chamber of Commerce and Industry (KCCI) in its budget proposals for 2021-22 had grilled the auto sector. The chamber said in the last 40 years, auto assemblers have enjoyed protective duties, exemptions and virtual monopoly in Pakistan’s automobile car market.

Contrary to initial agreements, the assemblers failed to implement a deletion programme up to 90pc. Instead, they are importing completely knocked-down kits (CKD) while they have created vendors who mostly import auto parts and supply them to these assemblers.

Consequently, the so-called vendor industry is only producing low quality and non-mechanical parts which are clearly visible in locally assembled cars. So far the assemblers have only drained Pakistan’s foreign exchange reserves to the tune of billions of dollars. Quality of automobiles produced by the assemblers is so poor that not a single unit of these cars has ever been exported to any country.

Despite such poor quality, artificial shortage is created to fetch a premium on the early delivery and allow undocumented investors to exploit genuine buyers.

The KCCI believes that more than enough protection has been given for decades to assemblers. The chamber urged the government to allow commercial import of used cars of models up to five years old besides a 50pc cut in tariff rates for import of used cars followed by restoration of depreciation to 50pc.

Published in Dawn, May 13th, 2021