Europe's No. 2 steel producer, Corus, will stop making multiyear deals with automakers as a result of volatile steel prices.
Arcelor, the world's No. 1 steel maker, also is expected to restructure its contracts with automakers and suppliers.
"There will be no more multiyear contracts," said Freek Schut, Corus' automotive commercial manager. "We are now quoting prices on a yearly basis and we are not even quoting for 2006 yet."
A European supplier executive, who didn't want to be identified, said that many multiyear contracts that ended last year have already been converted to three- and six-month contracts.
Arcelor has a number of three-year contracts with automakers that end this December.
"We will renegotiate these in the latter part of this year," said Patrick Seyler, Arcelor's corporate communications executive vice president.
"Last year's price movements made us question whether three-year contracts without adjustment clauses were realistic in such a volatile environment."
The steel maker's policy has been to have three-year contracts with automakers and yearly deals with auto industry suppliers.
Arcelor says that one in every two cars built in Europe uses its steel. Corus' biggest automaker customers are the Volkswagen group, Ford Motor Co. and Renault-Nissan.
The shorter steel supply contracts will be bad news for automakers as they make their forward costs less predictable, but suppliers could be worse hit.
"Annual contracts give the steel makers more bargaining power in a volatile market, but it's still the vehicle makers that are in control," said Antonio Ferreira, European components research manager at analyst CSM Worldwide.
"Systems supplier contracts with automakers are generally for the whole life of the model. [That means] suppliers are having to pay more for their steel and are trying to put pressure on their OEM clients to get higher prices," he said, "but they aren't succeeding."
Several OEM sources said the steel makers' moves would complicate their planning.
"Long-term contracts and planning security are in the interest of the steel makers," said one.
But another said: "At the current price level, we believe short-term contracts are interesting, too."
And the European supplier executive said many partsmakers also prefer spot or short-term contracts at the moment, because there is too much volatility in steel prices to justify multiyear agreements.
World steel prices in 2004 doubled from around $350 (E290) a ton to almost $700, putting heavy price pressures on automakers and partsmakers.
Arcelor admits that the sharp climb in steel prices during 2004 caught it by surprise.
"Our annual contracts run between January and December and are negotiated in September the year before, so in 2003 we set the 2004 prices at a fairly low level," Seyler said.
"We were contracted to supply our customers at the agreed prices despite the big increases which took place over the year," he said.
The typical family car uses 1 ton of steel in its manufacture, though some 400kg of this is lost as scrap during the production process.
The rise in steel prices has pushed up the bill of materials for a car by 1 percent to 2 percent, said Jon King, director of Corus Automotive.
Corus and Arcelor refuse to disclose the actual prices negotiated with their customers. Even carmakers are reluctant to reveal the true financial effect of steel price rises on their businesses.