Tuesday, December 28, 2004

Steel costs to pinch auto parts makers

U.S. suppliers' prices expected to rise 26% as demand from China doubles.

By Jeff Bennett / Bloomberg News

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U.S. auto suppliers expect steel costs to increase an average of 26 percent in 2005 from this year while their ability to raises prices is hindered by automakers buying fewer products and refusing to pay higher costs, a survey showed.

Suppliers' steel prices are rising at the fastest pace in eight years, mostly as demand from China doubles because of that country's economic boom, the Original Equipment Suppliers' Association said in a survey of 54 members. Prices for steel, used to make parts from brackets to vehicle frames, will rise to an average of $630 a ton during the year.

"The question is when will steel prices return to normal and what will normal be," said Mike Petro, of Arabia Inc. of Sunnyvale, Calif., which helps customers in purchasing decisions.

Delphi Corp., expects to spend $300 million more next year on steel and is forecasting losses in 2005 and cutting 8,500 jobs. Visteon Corp., has said its performance this quarter will be hampered by steel costs. Lear Corp., Johnson Controls Inc. and Dana Corp., had lower third-quarter earnings from higher material costs, including steel.

A ton of hot rolled steel, the industry benchmark, is expected to cost $630 next year compared with the average $350 a ton in 2003, according to members of the suppliers' association, based in Troy. Suppliers paid from $360 a ton to $580 during 2004.

Higher steel prices, coupled with planned production cutbacks by Ford Motor Co. and General Motors Corp., will force suppliers to look for other savings, analysts say. Alternatives may include cutting jobs and shifting production to nations with lower wages.

GM said first-quarter North American output will decline 7.1 percent from a year earlier. Ford will cut output 7.7 percent.

"It is a cruel market if you are in the middle like a lot of automotive suppliers," Petro said.

China remains the chief reason for higher prices. The Asian country's economy is forecast to expand as much as 9 percent next year. The country's demand for steel to support construction projects may double to almost 300 million tons annually by 2005, said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute in Washington.

Suppliers with less than $150 million in annual revenue reported that steel prices climbed faster than companies with more revenue, said David Andrea, vice president of business development for the supplier's association.

"The supply chain is fragile because the number of suppliers has been reduced," said Andrea. "If one or two critical suppliers fail, that may trigger a disruption in vehicle production."

Metal products maker Oxford Automotive Inc. filed for Chapter 11 bankruptcy protection Dec. 7. Troy-based Oxford said higher costs led to the decision. In September, Intermet Corp. of Troy and Citation Corp. of Birmingham, Ala., filed for Chapter 11 protection.