PARIS (Bloomberg News) -- Volkswagen AG, PSA Peugeot Citroen and Fiat SpA, already working to counter a slump in domestic car sales, may struggle to cope with rapid increases in steel costs following changes to iron-ore pricing setups.
Carmakers in the European Union want the bloc's antitrust regulator to “tackle distortive developments” after producers of iron ore, the main raw material in steel, announced price increases of as much as 90 percent and ended long-term supply contracts, the European Automobile Manufacturers' Association, or ACEA, said Wednesday.
“The auto industry simply couldn't handle exposure to highly volatile material prices,” Arndt Ellinghorst, a London- based analyst at Credit Suisse Group AG, said in a telephone interview. “Adding this to the already low visibility is a killer for carmakers.”
Vale SA and BHP Billiton Ltd., the biggest and third- biggest producers of iron ore, ended a 40-year-old practice of selling their product under one-year contracts and shifted to three-month sales agreements. Steelmakers said they will be compelled to raise prices paid by carmakers by one-third and replace their own long-term contracts with quarterly pricing.
“If you move from a yearly contract to a quarterly contract, you're much more exposed to volatility,” Sigrid De Vries, a spokeswoman at the Brussels-based ACEA, said by telephone. “Any cost increase is critical, particularly in the fragile economic circumstances we have today.”
Steel accounts for an estimated 10 percent to 15 percent of the manufacturing cost of a car, de Vries said.
ArcelorMittal, the world's biggest steelmaker, estimated that prices for the metal could jump 21 percent in the second quarter because of the iron producers' move.
The cash price for iron ore has more than doubled over the past year and traded at $155 a metric ton on Wednesday, according to the Steel Index. Prices for hot rolled coil steel have gained 32 percent in China to about $645 a ton, according to Metal Bulletin.
An increase in steel-price levels and volatility would be “much more damaging” for mass-market carmakers than for luxury brands, for which the metal accounts for a smaller share of overall costs, Credit Suisse's Ellinghorst said.
‘Impossible' to forecast
“With quarterly steel prices, it will just be impossible for carmakers to give any earnings guidance,” he said. “What are they going to talk about, earnings before cost?”
VW, Europe's biggest carmaker, reduces exposure to steel- price shifts by mixing shorter- and longer-term supply contracts, the Wolfsburg, Germany-based company said in an e- mailed statement. Spokesman Christoph Adomat declined to comment further.
Paris-based Peugeot, the region's second-biggest automaker, declined to comment.
The ACEA is speaking on behalf of the region's industry, said a spokesman at Turin-based Fiat, Italy's largest manufacturer, adding that the company doesn't comment on pricing issues. Fiat CEO Sergio Marchionne predicted on March 26 that the European car market may shrink by as much as 15 percent this year as state auto-sales incentives expire.
Backing ACEA's concerns
Renault SA, based in the Paris suburb of Boulogne- Billancourt, supports the ACEA's stance, said Gita Roux, a spokeswoman. She declined to give terms or suppliers for the carmaker's steel purchases, saying contracts come up for renewal at different times of the year.
Ford Motor Co. is “fully in line” with the ACEA's position, said Adrian Schmitz, a spokesman for the company's European division in Cologne, Germany. General Motors Co.'s Opel division “stands by” the ACEA's comments, said Andreas Kroemer, a spokesman for the Ruesselsheim, Germany-based brand.
Eurofer, a group representing steel producers in Europe, said March 30 that it had written to the European Commission, the EU's executive arm, about “possible anticompetitive practices and abuse of dominant position by the main iron ore suppliers.” It also described as “unacceptable” a planned joint venture between BHP and Rio Tinto Group.
The commission will use the Eurofer letter, which was “not a formal complaint,” as part of an information-gathering process as it looks at the BHP-Rio venture proposal and pricing mechanisms, said Jonathan Todd, a spokesman at the EU regulator.
BMW AG, the world's largest luxury-car maker, has “already fixed the majority of our steel supplies for 2010,” spokesman Mathias Schmidt said by phone from Munich.
Protected by hedging
Daimler AG, the world's largest truckmaker and second- biggest manufacturer of luxury vehicles, has protected itself against some anticipated raw-material price increases through long-term and hedging contracts, said Sebastian Wahle, a spokesman for the Stuttgart, Germany-based manufacturer. He declined to give details, adding that talks are in progress.
MAN SE, Europe's third-biggest truckmaker after Daimler and Volvo AB, may avoid short-term supply-cost increases because it uses mainly scrap metal in vehicles, diesel engines and power generators, said Michael Melzer, a spokesman.
Scrap-metal prices respond “only after several months” to a change those for in iron ore as purchasers shift to the cheaper alternative, he said. Munich-based MAN also has long-term purchase contracts to stem cost increases, Melzer said.