Raw-material prices up 10-20 percent, survey says

By David Sedgwick, Automotive News staff

Detroit, Michigan -- The cost of automotive raw materials such as steel, resins, rubber, copper and aluminum are rising, typically 10 to 20 percent from a year ago.

According to a survey of 110 suppliers by IRN Inc., a consulting firm based in Grand Rapids, Mich., rubber and plastic resins appear to be causing suppliers the most headaches.

The cost of natural rubber has soared over the past year, while synthetic rubber and plastic resins also have grown more costly as the price of petrochemicals rose.

Thirty-one percent of the survey respondents reported that rubber prices rose 11 to 20 percent this year, and 38 percent reported price increases greater than 20 percent.

Meanwhile, 43 percent of suppliers said plastics prices rose 11 to 20 percent, while 25 percent said prices exceeded 20 percent.

Steel, aluminum and copper prices also rose significantly, but many suppliers say automakers are indexing those materials. Not so with rubber and plastics. With indexing, automakers pay suppliers more for parts if raw materials raise suppliers' production costs. Automakers pay less if the price of raw materials drops.

Moreover, the problem seems likely to get worse, says IRN President Kim Korth, author of the study. "Everybody believes material prices will continue to increase," Korth says.

Automakers generally are willing to index a given raw material if they can monitor price fluctuations through a public price exchange, or benchmark. Such benchmarks exist for steel, aluminum and copper, but not for resins and rubber, Korth says.

Rubber has been especially troublesome, triggering a wave of price increases by tyre manufacturers. But suppliers who use rubber for their components often must eat those higher costs, Korth says, and not pass them along to automakers.

"There seems to be a lot of stress and tension over rubber," Korth said. "Prices have gone up dramatically."

As for plastics, resin manufacturers have not supported a public price exchange because they want to control their own pricing, Korth asserts. "It is not a level playing field."

For raw materials that are not indexed, suppliers must negotiate one-time price increases with automakers. And because prices are so volatile, "the minute the ink is dry, they have to go through the whole thing all over again," Korth notes.

In the past, the Detroit 3 were noticeably more reluctant to index raw material prices than the transplants. It's no longer that simple.

According to the survey, Ford Motor Co. and Toyota Motor Corp. are significantly more willing to index raw materials than their rivals.

Fifty-five percent of respondents said Ford was "more likely" to offer satisfactory price increases, and 47 percent said Toyota was more likely to do so.

By contrast, only 19 percent of Mercedes suppliers and 23 percent of Chrysler suppliers said those companies were more likely to grant satisfactory price increases.

The bottom line: Price indexing for steel, aluminum and copper is commonly accepted. But rubber and plastic resins continue to cause headaches.

Korth predicts these issues will sort themselves out eventually. Price indexing "is almost standard operating procedure," Korth said. "No single level of the supply chain can absorb all of the price increases."

From Automotive News (A Crain publication)