Research firm Frost & Sullivan is warning that volatile steel prices could undermine the automotive industry's recovery.

The firm notes that steel remains a key raw material in car manufacturing, accounting for approximately 55 per cent of the weight of an average C-segment passenger car and about 5 per cent of its production cost.

“With 'cash-for-clunkers' programs ending in most large European markets, automakers may have to continue reducing costs in order to contend with the unpredictable pricing policies of steel suppliers and weakened demand for cars.  Therefore, joining forces to combat rising prices should be of critical importance for automakers at the moment,” says Vitaly Belskiy, Research Analyst at Frost & Sullivan’s Automotive & Transportation Practice.

“Combining financial instruments like futures contracts on steel and relying on long-term agreements with steel suppliers might be one of the most suitable solutions,” advises Belskiy.

Strong support from the ACEA, which encourages EU and member states to develop a raw material strategy that facilitates access to raw materials on competitive basis, would also be helpful.

However, steelmakers will not be prone to signing long-term contracts if raw material prices, usually stable for at least a year, henceforth change on quarterly basis. Instead, they will likely transfer that risk to automakers, F&S says.

However, a higher steel price might bring opportunities to certain players in the automotive industry.

“Higher steel prices may lead to more intense cooperation between OEMs and automotive systems and materials developers as some automakers, especially of luxury brands, will be prone to focus on alternative materials development and implementation in their vehicles (aluminium, magnesium) and decrease usage of steel,” notes Belskiy.