Q&A: Higher steel costs will hit home with a 'big bang' in 2005

Everyone is now affected by steel price increases, says Cosma Europe chief

Sailauf, Germany. Gerhard Koenig, chairman of the board at the Magna International subsidiary Cosma Europe, thinks rising steel prices are a serious threat to medium-sized businesses. He talked about the short-term and long-term impacts of higher steel costs with Automobilwoche's Klaus-Dieter Floerecke.

By how much have Cosma's profits dropped due to the high steel prices?

Last year we did not have much of a negative impact. However, despite annual contracts, we were not 100 percent safe either. Still, I know that smaller companies that had no long-term contracts were under a lot of pressure in 2004. They had to make their purchases on the spot market, where prices are significantly higher.

And what developments do you expect for this year?

I reckon that the big bang will come. Everyone is now affected by steel manufacturers' price increases due to the new contracts for 2005.

How much higher will prices be compared with last years' contracts?

By between 20 and 30 percent in respect to the actual price. This consists of the basic price and a legally established extra charge for the different steel grades or surface coatings. In addition to that, steel manufacturers make significantly more profit within the non-automotive industry.

What are the consequences?

The steel manufacturers have made clear that when they do business with automotive customers they expect to make the same margins they get with other industry sectors. Or else the amount of steel available for the automotive industry might be reduced.

Do you expect steel prices to continue to rise in the medium-term?

Right now it is like reading the future in a crystal ball. Experts' forecasts don't show any standardized trend. I believe that the market will calm down a bit again.

Will you also be making annual contracts with steel producers in the future?

Generally, yes. We have to ensure that we have sufficient quantities for our production.

Do you have any sympathy for steel manufacturers' behavior?

In some way I do. Everyone would probably react that way. To be fair it needs to be said that in the past steel manufacturers have taken a beating. I guess that many now recognized the opportunity to make a healthy profit.

To what extent do you plan to pass on the price increases to your customers?

We have to pass on the rise in steel prices to OEMs at a 1:1 ratio. Otherwise our margins, which are already meager, would decrease. Many suppliers can't cope with that. In our case, material costs for a product are between 50 and 60 percent. The situation for sheet metal formers is already difficult without the high steel prices.

What do you mean by that?

Increasing global competition, OEMs' rising number of requests -- for example, that suppliers should contribute to expenses for tools and the financing of devices. All that results in medium-sized companies getting into big trouble.

Your tier 2 suppliers also suffer due to the tough situation on the raw material market. How are you dealing with their problems?

We are asking the companies to give us detailed information showing the extent that they are able to cope with the price increases and how they would affect individual prices for components. Auto manufacturers demand the same from us. We are very careful not to give the impression that we might disguise in-house problems as being the result of steel price increases in order to get them co-financed by OEMs.

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