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US:Ford seeks steel futures market

Ford seeks steel futures market
GM won't join effort to stabilize prices

Robert Sherefkin | Automotive News

DETROIT -- Faced with burgeoning steel costs and dwindling negotiating power with steel makers, Ford Motor Co. purchasing boss Tony Brown wants to change how the auto industry buys its most important raw material.

And he's not afraid to try something that once was considered anathema in the Glass House: asking rivals for help.

On Oct. 2 Brown sent a letter to his counterparts at General Motors, Toyota Motor Corp. and three other competitors in North America suggesting they join in cooperative steel buying strategies to lessen price volatility. Most notably, Brown lobbied his competitors to push for a steel futures market that would help make steel prices more predictable and easier to hedge.

"I would like to propose that we coordinate our future efforts in order to accelerate this process and to lay the groundwork to ensure that the steel contract is successful," Brown wrote in the letter obtained by Automotive News. "A financial hedging mechanism is a solution that will benefit us all."

Brown faces a fight in his unprecedented move. GM declined the invitation nine days later, and some steel insiders doubt that a commodities futures market can be established for such a highly engineered product as corrosive-resistant automotive sheet steel.

Futures contracts are agreements to buy or sell a specific amount of a commodity like steel at a particular price on a stipulated future date. They would allow Ford to lock in steel prices.

Brown's effort underscores the steel cost crisis gripping automakers and their parts makers.

In 2004, spot steel prices skyrocketed for much of the year, reaching $780 a ton for hot-rolled sheet in August. Prices fell to about $600 this fall but remain nearly triple the $210 spot prices posted during the fall of 2001.

This is one of several reasons why Ford lost $1.17 billion in the third quarter, before another $4.63 billion in one-time charges and accounting changes. About 64 percent of an average U.S.-built light vehicle is made of steel, or 2,582 pounds, according to the American Iron and Steel Institute.

Automakers buy different grades of steel at different prices. Using the hot-rolled steel benchmark price, automakers theoretically spend $480 more on steel per vehicle now compared with 2001. Multiplied by 15.8 million vehicles made in North America in 2005, the industry now spends $7.71 billion more a year for steel.

Affects all automakers

Unlike most problems being faced in Detroit, the steel crisis affects Asian and European automakers, too. Besieged by cutthroat competition and overcapacity, automakers cannot pass along higher steel costs to consumers. And suppliers, already weakened by the 2004 price run-up, will have trouble absorbing additional steel price increases.

Since 1999 at least 35 U.S.-based suppliers have filed for bankruptcy protection -- many of them citing higher raw material costs. Dura Automotive Systems Inc. joined the ranks last week, filing for Chapter 11 protection Oct. 30.

With few options but to eat the higher prices, automakers attacked U.S. steel tariffs last month before the U.S. International Trade Commission. Brown apparently seized on that united front and approached his competitors with the Oct. 2 letter promoting the development of steel futures contracts with the London Metal Exchange.

Brown's proposal, sent to his North American peers at GM, Toyota, DaimlerChrysler, Nissan and Honda, called for them to purchase steel with contracts just like investors hedge oil, copper, lead, natural gas and many other commodities. A year ago, the London Metal Exchange announced plans to launch a steel futures contract. Talks continue.

"We need to notify the (auto) industry to weigh in and accelerate the process," says Ford purchasing spokesman Paul Wood.

So far the effort has no legs. On Oct. 11, Bo Andersson, GM vice president of global purchasing and supply chain and the auto industry's largest steel buyer, e-mailed Brown his intention "not to participate," says spokeswoman Deborah Silverman. "GM is pursuing strategic alternatives to reduce steel costs over the long term."

A Chrysler statement did not rule out cooperation but said no decisions have been made.

Honda would only acknowledge receipt of the letter; Toyota would not. Nissan did not comment.

Wood says Ford has received some positive responses but declined to identify them.

"We intend to move forward with those who have expressed an interest," he says.

If this year's purchase is any indication, Brown will be looking for help when he negotiates Ford's 2008 steel buy.

Wood declined to characterize Ford's 2007 negotiations for the 3.6 million tons it will use for its U.S. operations. GM accepted price increases of 3 to 11 percent, its biggest increases in years.

In recent months steel prices have softened in the volatile steel spot market used by some parts makers. That is not likely to bring relief to automakers. That's because steel makers have promised to reduce production to firm up prices and prevent automakers from demanding a reopening of their 2007 long-term steel contracts.

Auto vs. steel

Years ago the Detroit 3 had more power when they negotiated with nine weakened steel mills.

Today, a consolidated and healthier steel industry has just four major integrated mills and they can make prices stick, says analyst Charles Bradford of Soleil Securities Inc. in New York.

Brown's call for cooperation in creating a steel hedging initiative puts him in opposition to Lakshmi Mittal, CEO of Mittal Steel, of London, the world's largest integrated steel maker.

Mittal told industry leaders in New York in June that price increases come from the steel industry's boom-and-bust cycles. The way out is through steel industry consolidation, not steel futures, he said.

Tom Sidlik, vice president of global procurement and supply for DaimlerChrysler AG, appears to share that view. Asked about steel prices in late August, he told Reuters that he would "look at" steel futures contracts as a hedging tool should they become available. He was not convinced how attractive they would be.

Producers of aluminum and copper use futures contracts to be assured of the price they will either receive or pay for a commodity. They can hedge their position by buying and selling simultaneously in the futures market. For example, Ford could hedge its supplies of steel in the futures market to limit the risk of a rise in steel prices.

But commodities futures contracts can be difficult to introduce.

Brown's plan to employ the London exchange would not work unless everyone -- automakers and steel makers -- is a party to it, says Peter Peterson, a Pittsburgh steel analyst who has worked 43 years in the industry.

He adds, "It's all or nothing."

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My next Ford.....
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