Automotive MMI: Index drops 2% while Stellantis takes a page from the GM supplier handbook

The Automotive Monthly Metals Index (MMI) dropped by 2.5% for this month’s reading, following last month’s 3.4% decline.

However, from a historical perspective, the Automotive MMI sits just off its all-time high. For nearly all of 2021, the entire automotive industry has felt pain. That pain has come in the form of high prices, lack of material availability, and logistics delays. 

Steel mills, in particular, took a very aggressive negotiation approach with automakers during Q4 2021. In fact, MetalMiner stated that the mills’ aggressive approach would likely lead to demand destruction. Automakers then and now always have options. MetalMiner outlined a few of those options previously. Options include: moving tons to other suppliers, PPAP (qualifying new suppliers for new parts) new suppliers, among others. 

MetalMiner did not consider changes to boiler plate purchase order terms and conditions. But Stellantis opted for that strategy.

FWIW, this quick-read strategy brief outlines the “5 Best Metal Sourcing Strategies

Steel mills took the first shot 

At the time, steel mills wanted to force automakers to adjust their 2022 contract pricing to better reflect the then-current spot market (+$1500/st for HRC). Mills, because of high demand and supply constraints, dictated all sorts of terms and conditions. These included: minimum tonnages, premium pricing for items the mills did not want to produce, adders and extras etc.  Negotiations took a “take no prisoners” attitude. 

Steel industry consolidation, most notably Cliffs buying up AK Steel as well as much of Arcelor’s automotive business, further tilted the negotiation balance toward suppliers.

Then the market started to shift

Several automakers in discussions with MetalMiner revealed frustration over the heavy handed negotiation approach taken by the steel mills. A few weeks later, prices had started to slip as new capacity came online and imports started to arrive in greater volumes. So far, steel prices have not reached a price floor.

Here is how metal buying organizations know precisely when markets shift out of trend.

Stellantis rebels with a big hammer

So it should come as no surprise that Stellantis recently released an extensive update to its standardized terms and conditions. Perhaps they did this in response to what it saw from suppliers. Many auto producers have reported significantly higher raw material price increases throughout 2021. In a recent Ford interview, the company indicated that it spent an additional $2-3b last year and will see another $1-1.5b in additional costs this year. Ford went on to say that the supply chain will loosen up during the second half of 2022 due to new chip capacity coming online and Covid impacted workers returning to work. 

As a result, MetalMiner speculates that Stellantis changed many aspects of its terms and conditions to counter what the company perceived as strong arm tactics across its supply base. Warner Norcross and Judd, a law firm, published a summary of those contractual changes

From a procurement perspective, the most significant changes include:

  1. Volume – this gives Stellantis increased unilateral control over volumes.  Volumes of course for the steel industry, serve as the lynchpin for all contract negotiations. However, volume commitments with specified tonnages make these contracts valid. In force majeure situations for example, courts have rejected customer claims where purchase volumes are not contractually committed. In addition, the new terms allow Stellantis to require certain volumes of safety stock. 
  2. Quality and Warranty provisions – Though this entire provision errors on the extreme, the requirement that suppliers warrant their products for all uses contemplated by Stellantis appears outrageous!
  3. Price decreases – This provision tears a page out of the GM supplier manual (GM has the reputation of serving as the “harshest automotive OEM” from a procurement standpoint). Stellantis here too demands any and all cost savings identified must pass to it (Ed. Note this ask appears ridiculous)
  4. Changes – This provision allows Stellantis to make unilateral changes “to any aspect of its purchases.” The biggest issue involves price relief given to suppliers for increases and restricts those increases to “approved net out of pocket direct costs actually incurred by the supplier.”
  5. Payment – the T’c and C’s now set default payment terms at net 90. Factoring has been prohibited. This could become very problematic for smaller suppliers in particular.
  6. Termination/Transition Support – This condition allows Stellantis to “terminate purchase orders with or without cause.” This clause appears problematic because again, it takes away the volume commitment from Stellantis. It’s well known that volumes nearly always dictate price.

 Stellantis contracts – the takeaway

MetalMiner Vice President of Business Solutions, Don Hauser, formerly a global supply base manager for a large agricultural equipment manufacturer, believes the quality warrant clause poses the biggest cost for suppliers. By asking the supplier to warrant parts for applications unknowable to them, suppliers have taken on large liabilities. In the case of the automotive industry, that could lead to lawsuits that involve injuries and deaths. 

In addition to the quality clause changes, the price decrease clause creates huge disincentives for OEM’s to look for cost reductions. Who would care to try and achieve cost reductions if all of them go back to the customer? These clauses create a more transactional business, particularly for steel supply. MetalMiner has seen first hand that those with the strongest relationships get material in constrained markets. Stellantis will serve as the first customer that steel producers would want to rid themselves of.

Material availability

Sadly, some will accept the terms and conditions. Smaller tiered suppliers may need the volume but if/when the market weakens, they will likely go out of business. Of course filing for bankruptcy exempts the supplier from having to produce and ship material. So where would Stellantis get material in that case?

MetalMiner suspects no steel mill has accepted these terms and conditions. Short term Stellantis can use this to strong arm their suppliers but long term, they will lose all partner relationships – including those that foster new product development. Stellantis may also lose access to the development of cutting edge materials. 

In the rising 2021 market, Stellantis would have moved to the bottom of the “allocation”, so to speak. Had these terms been in place last year, Stellantis would likely have a line shutdown. This behavior ruins relationships at both a mill and service center level. 

In rising markets with limited supply, “difficult customers” move to the back of the line. Suppliers prioritize clients in which they have strong working relationships. 

Actual metal prices 

The U.S. hot dipped galvanized steel price continued to fall. The price dropped 9.55% on top of last month’s  2.6% drop to $1838/st. While US scrap (shred) fell 4.76% to $480/st from $504/st. 

U.S. palladium bars continued to increase by 22.71% from $1,845 per ounce to $2,264 per ounce. U.S. platinum bars increased by 7.17% from $963/oz to $1032/oz.

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