Steel Is No Steal

Steel Mill

That just one of what General Motors CEO Rick Wagoner recently called “the headwinds” facing Detroit’s Big Three automakers – and most of the rest of the industry, as well.

Virtually every single commodity used by the auto industry has been surging lately, from glass for windows to palladium and the other exotic metals used in catalytic converters. But no raw material has a more immediate impact on the cost of building cars as does steel, a vehicle’s largest component by weight.

The surge in steel is due to a variety of factors. There has been a huge surge in demand, driven, in large part, by emerging nations like China. At the same time, there has not been a significant increase in the supply of raw materials. Now add the run-up in energy prices. Steel is energy-intensive from start to finish. It’s heavy and thus costly to ship raw materials and finished goods. And steel mills demand tremendous amounts of energy to fire their furnaces.

According to a new study by the Detroit consulting firm, AlixPartners, raw material costs, overall, could rise by anywhere from $8 billion to $13 billion annually in North America in the near term, and steel would account for as much as two-thirds of that jump. The increases are so significant that manufacturers like Toyota have already begun passing the numbers on in the form of higher vehicle prices.

Whether carmakers can chance big increases during an economic downturn is unclear, however. On Thursday, Ford Motor Co. announced it was cutting production and downgrading its own financial forecast, in part due to added steel and other materials costs.

To compound the problem, auto parts makers are also feeling the pinch, notes Rod Lache, of Deutsche Bank. "We’ve become incrementally more concerned by the potential impact of rapidly escalating steel and other commodity prices on the auto suppliers in our universe." They may have an even tougher time recovering costs, however, as automakers have been more than reluctant to increase payments to their suppliers. And as a result, it could lead to an even faster shake-out in the parts business than we've already been seeing, industry analysts warn.