Suppliers rewrite contracts to protect against raw material price surges

By James B. Treece, ERJ staff (AN)

Detroit, Michigan -- A majority of US automotive parts suppliers have rewritten contracts to protect themselves against steep jumps in steel prices, but some remain exposed to price swings, according to a recent survey by consultants IRN Inc., of Grand Rapids, Michigan.

Among companies that use steel, about 55 to 60 percent of suppliers who responded to the survey in May and June said they have some form of contractual terms in place to protect against price surges, IRN President Kim Korth told a meeting of the Society of Automotive Analysts.

In contrast, when the spot price of hot-rolled steel roughly doubled in April 2007, “virtually no one at that point had any kind of material relief contracting with the customer,” she said Wednesday.

“Suppliers have done a great deal to protect themselves from materials price increases since when we last conducted this survey” in May-June 2008, Korth said.

Still, suppliers' exposure to potential increases in commodities prices varies widely.

“It astonishes us how huge a variation there is between those who haven't done anything on cost relief and those who say, 'Why would I ship anything if I'm not protected on cost relief?' ” Korth said.

But a refusal to ship parts is becoming less common as a bargaining tactic, she said. In 2008, about a quarter of suppliers surveyed said they would consider halting all parts shipments to force a customer to grant price increases that reflected higher raw material costs. In the latest survey, that dropped to 10 to 12 percent, depending on the commodity.

The reason, Korth said, was that suppliers are more profitable today, and the issue isn't as urgent as it was when steel and other prices were soaring.

Renegotiate now

She urged suppliers to begin negotiating new contract terms if they have not done so.

“Even if you don't win or only get 50 percent of what you sought in material price increases, it needs to be part of your negotiations,” Korth said.

Commodity cost protections take various forms, but one-time price increases and price surcharges to compensate for soaring costs for raw materials are going away, Korth said. The reason: Surcharges “assume you return to stability,” and they aren't standing up in court, she said.

Instead, the survey found, the most common change in contracts is to add an index-based automatic price adjustment.

But even then, whether so-called pass-through agreements “really protect you depends on how often it is adjusted, the method used” to calculate the pass-throughs, and so on, Korth said.

“It requires constant management of the commercial relationship, something suppliers don't do well” and often “aren't well-staffed for,” she said.

Korth noted, though, that most suppliers and automakers are expecting prices of commodities to increase less than 20 percent this year. “If it's more than that,” she said, “all bets are off.”

From Automotive News (A Crain publication)

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