News Room - Steel Industry

Posted on 08 Jul 2008

Auto Makers Resist Steel Firms' Surcharges

In an effort to curb the relentless rise in steel prices and bolster their own frail finances, some auto makers are beginning to push back on price increases, saying they won't pay surcharges on agreed-upon supply contracts. 

The resistance is one of the first strong signals to steelmakers that their hardest-hit customers have reached a tipping point and may not be able to withstand higher prices.

Some auto makers are threatening to fight the additional charges in court, saying that financial terms of a contract can't be altered, according to people familiar with the matter.

The standoff comes as most steelmakers in the U.S., including ArcelorMittal,U.S Steel Corp. and AK Steel Corp., are engaged in the latest cycle of negotiations with Ford Motor Co., General Motors Corp., Toyota Motor Corp. andothers to set the price and terms of steel bought on a contract.

Many contracts are negotiated this time of year. Representatives of Ford, GM and Toyota declined to comment on the current contract negotiations.

Both sides concede that the price in the next cycle of negotiated contracts will be significantly higher than in previous contracts, owing to higher costs for raw materials such as iron ore and higher energy prices. On Friday, the world's largest miner by output, BHP Billiton, said it is charging steelmakers an average of 85% more for iron ore, a key ingredient in the production of steel, than charged last year. Rio Tinto, the world's third-largest miner by output, announced an average increase of 85% last month.

But the auto makers are balking at surcharges steelmakers are attempting to impose.

ArcelorMittal, by all measures the biggest steelmaker in the world, has added a surcharge of $250 on each short ton of steel. The surcharge was slated to begin May 5, according to a letter the steelmaker sent to its customers. But now, two months later, some auto makers are still resisting. 

"There are some customers who have accepted the surcharges and some who have not," says Aditya Mittal, chief financial officer at ArcelorMittal. "For those who have not, we are still in negotiations." 

Other steelmakers haven't levied unilateral surcharges, but are negotiating surcharges individually with car makers. AK Steel spokesman Alan McCoy said the company is negotiating on a case-by-case basis. U.S. Steel declined to comment on price talks.

Negotiations between steelmakers and auto makers are highly specific and often include clauses and conditions that could result in changes to the contract after the two sides sign. Auto makers aren't charging steelmakers with gouging, but some auto makers are questioning whether steelmakers have a legal right to change existing contracts. Steelmakers assert that they do have this right and that terms agreed upon within existing contracts allow for these changes.

ArcelorMittal said it is confident that auto makers will end up paying the surcharges.

As emerging countries increase their need for steel to build infrastructure, commercial buildings and automobiles in their respective countries, the demand for steel has outstripped supply. That has caused prices to shoot up, most drastically in the past year.

That has left U.S. auto makers, which had long dominated steelmakers during negotiations, in a weak bargaining position. For decades, U.S. auto makers were the steelmakers' most lucrative customers and bullied them into selling them long-term contract steel at discount rates.

Although auto makers declined to comment on current talks, they have stated that steel and other raw-material costs are burdening the industry at one of its worst times.