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Suppliers Suffer From High Raw Materials Prices

July 1, 2008

By Brent Snavely, Detroit Free Press

Jul. 1–Prices of raw materials have surged so much this year that 25% of manufacturers and auto suppliers surveyed by automotive consulting firm IRN Inc. say they are willing to stop shipping parts if they don’t get higher prices for their products.

The price of steel has doubled this year and the prices of many other products used in cars — including plastic and magnesium — have also increased substantially. Grand Rapids-based IRN received 177 survey responses from 150 component suppliers with most saying they are suffering from the crisis.

“We were really kind of overwhelmed by the response,” said Kim Korth, founder and president of IRN.

Korth warns that if automakers and tier-one suppliers continue to try to negotiate individually they will find themselves bogged down in time-consuming talks and may face the need for additional negotiations as prices continue to go up.

“It’s a situation where one-time solutions don’t work because that assumes that you get it behind you and you move on,” Korth said. “Given the continued volatility, unless there are almost continuous negotiations, it’s going to be very problematic.”

Korth said several automakers are thinking about modest vehicle price increases in the hopes that most consumers don’t notice. That may be possible since the increases would be spread out over life of multiyear auto loans. Korth also said another plan would allow suppliers to get higher prices from automakers on a sliding scale as commodity prices fluctuate.

Since Jan. 3, prices of hot rolled steel have increased from $520 to $1,125 per ton, and Korth said automotive plastic is expected to increase 17% in July. High steel and raw material prices have already resulted in surcharges and lawsuits between suppliers and their customers.

Milwaukee-based Johnson Controls Inc., the world’s largest maker of automotive seats, filed a lawsuit earlier this month against Illinois Tool Works Inc. saying the supplier broke a contract by demanding higher prices to cover raw material costs.

Johnson Controls said in court documents filed June 24 in U.S. District Court in Detroit that a halt in shipments of bolts, screws and fasteners from the Glenview, Ill.-based company would disrupt production at “numerous plants across the country owned by General Motors, Ford, Chrysler, Nissan, Toyota, Mercedes and Honda” and cause layoffs of “hundreds of thousands of workers.”

In May, Dana Holding Corp. Executive Chairman John Devine said dealing with the cost of steel has become the Toledo-based supplier’s No. 1 priority.

And on June 1, Troy-based ArvinMeritor Inc. put a steel surcharge in place for some of its automotive, military and commercial vehicle customers.

“It’s definitely a major issue impacting all of our businesses,” said ArvinMeritor spokeswoman Lin Cummins. “It’s on a case-by-case basis. We are working with all our customers.”

Contact BRENT SNAVELY at 313-222-6512 or bsnavely@freepress.com.

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