Sparring Over Steel

The automotive Management Briefing Seminars held each August in the northern Michigan resort town of Traverse City generally are sedate affairs. Hosted by the University of Michigan and the Center for Automotive Research, the speeches are thought-provoking but academic, and the applause usually is little more than polite.

This year, there were fireworks — an emotional confrontation at the podium that nearly turned into a fistfight between the CEO of a major supplier and a top steel industry executive. The source of the acrimony: tariffs being placed on certain types of imported steel by an executive order from President George W. Bush since last March. The steel industry says they're needed; auto suppliers say they're putting them out of business.

The Section 201 tariffs run as high as 30% in the first year, 24% in the second year and 18% in the third. The tariffs, which may be extended up to eight years in total, are meant to stop the illegal dumping of foreign steel in the U.S. It impacts only 29% of import steel.

Still, almost immediately after the Steel Safeguard Program tariffs were in place, the price of domestically produced steel in the U.S. jumped by as much as 50%. Steel industry sources say the average increase is closer to 20%.

U.S. steel producers long have complained that cheap foreign steel kept their prices artificially low; the tariff allowed them to raise prices significantly, while remaining competitive with foreign steel.

For automotive suppliers that routinely sell parts to auto makers for less than they did the previous year the pain of such an increase is acute. Many grades of steel also became harder to find in the U.S., as shipments from Brazil, Europe and elsewhere all but dried up. Finding relief in Mexico or Canada was not an option because producers there also had raised prices.

Suppliers were hit hardest because they purchase most of their steel directly from mills and service centers and can't lock in prices with long-term contracts. Auto makers, because they purchase so much steel, have more leverage and sign multi-year contracts that insulate them from wild price fluctuations like the ones of late. Auto makers do have programs where they buy steel in bulk and re-sell it to suppliers at good prices, but not all suppliers can take advantage of such “repurchase programs.”

Although suppliers have complained about rising steel prices, their auto maker customers have remained tight-lipped. Some insiders suggest Detroit's Big Three don't want to make waves that will hurt their lobbying efforts against fuel economy and emissions regulations.

Not every auto maker has been quiet. In July, Honda Motor Co. Ltd. demonstrated the volatility of the debate by airlifting carbon sheet steel from Japan to its Canadian and U.S. assembly plants because of the shortage caused by the tariffs.

Airlifting steel is 12 times more expensive than shipping by sea. Plus, the Japanese auto maker had to pay the new tariffs. Still, Honda had to keep its assembly lines moving, and its contracts with North American steel makers were expiring in July.

A Honda spokesman says the company airlifted some 2,000 tons of steel to North America during two weeks in July, and that the shipments ended when Honda reached agreement on new contracts with domestic producers.

Perhaps the Chrysler Group will be the first of Detroit's Big Three to break the silence, as 30% of Chrysler's steel purchases are up for negotiation this fall. “Negotiations are proceeding, and we do expect upward pressure on pricing,” a Chrysler spokesman says.

Even without OEM backing, suppliers are fighting the battle on several fronts. The Motor & Equipment Manufacturers Assn. and its Troy, MI-based Original Equipment Suppliers Assn. have been urging the Bush Admin. to rescind the steel tariffs and suggest it could become a sticky issue this election year.

MEMA's 450 supplier companies expected steel prices to go up because of the tariffs, but at a more reasonable rate, says Ana Lopes, director of government relations for MEMA. She says suppliers and auto makers support the U.S. steel industry but are now forced to find steel overseas because of the impact of the tariffs. In some cases, it's cheaper to pay the tariff on imported steel than buy U.S.-produced steel, she says.

But U.S. steel producers have faced their own economic hardships and argue the tariffs are justified and fair. Thirty-four of them have been driven into bankruptcy in the past five years because they cannot compete with the flood of cheap steel that has washed onto U.S. shores. There's too much steel-making capacity around the world, and the U.S. has been the market of choice for foreign producers because they want U.S. dollars, the steel industry argues.

Clear evidence of illegally dumped, unfairly priced foreign steel in the U.S. led to a unanimous 6-0 ruling by the U.S. International Trade Commission in support of the tariffs. The American Iron and Steel Institute says that after the Bush Admin. approved the Steel Safeguard Program, Canada, China and some European nations all moved to enact protective barriers because they don't want their domestic steel producers to suffer like those in the U.S.

AISI says hot-rolled sheet prices are just now recovering from a 20-year low. Even with a 50% price increase, steel doesn't cost any more than it did two years ago. “What were these companies (suppliers/steel users) doing two years ago? No one was complaining then,” says Pete Peterson, AISI spokesman and director of marketing-automotive for U.S. Steel Group.

Peterson says U.S. mills are among the world's most efficient and environmentally responsible, while imported steel, especially from the former Soviet Union, represents a step backward. “You're essentially bringing in awful, polluted steel,” Peterson says.

When prices fluctuated wildly in recent years, some suppliers stopped requesting steel from their OEM customer repurchase programs because they could buy it cheaper elsewhere. Peterson says that suppliers complaining about recent price increases likely have violated their contractual obligations by not buying steel from the OEMs.

Contributing to recent price increases were two steel makers that stopped production — one due to fire, another to bankruptcy. Plus, the steel industry was banking on slower auto sales. Stocks had to be built back up and demand filled. The supply problem “was not 201-driven,” Peterson says.

So it was against the scenic Traverse City backdrop last month that the steel debate erupted.

Peterson had just listened to a passionate speech by Tim Leuliette, chairman, president and CEO of supplier Metaldyne Corp., in which he urged the supplier community to resist the huge price increases for steel.

After the speech in the Grand Traverse resort ballroom, Peterson confronted Leuliette and told him why the tariffs were necessary.

“Some of the things you said, in fact, were incorrect, and you have such a bully pulpit here,” an agitated Peterson said to Leuliette.

“Apparently it's not as good as yours,” Leuliette shot back. “When you put in tariffs, it's going to raise our prices. So it's your problem, and it affects my balance sheet. When you do that, I'm going to fight back.”

Neither man gave any ground. At one point, it appeared a referee would be necessary to keep them from coming to blows. They parted company without agreeing on anything.

The following day, after reading an account of the incident, conference host David Cole jokingly suggested a WWF-style cage match between Peterson and Leuliette.

No word yet if either is game. Perhaps the bigger question is, who would buy the steel cage, and at what price?