Rising fuel prices could make SUV owners nervous. Turmoil in Asia-Pacific still could cause indigestion for any CFO. Work stoppages always are possible in North America when the United Auto Workers union negotiates a new contract, which it will do later this year.
The auto industry faces enough uncertainty every day, so it makes sense to eliminate it when possible. General Motors Corp. tries to do just that by signing long-term contracts for both steel and recycled aluminum.
First came GM's pacts to buy 18 million metric tons of steel worth $11.7 billion over four years from 40 global producers. Three-quarters of the steel will come from U.S.-based producers.
The deals represent the largest steel purchase ever and, for GM, the first attempt to buy steel globally. The world's largest automaker, which uses up to 6 million tons (5.4 million t) of steel annually for vehicle production, secures 90% of its steel needs through 2002. The pact also calls for GM to buy more high-strength steel for vehicle production.
The long-term commitment also is unique. In the past, contracts for steel were signed quarterly or every six months because of vast price fluctuations. Two- or three-year contracts were occasionally signed.
The four-year deal exposes sinking prices on the commodities market and shows how eager GM is to lock in at a good price. Steel prices plummeted last year in the face of heavy imports into the U.S. It's easy to see why GM wants 10-year steel contracts.
GM hopes long-term deals will stabilize availability, improve quality control and cut product-development costs because engineers will know steel prices as vehicles are developed.
The contracts also account for nearly all the steel GM will resell to its suppliers, says John Stiles, executive director of GM Worldwide Purchasing-Metallic. The practice of resale is not unique to GM. It is another example of automakers whacking away at cost factors to prevent suppliers from increasing component prices by blaming procurement expenses. Mr. Stiles says GM surely will spend less for steel than it would have otherwise, but he declines to be specific.
He says steelmakers should benefit because they know production volumes and expenses four years in advance. "What we're really seeing here, we believe, is a shift in the relationship between the steel mills and General Motors on a global basis to more of a strategic relationship," Mr. Stiles says.
But some steel producers apparently are lukewarm on the deal. John Correnti, president of Charlotte, NC-based Nucor, the largest mini-mill flat-rolled producer in the U.S., tells American Metal Market newspaper that the deal doesn't make the automotive market more enticing for his company.
"Do the numbers," Mr. Correnti tells the newspaper, noting that GM's contract amounts to about 4.5 million tons (4.1 million t) per year. "Divided between nine suppliers, that's not a lot of steel in a 130-million-ton [118-million-t] (per year U.S.) market."
When negotiations began a year ago, it reportedly rattled some U.S. steel suppliers; they were nervous about losing GM business to overseas mills. While Mr. Stiles acknowledges a few domestic firms will lose some business with GM, he says the number of foreign companies supplying steel for North American-made vehicles will not increase.
The contracts include provisions that would allow GM to buy steel elsewhere if a labor dispute disrupts a steel company's production. U.S. steelmakers are preparing for labor talks this year with the United Steelworkers union.
Two weeks after announcing its steel deal, GM signs a 13-year contract to buy more than $1 billion worth of recycled aluminum from IMCO Recycling Inc. of Irving, TX. Until now, GM's longest secondary aluminum contract had been only three years.
The automaker confirms the reclaimed alloys will be used in two high-volume engine programs as well as other vehicle components. GM predicts aluminum content in its vehicles will rise 7% or more a year for the foreseeable future. About 65% of GM's current aluminum now comes through recycling.
IMCO will process nearly 2 billion lbs. (907,000 t) of aluminum during the length of the contract from a new $22 million facility it plans to build close to GM's Saginaw, MI, metal casting operations.
Also, GM is building a powertrain factory in nearby Flint that sources say will build a forthcoming all-aluminum engine for GM's compact pickups and midsize sport/utility vehicles. GM also has a smaller all-aluminum powerplant that currently is in pre-production at its Tonawanda, NY, engine factory and will debut later this year in Saturn Corp.'s L-Series midsize sedan, sources say.
The IMCO plant will have an annual capacity of 200 million lbs. (91,000 t) and will open in mid 2000. Until then, IMCO will supply aluminum to GM from another plant in Michigan, as well as Tennessee.
In addition to eliminating market fluctuations, the proximity of the facilities is a key to cost reduction because most of the aluminum will be transported as molten metal in customized trucks on a just-in-time basis from IMCO's facility to GM's Saginaw operations.
The automaker says the IMCO deal doesn't displace other aluminum suppliers. "This is for growth," says Kevin Moore, GM's manager of commodities for secondary aluminum.
GM's aluminum purchase includes resale to its partsmakers. GM contends it has no plans for another secondary aluminum deal.