Soaring steel prices could force expense cuts
March 4, 2004
BY JOHN PORRETTO
ASSOCIATED PRESS
GENEVA, Switzerland -- Rising steel prices are causing major automakers to brace for an increase in the cost of building vehicles, a development that likely will force them to trim expenses even further.
Because of long-term contracts with producers and the large quantities they buy around the world, automakers largely avoided drastic cost increases during recent steel-price hikes.
But top executives for two of the world's largest automakers say even extended contracts and other factors might not protect them from current surging prices. Steel prices have risen roughly 30 percent in the past few months, thanks to a weak U.S. dollar and intense demand from China.
"We have contracts in place, but steel costs are a problem," John Devine, General Motors Corp.'s chief financial officer, said Wednesday in an interview at the Geneva International Motor Show.
He noted that prices of other materials used in car production, such aluminum, are up, too.
Devine 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 said. "We have to find a way of offsetting it, and that's what we're going to do."
What makes the timing so bad for automakers like GM, Ford Motor Co. and DaimlerChrysler AG's Chrysler Group is 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 auto suppliers too, who are under intense pressure from automakers to lower their costs.
President George W. Bush revoked protective tariffs on steel in December, but so far that has not helped prices to stabilize.
"It just shows you the magnitude of the impact of China," said Christopher Plummer, a steel industry consultant at West Chester, Pa.-based Metal Strategies Inc. "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."
Plummer said the most common steel product -- hot-rolled sheet -- now costs about $500 per ton including surcharges, compared to an average over the last 15 years of about $310. Steel prices have fluctuating wildly since 1998, he said.
"We were very successful in recent years to avoid any of those economics to hit us," said Chrysler CEO Dieter Zetsche. "This time it's getting tougher and tougher to stand firm."
"When this hits us," he said, "we have to offset it by more savings across the board."
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