April 29, 2008

Bite Size Bad News 2--Auto

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[This is one in a projected series of short posts focused on one or another aspect of the economic situation and designed as a corrective to the "out of sight, out of mind" approach of the mainstream media to the deepening meltdown.]

The prospect of $4 a gallon gas, falling real incomes and the growing recession are obviously hitting the US auto industry hard. Other recent developments suggest things are going to get appreciably worse for Ford, GM et al, fast.

For one thing, the runup in commodity prices is sinking its teeth in. Netherlands-based AcelorMittal, the world's largest steel company, has announced a $250-a-ton "surcharge" on steel it has contracted to sell its US customers. Other steelmakers, hit hard by higher raw material and fuel prices, are expected to follow. The spot market price of steel is up 40-50% from last year. (Hot-rolled sheet steel now runs about $1000 per metric ton at spot, to give you a comparison point). Supplies have tightened further as countries like Egypt, China and Brazil cut exports to ensure their domestic supply. (Need I mention that Hugo Chávez is renationalizing Sidor, Venezuela's largest steelmaker?)

As the Wall Street Journal delicately puts it:

Until now, contract prices were nearly sacrosanct, and customers could count on paying that negotiated amount for the length of the contract. For most steelmakers, the majority of steel is sold under one-year or multiyear contracts.

The car companies are making noises about reducing the amount of steel in cars, but that's a long term project. Right now, with supplies so short, they have to suck up the surcharge and figure whether they can afford to eat it or have to try and pass it on to already cautious potential new car buyers.

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