Price increases are squeezing the metalworking economy
Tom Stundza, Executive Editor -- Purchasing, 9/2/2004 2:00:00 AM
Metalworking companies continue to face soaring steel prices, at a time when they are unable to pass along soaring costs that would create demand-dousing, end-product prices. In fact, cold-rolled sheet prices are moving to all-time records.
The main culprits are higher input costs (scrap, iron ore, coke), which the mills are passing along. These escalating steel prices are taking a huge financial toll on automotive, commercial equipment and industrial machinery parts suppliers—and could push some smaller parts makers into bankruptcy. The surge in steel prices couldn't come at a worse time for these suppliers. Already clawing for profits in a competitive market, they are now under pressure from automakers and other original equipment manufacturers (OEMs) to provide parts at lower prices. Yet, cold-rolled is moving toward 40¢/lb later this year—compared to an average of just 19¢ in 2003.
Since December, Jim Zawacki's automotive stamping business in Grand Rapids has seen steel prices almost double to 38¢/lb, the average Midwestern price for cold-rolled sheet in July reported by Purchasingdata.com. Letters from mills keep being mailed (or e-mailed) to Zawacki, telling him monthly that another hike is on the way. Because his GR Spring and Stamping consumes hundreds of tons of steel each year, every penny increase hurts. The rising costs have cut into profits and spurred Zawacki to trim jobs and scurry for new accounts. Another price jump could mean more of the same. Three years ago, the $40 million-a-year company was generating pretax profit margins of around 3%, but Zawacki says his profit margins have been cut in half.
One of the larger manufacturing sectors, automotive, is feeling the pinch on corporate bottom lines. "The big automakers are clearly getting squeezed," says Paul Taylor, chief economist for the National Automobile Dealers Association. "They have rising costs on the materials side, and cutthroat competition on the pricing side." Deutsche Bank recently cut its 2004 profit estimates for top automakers, including Ford and General Motors, on concerns that higher steel prices would bite into profits in the last six months of the year. Although automakers buy much steel under long-term contracts, they also buy a substantial amount on the spot market.
And, this year, they have been forced to accept some of the scrap surcharges from steel suppliers. If added increases in steel costs take hold in the second half, Ford and GM will have to continue to stoke demand in the face of what could be increasingly pricey gasoline, according to analysts. "The question here is whether or not automakers can pass these costs on to the customer," says UBS analyst Robert Hinchliffe in New York. "And that's going to be very difficult."
These kinds of cost pass-through problems are being reported throughout manufacturing. While 70% of the buyers polled in July by Purchasing.com say their companies have passed some increased steel costs to their customers during 2004, only 27.5% of these buyers say their firms have passed 80%-100% along. The majority of buyers (42.5%) have seen their firms recoup an average 60% of the increased steel costs. The remaining 20% say less than 40% of steel price increases have been passed to customers. And there are some other issues from the mills—who have been raising base prices with a vengeance (as well as adding scrap surcharges) all year even if their on-time delivery records have been miserable. The purchasing agent for a Pennsylvania manufacturer of heating, ventilation, air conditioning and refrigeration products suggests that "supplier leadtimes are being extended because of production problems, not because of strong demand." This is a comment echoed throughout metalworking.
In fact, Zawacki is one of a growing chorus of supplier industry representatives urging the Bush administration to force the steel industry to come down on prices to avoid a situation where manufacturers will look overseas for cheaper options. "Steel is just another excuse for our customers to go offshore," he says. If high steel prices continue, some small and medium-sized parts makers will be forced into bankruptcy, according to a study released this month by Southfield-based accounting firm Plante Moran. "We will see multiple bankruptcies of suppliers within the next 90 days," says partner Craig Fitzgerald. To survive in a highly competitive market, auto suppliers are cutting capital spending and trimming other operating costs.
Higher steel prices have helped propel steel producers into profitability, but the steel-framing industry has been hurt by skyrocketing prices and delayed supplies needed to complete home housing, commercial and industrial construction projects. And some have accused steelmakers of price gouging by adding surcharges to existing contracts. GM has lawsuits pending against two steel suppliers, Textron and Steel Dynamics, which also accuse them of breaking fixed-price contracts by adding surcharges. Delphi has a similar suit going against steelmaker Ispat Inland. While these cases are being argued, the OEMs have agreed to pay the surcharges, but under protest. Hayes Lemmerz Corp., a major producer of automotive wheels, warns that higher steel prices are putting a $15 million dent in its earnings—estimated now at $255 million and not $270 million—in this fiscal year.
Also, to ensure that parts suppliers get the steel they need, the Big Three automakers have set up steel resale programs wherein they are buying steel in bulk and selling it to their suppliers at a fixed rate. Still, automotive parts suppliers are cutting capital spending, raising parts prices and trimming other operating costs to offset the rising costs. Some suppliers and automakers also are preparing contingency plans, studying steel alternatives and seeking relief from Washington lawmakers.
"The problem we face in the steel drum and pail industry is that, indeed, we are almost an afterthought to the steel producers in the 'food chain' of steel consuming industries. So, in effect, they feel empowered to charge what they can without fear of consequences and deliver product when they like," says John A. McQuaid, chief executive of the Industrial Packaging Alliance of North America. "That's a monopolist's attitude if ever there was one. The mills' 'take it or leave it' mentality regarding the industrial packaging segment of the steel consuming market is reprehensible." And he's not the only metals-oriented trade association executive venting about the attitude of the steel mills this year.
The market price of benchmark hot-rolled steel sheet more than doubled in the second quarter this year to an average of 30¢ a ton from 13.35¢ a year earlier, according to Purchasingdata.com. In fact, the monthly marketplace price average reached an all-time high of 32.3¢/ton in July—and U.S. Steel Corp. was trying to get the list price up to 39¢ in August.
Based on the monthly survey of buyers for Purchasingdata.com, the July price average from various steel mills for cold-rolled steel sheet rose to 37.7¢ in July from 36.85¢ in June. U.S. Steel wanted that product to sell for 39.25¢ in August.
The other major sheet mills aren't so far behind in their pricing proposals due to spiking mid-summer steel scrap prices and questions about future iron ore, metallurgical coal and baked coke supply. Thomas Usher, chief executive of U.S. Steel recently told analysts that the Pittsburgh-based firm "expects robust worldwide steel pricing and tight supplies as the global economy continues to recover."
Meanwhile, Daniel R. DiMicco, chief executive officer of Charlotte-based Nucor Corp., now admits to analysts that high prices are beginning to put the hurt on steel customers.
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