Due to changes to iron-ore pricing setups, steel costs have increased suddenly. This is believed to cause problems for carmakers, Volkswagen AG, PSA Peugeot Citroen and Fiat SpA. According to the European Automobile Manufacturers' Association (ACEA), carmakers in the European Union are asking for the bloc's antitrust regulator to "tackle distortive developments."
Producers of iron ore, the main raw material in steel, terminated their long-term supply contracts and revealed steep price hikes of as much as 90%.
In an interview, Arndt Ellinghorst, a London- based analyst at Credit Suisse Group AG, said that the auto industry is simply unable to handle highly volatile material prices.
Ellinghorst said that when you consider the already low visibility, carmakers would struggle further. Vale SA (the biggest producer of iron ore) and BHP Billiton Ltd. (the third largest) ended a 40-year-old practice of selling their product under one-year contracts. Instead, they made a shift for three-month sales agreements.
Steelmakers said they will be forced to raise prices paid by carmakers by one-third and replace their own long-term contracts with quarterly pricing.
Sigrid De Vries, a spokeswoman at the Brussels-based ACEA, said that the move from a yearly contract to a quarterly contract exposes the carmakers to volatility and since the economy has yet to make a recovery, any cost increase is critical.