I have been thinking more about the MEPS report on falling steel prices, which I reported here last Thursday.
It may or may not be generally known, but the large “tier one” automotive manufacturers and a few other big steel users manage to avoid the wildest fluctuations in steel prices by having them “fixed” for anything up to 18 months. Many of these large consumers will have had the power to resist the large increases of 2004 by having contractual price agreements.
Moving forward to 2005, how difficult is it going to be for the steel producers to convince their major customers who avoided last years substantial price levies that they must play “catch-up” on previous price rises? As demand is falling will they have the strength of their convictions to resist the inevitable pressure that will be brought to bear on prices, when volumes are falling?
It is clear from reports over the past few months that the steel producers are prepared to restrict production to help protect prices. However in any “continuous” operation like steelmaking, there are cost gains to be made by working close to maximum capacity. The reverse side of the coin are the cost penalties incurred working at low capacity, as “fixed costs” start to represent a greater proportion of the overall structure. At what point the producers start to become nervous can only be speculated upon, because cutting capacity will only work for a while. It is unlikely that the demand from China can be relied upon to provide volume sales away from their domestic market this year. Indeed it may not be too long before Chinese exports add to their woes.
One thing about being in this game a long time (oh alright, being an “owd bugger”) is that I have seen it all before, and I’m starting to get a feeling of Déja Vu.
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2 comments:
Steve: You are right, the automotive contracts are a huge distortion, in several ways.
Not only is the steel directly purchased by the Tier 1 people price protected, but if you qualify, Tier 2 and 3 people can buy steel at the protected price for parts that go into cars.
The price difference is stunning. I was invited to bid on some small parts going into larger assemblies and our quantities qualified (barely) for inclusion in one of these programs. They told me to quote based on a price that was so low, I was sure they had given it to me in the wrong currency. But no, that's the "guaranteed" price .. up until the contracts are up.
Of course, since so much steel goes into automotive, it's the "unprotected" stampers, the little guys like me, who pay the entire upcharge when raw materials or market conditions dictate price increases.
I don't know when the contracts are up for renewal, but you can bet that, if they're coming up this year, it's going to be a huge fight. The steel companies will flex their muscles and try to get a better price, but with volumes dropping, who knows if they can. The car companies, who are already losing tremendous sums of money, will try to keep the prices down.
It'll be quite a fight. And, once again, the little guys will fill the gap ....
Michael,
The differential between the price paid by the smaller and medium sized stampers, when compared with the high tiered automotive suppliers is very significant. It can keep newer players who are unaware of the rebates “out of the game” when quoting for automotive pressings.
Many years ago, British Steel (now Corus) was more open about the automotive rebates, which left companies on a more “even keel” when quoting for work. It is arguable that the confidentiality of the automotive sector rebates is anti free market, in that manufacturers who are not in the favoured sector do not have access to true raw material costs.
It is a good point that you raise about the “unprotected” stampers bearing an unfair share of the cost. If prices were raised more evenly “across the board”, there would be a much lower “average” increase. Giving way to the automotive sector, (which represents a large part of the strip market), means everyone else is left paying for their rebate.
I think you are right, there is “one hell of a fight” ahead as loss making car manufacturers are faced with demands for significant increases. I am not sure that the steelmakers have the “backbone” for that fight at a time when demand is so weak. China “bailed them out” last year, but I cannot see that happening again. I watch with interest.
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