Europe's No. 1 automotive-steel producer Arcelor wants to add price indexing to new multi-year contracts it is negotiating with automakers and suppliers.
Two-thirds of Arcelor's auto-industry contracts expire at year-end, CEO Guy Dolle said. The three-year contracts were signed in late 2002.
"Our preference [is] multiyear contracts, but with an indexation clause," Dolle said.
Such a clause would tie steel prices over the life of the contract to a basket of industrial goods and services including coal and iron ore, freight costs and the euro-dollar exchange rate, he said.
Another option is a yearly revision in steel prices, Dolle added.
Either one would shield Arcelor against increases in raw material prices or adverse exchange rates. PSA/Peugeot-Citroen is one of the carmakers that will have its three-year contract expire at the end of the year. PSA CEO Jean-Martin Folz declined to discuss his negotiation strategy before talks are completed.
Traditional three-year auto industry steel contracts have a flat price. But both steel makers and their carmaker and supplier customers are more aware of the risks from price volatility. As a construction boom in China tightened supplies in 2004, world steel prices doubled from about $350 (E290) a ton to almost $700. That put price pressure on automakers and suppliers of steel-based parts.
Some carmakers ran short of steel, such as Nissan in Asia. Dolle said Arcelor shipped 10,000 to 20,000 tons to Nissan from Europe as a stopgap measure. But freight costs were too high to be a long-term solution, he said.
Arcelor wants to expand in China, Dolle said. Arcelor has been talking to Chinese companies and hopes to reach an agreement within six months to create a business in China.
Luxembourg-based Arcelor makes 10 million tons of automotive sheet steel annually and is the European leader in the sector. It is being challenged by Mittal Steel of the Netherlands, which became the world's largest steel maker in April by acquiring International Steel Group of the US. ISG makes 6 million tons of automotive sheet steel, mostly in the US, but Mittal plans to use ISG expertise to build an auto-steel mill in central Europe.