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30 Mar 04. A report in the F.T with regard the effect on steel price rises in the car industry will almost certainly translate into similar worries for defence contactors such as ship builders, truck and light vehicles using large quantities of steel. This rise could also impinge on the prices offered for the U.K. Support Vehicle requirement and partly explains the Penatgon’s search for alternatives such as aluminium as a fabrication material which reduces weight and thus fuel consumption and the ability to make the vehicle air portable.

Analysts at Credit Suisse First Boston calculate the average car or light truck uses up to 1.5 tons of steel, worth around $600, or just under 3 per cent of the sale price. If the full doubling of the steel price was passed on to the vehicle manufacturers immediately it would wipe out profits at all three of the domestic manufacturers, explaining their reluctance to pay more. However, the car industry is starting to accept that it will have to offer financial aid to the steel industry in order to secure supplies.

The first move was made earlier this month by Chrysler, the US arm of Germany’s DaimlerChrysler and America’s third-biggest vehicle manufacturer. In an innovative bartering deal, first reported by Automotive News, Chrysler is returning offcuts of steel to the mills it buys from, protecting them from the more than doubled price of scrap – one of their major costs.

GM is considering a similar move, which would reduce the windfall profits it is making from scrap sales. But it has also taken legal action against Textron and Steel Dynamics, two of its steel suppliers, in an attempt to force them to stick to agreed prices. In Japan steel makers are also trying to squeeze price rises out of car makers, with Toyota reported to have agreed increases of up to 15 per cent.

The US is under particular pressure, because of the reliance on “mini-mills” for half its steel. Quick to build, low-cost and free from union power, these mills produce new steel cheaply from scrap. Now the dependence of mini-mills on scrap metal is proving to be an Achilles heel. Growing demand from China, which has invested heavily in new mills, is sucking in scrap and other raw materials, creating shortages for US steel producers.

The price rise has hit smaller steel users the hardest, as they tend to have fixed price agreements with customers but are not big enough to secure long-term supply agreements, leaving them exposed to cost increases.

John Knappenberger, vice president of administration at Dura Automotive, a parts supplier, said component makers were being squeezed by both customers and their own suppliers.

“The steel makers are putting pressure on one end, while the car makers are putting on the pressure from the other. What will happen is the weak link in the chain will start breaking and it is going to be the speciality suppliers.”

“If you break one link the whole chain is in trouble. “The strain is beginning to show, with Federal Forge just the most extreme example.

So far the car makers have successfully resisted price demands from their component suppliers. But as steel costs threaten to overwhelm smaller operators, suppliers believe they will have to back down.

“Car makers buy a lot of steel indirectly [as parts] so they are going to have to deal with it now or further down the road as their suppliers come under pressure,” said Alan Dawes, chief financial officer of Delphi, the world’s biggest parts supplier. If steel prices remain high and the flow of vital components is threatened with interruption, car makers will have no choice but to accept higher costs, just as they are with steel. That could prove very expensive.

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