Rising steel prices are causing major carmakers to brace for an increase in the cost of building vehicles, a development that likely will force them to trim expenses even further.
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An Associated Press (AP) report said carmakers largely avoided drastic cost increases during recent steel price hikes because of long-term contracts with producers and the large quantities they buy around the world.
But top executives for two of the world’s largest carmakers told AP that even extended contracts and other factors may not protect them from current spiking prices. Steel prices have risen roughly 30% in the past few months, thanks to a weak US dollar and intense demand from China.
“We have contracts in place, but steel costs are a problem,” General Motors’ chief financial officer, John Devine, told AP in an interview at the Geneva motor show.
He reportedly noted that prices of other materials used in car production, such as aluminium, are up too but said he didn’t anticipate higher material costs to result in more expensive vehicles for consumers.
“The cost structure and revenue structure are two different things,” he told Associated Press, adding: “We have to find a way of offsetting it, and that’s what we’re going to do.”
Associated Press said the timing is so bad for carmakers like GM, Ford and Chrysler Group because they’ve already slashed expenses by billions in recent years in the wake of increasing competition and tight profit margins, if not losses.
The situation is tough for suppliers too, who are under intense pressure from carmakers to lower their costs, AP added.
The news agency noted that US president George Bush revoked protective tariffs on steel in December, but so far that has not helped prices to stabilise.
“It just shows you the magnitude of the impact of China,” Christopher Plummer, a steel industry consultant at Metal Strategies, told the news agency, adding: “Within the last 12 to 18 months, that country’s government had a policy that was very strongly promoting growth in construction and in industry. They basically just opened the floodgates.”
Plummer reportedly said the most common steel product – hot-rolled sheet – now costs about $US500 per ton including surcharges, compared to an average over the last 15 years of about $310. Steel prices have been fluctuating wildly since 1998, he added.
“We were very successful in recent years to avoid any of those economics to hit us,” Chrysler chief executive Dieter Zetsche told Associated Press, adding: “This time it’s getting tougher and tougher to stand firm.”
“When this hits us,” he reportedly added, “we have to offset it by more savings across the board.”
