Buyers want lower prices now

Chrysler's 5% price-cutting demand underscores manufacturing's deflationary stance on materials.

By -- Purchasing, 2/8/2001

Suppliers may have been shocked when Chrysler Corp. announced its intentions to reduce the cost of purchased metals by 5% this year. Metal buyers weren't. Ford Motor Co. and General Motors Corp. already were negotiating 3% price reductions from metal providers, and several other major metal-consuming companies were planning to hold the line against higher prices-or to seek 2%-3% reductions-for deliveries this year.

The demand environment from automotive and construction, the two largest end markets for steel, for example, are showing signs of weakening. Analyst Mark Parr at McDonald Securities in Cleveland has predicted that steel mills will see a 2%-3% reduction in contract pricing for 2001, although he doesn't dismiss Chrysler's "attempt to wrestle a 5% downside." And there are concerns about aluminum's key markets, transportation and packaging, and copper's major end-use arena, construction.

"The reality is that metalworking suppliers have weak negotiating positions, and the environment gets weaker with every report on the state of manufacturing," says Ron Tadross at Banc of America Securities in San Francisco. With the economy slowing, he says metals suppliers "will continue to get hammered as major manufacturing companies press them for cost cuts to keep final product prices low."

Additionally, several major appliance manufacturers have become more cautious about this year's demand in North America, and are reported to be discussing metals price cuts with key suppliers. In general, with manufacturing's growth expected to slow this year, and with metals in excess globally, buyers "are in no mood to entertain higher raw materials prices," agrees the purchasing manager of a metal stamping firm in St. Louis. Low demand for our products means that we will be buying less this year, and certainly paying less," says the buyer at an Iowa steel-fabricating plant.

It is the assembly plant closings by the Big Three domestic automakers-to help bring vehicle inventories in line with declining market demand-that will have a significant effect on purchasing-and pricing-of steel, iron, aluminum, copper and other production materials this year. General Motors Corp., Ford Motor Co. and the Chrysler Corp. division of DaimlerChrysler already have reduced their production schedules for first quarter 2001. And most forecasters are predicting a 5%-6% decline in the auto industry's production volumes for this year.

And it is the Chrysler Corp.'s metals suppliers who will face the toughest challenge. The North American unit of DaimlerChrysler has ordered all suppliers to begin the year with immediate 5% price cuts. And, over the next two years, Tom Sidlik, DaimlerChrysler's executive vice president for procurement and supply, is demanding they find an additional 10% of savings. Sidlik says the company's engineers, platform teams, manufacturing managers and procurement managers "will work closely with suppliers to identify additional 10% cost improvements through 2002." He says these won't necessarily be price cuts, since he hopes the additional 10% cost reductions will be margin-neutral for the supplier base."

Metals suppliers look at Chrysler's actions as the most recent skirmishes in an ongoing price-cutting process. Nearly every carmaker, truck maker and major machinery manufacturer has been pressuring metals suppliers for at least 3% price cuts in production metals this year. That's despite the fact that Purchasing's steel price index fell to a record low in December, and the magazine's nonferrous metals index was at its lowest since the close of 1993.

In fact, just a few months ago, market analysts were suggesting that metals prices, on average, would rise by 3% this year. Now, they are projecting a 3% falloff in key steel and nonferrous pricing. Jon Jenson, chairman of the Cleveland-based Consuming Industries Trade Action Coalition (CITAC), says reduction in the cost of metals will be very important in a slowing manufacturing economy to the groups' membership. Besides producers of automobiles, CITAC members also make commercial buildings, electronic equipment, heavy machinery, food processing equipment, and oil and gas drilling equipment.

And business doesn't look as bright in the heartland as it has for the 116 consecutive months of continued manufacturing growth through December. The National Association of Purchasing Management's latest Chicago-area Business Barometer was 44.7, and any reading below 50 signals a contraction in the manufacturing economy. NAPM 's Milwaukee-area index dropped to 42, and the latest Detroit-area index also showed that region's economy was losing steam. PURCHASING Magazine's grassroots business index, which operates on the same principle, was 35%.

"Little wonder that mill pessimism about steel prices is rampant," says analyst Peter Marcus at World Steel Dynamics at Englewood Cliffs, N.J. "New orders for the steel mills aren't good, and an immediate recovery of spot-market steel prices doesn't seem likely." He's not alone in this view. None of the steel mavens contacted by PURCHASING were bullish on near-term prices.

And the pessimism is spreading to the specialty steel and key nonferrous metal markets. Specialty metals producer Allegheny Technologies Inc. has downgraded its outlook for the commodity stainless steel sheet business in 2001. The Pittsburgh-based company is the nation's largest stainless steel sheet producer. Robert P. Bozzone, chairman and president says: "Conditions have deteriorated significantly in the commodity stainless steel business as a slowing U.S. economy has weakened several end-use markets. This economic slowdown coupled with high levels of inventory at service centers and near-record levels of imports resulted in significantly lower prices and softer demand for nearly all commodity stainless steel products."

Bozzone believes that "difficult conditions in the commodity stainless steel business are likely well into the first half of 2001." Analyst Mike Gambardella at J.P. Morgan Securities in New York estimates that Allegheny Technologies' stainless steel shipments, which account for a quarter of total company sales, fell by 12% in the fourth quarter. "For the full year 2001, we estimate a 13% drop in flat-rolled shipments, a 4% decrease in price realization, and a 2% increase in cost per ton," Gambardella adds.

Economist Patricia Mohr at ScotiaBank in Toronto sees 2001 cutbacks in the output of stainless steel and galvanized steel, from high levels earlier last year, which will reduce orders-and depress pricing-for nickel and zinc. "Overall, base metal prices will continue to be hurt by a sharp slowdown in U.S. growth-especially because it is centered in the auto and housing markets. ScotiaBanks' Metal & Mineral Index, which is based on sale prices for nonferrous metals, started dropping sharply in the fourth quarter, and Mohr foresees no dramatic recovery in 2001. Bill O'Neill at the commodities research unit of Merrill Lynch & Co. in New York agrees there won't be much of a rally in 2001 for base metals pricing.

There are some nonferrous metals analysts who remain bullish about a 2001 rebound in spot-market pricing. "Nonferrous metals prices should trend higher in coming months if supply falls short of global consumption," suggests economist Kenrick Jordan at Bank of Montreal in Toronto. Frederick Demler, senior vice president and minerals economist at E D & F Man International Ltd. in New York agrees, noting that "with the economy still in reasonably sound shape and with worldwide nonferrous metals stocks low, prices seem poised to bounce higher."

Buyers heartily disagree. After an initial forecast in December 1999 of a 1.5% increase in prices paid during 2000, metals buyers reported an increase of just 0.6% for all of 2000. And many metal purchasing groups have been factoring lower prices into their cost equations for 2001, according to surveys. PURCHASING Magazine's latest monthly poll of metals buyers found 75% who expected to pay the same or less this year than in 2000. Note that NAPM 's Business Survey Committee recently found 72% of the buyers in manufacturing paying the same or less for materials at year's end, and only 40% who expected to pay more this year. Interestingly, none of these buyers listed metals as one of the potentially inflationary product groups. In fact, metals buyers expected to see a net overall price change down 0.2%-at least in the first half.