Friday, May 23, 2008

Steel costs add to auto industry's woes

Yet another challenge has emerged for the automotive industry: rapidly rising steel prices.

The price of hot rolled steel has increased from just over $500 a ton in November to $1,080 per ton Thursday.

Prices are soaring because of increasing global demand despite a level supply of raw materials used to make the metal, as well as increased energy and transportation costs.

John Hoffecker, managing director of AlixPartners LLC, said Thursday that the cost of steel is rippling through the automotive industry and will likely result in higher vehicle prices because the expense is too large for the industry to absorb by cutting costs and using different materials.

''It's going to hit suppliers, it is going to hit manufacturers, and my view now is it is going to start hitting consumers,'' Hoffecker said.

Toyota Motor Corp. said this month that steel prices were partially behind its decision to raise prices on some vehicles. Ford Motor Co. said Thursday that steel prices were a main reason for its dimmed outlook.

To some degree, vehicle manufacturers and automotive suppliers have been insulated from this year's price increases because of long-term contracts, which can be hundreds of dollars below the spot trading price.

But Hoffecker said many long-term contracts will expire this year and estimated that the North American automotive industry is facing an additional $8 billion to $13 billion in costs for raw materials this year. About two-thirds of those costs are related to steel, he said. The additional costs translate into about $600 to $900 per car, according to an AlixPartners study.

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Nippon recently secured a 30% rise from Toyota, and recent reports from Corus suggest that long tem contracts with Automotive manufacturers that were due to run through until the end of 2008 will have to be renegotiated.

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