DETROIT -- Most auto parts suppliers have rewritten contracts to protect themselves against steep jumps in steel prices, but some remain exposed to price swings, according to a survey by consultants IRN Inc. of Grand Rapids, Mich.
Among companies that use steel, 63 percent of suppliers who responded to the May-June survey said their contracts include terms that protect them against price surges, IRN President Kim Korth told a meeting of the Society of Automotive Analysts last week.
In contrast, when the spot price of hot-rolled steel roughly doubled in April 2007, "virtually no one at that point had any kind of material-relief contracting with the customer," she said.
"Suppliers have done a great deal to protect themselves from materials price increases since when we last conducted this survey" in May-June 2008, Korth said.
The new contracts typically include some way to pass along higher costs to the customer.
Still, suppliers' exposure to potential increases in commodities prices varies widely.
"It astonishes us how huge a variation there is between those who haven't done anything on cost relief and those who say, 'Why would I ship anything if I'm not protected on cost relief?' " Korth said.
But a refusal to ship parts is becoming less common as a bargaining tactic, she said. In 2008, about a quarter of suppliers surveyed said they would consider halting all parts shipments to force a customer to grant price increases that reflected higher raw material costs. In the latest survey, that dropped to 10 to 12 percent, depending on the commodity.
The reason, Korth said, was that suppliers are more profitable today, and the issue isn't as urgent as it was when steel and other prices were soaring.
She urged suppliers to begin negotiating new contract terms if they have not done so. "Even if you don't win or only get 50 percent of what you sought in material price increases, it needs to be part of your negotiations," Korth said.
Commodity cost protections take various forms, but one-time price increases and price surcharges to compensate for soaring costs for raw materials are going away, Korth said. The reason: Surcharges "assume you return to stability," and they aren't standing up in court, she said.
Instead, the survey found, the most common change in contracts is to add an index-based automatic price adjustment.
But even then, whether so-called pass-through agreements protect you depends on factors such as how often the pass-through is adjusted and the method used to calculate it, Korth said.
"It requires constant management of the commercial relationship, something suppliers don't do well" and often are not staffed for, she said.
But Korth noted that most suppliers and automakers expect prices of commodities to increase less than 20 percent this year. "If it's more than that," she said, "all bets are off."