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Fri, Mar 26, 2004 - Page 12 News List

Rising steel prices worrying automakers

HOT METAL Lawsuits have already begun to fly as auto suppliers try to offset their increasing costs by surcharging carmakers, who need a consistent supply of parts

AFP , DETROIT, MICHIGAN

Soaring steel prices have roiled the ranks of US auto suppliers, pushing some to the brink of bankruptcy, and threatening to disrupt the multi-billion dollar US automotive industry.

US steel prices have risen 30 percent this year, driven by China and South Korea's rapacious appetite for steel imports, and rising domestic demand.

The increase in material costs has been felt most acutely by the smaller suppliers that are most vulnerable to price fluctuations, but it's gradually becoming an issue for automakers who are vulnerable to disruptions in their supply chains.

"This is a very fragile situation that may affect delivery and possibly shut down plants," said Neil de Koker, president of the Original Equipment Suppliers Association (OESA) that represents auto suppliers.

Cost-conscious automakers, struggling to protect paper-thin margins that have been eroded by fierce competition and an incentives war, have been reluctant to pay steel surcharges.

But at least one automaker, General Motors Corp, has had its hand forced.

The automaker confirmed this week that it has been paying surcharges "under protest" to at least two suppliers who threatened to suspend shipments.

"We felt it was necessary to protect our supplies to prevent any possible shutdown in facilities," said GM spokesman Tom Wickham.

GM is suing Steel Dynamics Inc, an Indiana mini-mill, and Textron Inc, which supplies 80 percent of the fasteners used in GM cars and trucks, for breach of contract and damages.

It's not alone. Delphi Corp, the world's leading supplier of automotive components, also went to court over a similar pricing dispute with two of its suppliers who threatened to cut off deliveries.

On March 10, the Troy, Michigan-based company announced that it had settled with Republic Engineered Products, but it was continuing a dispute with NSS Technologies Inc, which makes a part used in a GM steering gear assembly.

They are not isolated cases, according to OESA, which surveyed 47 of its members in February to get a feel for the impact of the crisis.

More than three-quarters said steel mills had slapped surcharges on existing contracts and were threatening to halt shipments if they weren't paid.

"It's a time for lawsuits and confrontations," said an executive from a forging plant who declined to be named.

The industry has petitioned lawmakers for relief, urging them to cap steel exports to ease prices.

In hearings on Capitol Hill earlier this month, representatives of the Emergency Steel Scrap Coalition warned that the crisis could result in steel shortages and bankruptcies within weeks.

"We cannot afford to absorb these increases," coalition president Bob Stevens told members of the House committee on small business. "We are in negotiations with our customers to pay the steel surcharges or we will be forced to stop shipments."

Observers say the Bush administration is unlikely to exercise that option, given the potential for reprisals from the WTO.

The situation could spell financial ruin for some suppliers, according to OESA president Neil de Koker who described their financial predicament as "precarious."

Much will depend on the automakers who, while they have been somewhat insulated by fixed-price, long-term steel supply contracts, are vulnerable to supply chain disruptions because in some cases they deliberately carry a small inventory of certain parts.

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