Manufacturers blame increased raw material cost, freight charges
Less than two months after car prices were slashed after a reduction in duties and taxes, companies in Pakistan are planning to jack them up again. Their excuse: raw material prices and freight charges have gone up.
“Around 70% to 80% of a typical passenger car is made up of some grade of imported steel,” said Syed Shabbiruddin, the director for Sales and Marketing at Changan Pakistan. “A car price is, therefore, highly sensitive to the price of steel and the exchange rate.”
If steel prices go up, car prices will inevitably increase, he said. In fact, even motorcycle producers recently also passed on the burden to their consumers. Soon car companies will also have to raise vehicle prices because of rising steel prices and the increased cost of shipping, Shabbiruddin said.
“An unprecedented increase in shipping costs due to the recent wave of Delta variant in South Asian countries is also putting pressure, especially on new car assemblers, to increase prices to pass on the impact,” he added.
Research analyst Taha Madani said that car companies will be under pressure from the government which recently slashed tax and duties to bring car prices down. The government had reduced the Federal Excise Duty (FED) and Additional Custom Duty (ACD) on all cars. It also cut the sales tax on cars below 1000cc.
Madani says the demand for cars has been high for the past one year and a higher number of cars sold might help companies absorb increasing steel prices and shipping costs. But since demand is high, companies may choose to increase the price to increase their profit margins.
“Suppose, a company can assemble 2,000 cars in a month and the demand is for 4,000 cars. If the company increases the price, the demand might come down to 2,500 cars. Will it make any difference for the car company?” he said.
Research analyst Waqas Ghani wagered that steel prices might remain at this level for the next few months.
“However, steel is a commodity and its price might even go down after some time. I don’t think the steel price will remain high permanently,” he said. According to him, Cold Roll Channel steel sheets used to cost Rs132,000 per ton a year ago. This has gone up to Rs239,000 per ton.
Similarly, the price of steel rebars that are used in the construction sector has increased from Rs117,000 to Rs173,000 in one year, said Ghani. The price hike was the outcome of steel scrap prices going up from $300 per ton to $535. He was comparing prices from last August to this year.
At least three independent sources in the auto industry confirmed to SAMAA Money that the shipping cost have gone up from $800 for a container pre-pandemic to up to $4000 currently.
“The containers are also not available because ports at choked amid the pandemic,” said Shaukat Qureshi, Chief Operating Officer at SZS’s auto division, which is planning to launch electric cars in Pakistan.
“Moreover, countries such as China have reduced their number of workers at the ports which is creating hurdles.”
However, analysts pointed out that these two factors were caused by a spill-over effect of the coronavirus pandemic.
Research analyst Ahmed Lakhani said that this was the first time that all car companies reduced prices this year and the impetus actually came from the the government not the private sector. “Before this, I have not seen car prices going down in Pakistan except for a couple of instances when companies reduced a single model’s price because of low demand,” he said. It happened only in the Suzuki Wagon-R and United Bravo’s case. Other than that, prices have technically been irreversible.