Raw-material cost pass-throughs may become the norm

DETROIT -- Raw-material cost pass-throughs may become standard in the industry.

Since steel prices soared a few years ago, suppliers increasingly are asking their customers for guaranteed pass-throughs in contracts.

In a pass-through, the customer agrees to adjust payment terms quarterly or sometimes monthly to account for higher commodity prices. Pass-throughs are mostly limited to commodities traded on a public exchange, such as the London Metals Exchange, which can provide an independent tracking of prices.

The trend has spread from steel to other commodities: copper, aluminum, nickel and other raw materials.

Pass-throughs aren't yet universal. But if more suppliers adopt the stance of Grede Holdings, they may become the norm.

Grede (GRADE-y), a suburban Detroit castings maker, relies on scrap steel for its foundries. Scrap steel makes up 30 percent of its costs. Alloys and other materials, which include rare-earth metals, account for another 20 percent of its costs.

Today, all of Grede's customers grant it pass-throughs, says Grede CEO Doug Grimm.

Repeat: All of its customers grant pass-throughs.

Grede wasn't just lucky in getting cooperative customers. Grede won't sign a contract if a customer balks.

The foundry sector was hit hard by the steel-price spike in the middle of the last decade. Numerous companies went bust. Indeed, Grede was formed by merging two companies and acquiring a third -- Grede, Citation and Blackhawk -- which among them had three bankruptcies over six years. It learned. And the sector shut down a lot of excess capacity.

Not all suppliers are as adamant about getting pass-throughs. But customers could find their suppliers increasingly unbending on this. If those suppliers want to stay in business, they may have to insist on pass-throughs. Customers who talk about collaboration with their suppliers had better get used to this request.

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