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29. March 2010

Soaring steel prices continue to affect auto industry

Soaring steel prices continue to dictate the direction of the auto industry. And it's starting from the bottom. Steelmakers are raising prices because their own raw materials have grown more expensive. Mining companies around the world have raised spot prices for coal, iron ore, manganese and other key steel making ingredients. As a result of the price increase, the auto industry has to decide whether to negotiate with steelmakers, or increase the cost of new automobiles.

Mr Pete Peterson, a steel industry consultant and former director of automotive marketing with US Steel in an interview with Financial Week, said that "The automakers are between a rock and a hard place."

According to Auto News, in November the spot price for hot rolled band, used for vehicle body panels, was around USD 559 per tonne, up USD 381 in early June. This rapid increase has automakers looking at even higher prices in 2010. What typically happens is that automakers typically buy steel on long term contracts, and buying in quantity allows both automakers and suppliers to push down and stabilize prices. Currently, with poor market conditions, spot prices are often better than contract prices as a result of a lower volume of steel.

Automakers aren't going to pay more for less. Everywhere in business, companies are trimming the excess fat. The same concept applies for auto makers. By shutting down production of certain vehicles, laying off workers, terminating sectors of business that are under producing, and cutting management layers, they are able to save billions of dollars.

Subsequently, by navigating to more progressive means of production, they not only save costs but are seen as innovators in one of America’s most traditional industries. You’ve got to crack a few eggs to make an omelet.

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