Auto-parts maker Intermet Corp. is reported to have filed for Chapter 11 bankruptcy, blaming soaring prices for scrap steel and other raw materials.
Accoring to the Associated Press (AP), Intermet said it applied to the court for the use of cash collateral with the consent of lenders, which would fund operations at least to mid-October.
AP said Intermet is one of the world’s largest metal casters. Founded in 1846 as Columbus Iron Works, it has nearly 6,000 employees.
The Troy-based company reportedly estimated its payments for scrap steel rose from $US160 per ton in early 2003 to $395 a ton in August. The company attempted to mitigate these rising costs through customer surcharges and other means.
“However, we operate within an extraordinarily competitive industry already challenged by relentless price and margin compression,” chief executive and chairman Gary Ruff told AP. “When you add in unprecedented raw-material cost increases, it creates a situation that must be addressed.”
The report said Intermet is negotiating up to $50 million in debtor-in-possession financing, and expects to answer a firm offer in a matter of days.
At June 30, Intermet had cash and cash equivalents of $9.3 million, and accounts payable of $78.3 million.
Earlier in September, AP noted, Intermet warned that it expected a loss of $19 million to $24 million, or 74 cents to 94 cents a share, in the third quarter. The warning came despite an anticipated revenue increase to $197.8 million from $172.7 million last year.
Intermet’s European operations were not included in the filing with the US Bankruptcy Court in the Eastern District of Michigan, the Associated Press said.
The news agency said Intermet makes parts for vehicle powertrains, chassis, brakes and body interior s. In 2003, its biggest customers were Delphi Corp. and Ford Motor Co., which made up 11% of sales each, and DaimlerChrysler with 10%, according to the company’s 2003 annual report.
AP noted that Intermet was the second automotive supplier in less than two weeks to file for Chapter 11 bankruptcy protection. On Sept. 18, privately held Citation Corp. filed, blaming a doubling in steel prices since March for the action.
According to the Associated Press, scrap steel prices have been increasing as demand for steel in China accelerates. Most of the larger automotive suppliers buy their steel through long-term contracts, leaving only a small percentage of their steel buy open to the wild fluctuations in the scrap steel market.
“Nonetheless, prices have gone up pretty meaningfully in the last six months,” Martin King, an analyst with Standard & Poor’s, told AP. “It is going to strain the earnings and cash flow of most suppliers.”
S&P reportedly tracks 40 automotive suppliers, and Intermet and Citation, of Birmingham, Alabama, ranked toward the bottom both in terms of size and credit worthiness. King told AP he expects the larger suppliers will be able to absorb steel price increases, but companies smaller than Intermet “probably are much more vulnerable to adverse developments,” he said. “Among that tier of suppliers, I think you could see a lot of stress.”