When is a Contract Not a Contract?

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Ferrous Metals

When is a contract not a contract? Apparently it’s when you are a U.S. Steel company in an extremely tight market. Honda chief executive Takeo Fukui told Reuters in Tokyo that an unnamed U.S. mill had requested (polite speak for demanded) a price increase during April on an annual contract negotiated earlier this year. Favorites are U.S. Steel or Arcelor Mittal, as both have imposed surcharges on contracts recently and both have been at the forefront of pushing through price increases above those widely believed purely necessary to cover raw material costs. If Honda has been asked to pay more, then probably so have Toyota and Nissan. This comes on top of cost increases facing the Japanese transplants, caused by the weak dollar inflating the cost of imported parts made overseas.

Interestingly, in a quote reported in Metal Bulletin, a U.S. steel representative was heard to say with reference to this price increase for Honda, Our goal is to get the market price for our steel. It wasn’t, We are being driven to this by cost pressures, but merely a statement that if we can charge more in a tight market then we will, regardless of the fact the ink has barely dried on the contract. U.S. Steel incidentally owns its own iron ore mines and coking operations and even by its own admission is largely insulated against many of these cost increases. Estimates of the cost increase steel prices are adding to cars have been as high as $600-900 per car although to what extent manufacturers will pass these on remains to be seen in a soft consumer market.

Takeo Fukui’s response to the situation in the short term is to say they have no alternative other than to pay. In the medium term, they are seeking to reduce the steel content of cars ” in the best traditions of car making Honda instinctively turns to the engineering department to find a solution.

–Stuart Burns

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