Supply Excellence — Even Honda’s Steel Contracts Are Not Sacred

Even Honda’s Steel Contracts Are Not Sacred

November 13th, 2008 · by Mike Petro · 1 Comment · automotive sector, contract management, sourcing, supplier management, supply management, supply market dynamics, supply risk

There is no doubt that volatility in the steel market has shifted the balance of power in recent years. Granted the recent drops in steel price will change the dynamics between buyers and suppliers yet again, as mills struggle to maintain their profit margins. But during the recent price run up, mills set the precedent of broken pricing agreements…and it might be hard to put that genie back in the bottle.

The perception has been that larger companies - with their deeper pockets, global operations and massive purchasing power - were somewhat insulated from the pricing whims of the steel mills. But as Honda’s case shows, no one is immune from broken contracts and higher prices.

Honda recently participated in a story on MetalBulletin.com that reported that a long-time U.S.-based steel supplier broke their existing formal contract and raised the prices Honda pays for their steel supply.

While news of suppliers breaking contracts is not unusual, it is rare that a CEO of such a large global company as Honda admits publicly that a large supplier has broken their contract, and that they expect more suppliers to do the same in the near future. In the past, Honda and all steel buyers would have simply turned down the price increases and instead brought in foreign steel to meet their immediate needs. However, the weak U.S. Dollar and a strong global demand for steel did not allow Honda and others to source overseas.

It is truly unusual that a CEO of a large global entity would make this announcement for fear that it would send a message to other suppliers that are contemplating breaking similar contracts with large global buyers. While this may be a maneuver to publicize Honda’s rising raw material costs in an effort to pass through increases to consumers, it does provide a good indication as to just how aggressive steel mills have become in the current market. As one buyer we spoke recently said, “If someone as large as Honda is accepting broken contracts in the form of higher prices, then how is someone that only buys $150 million worth of steel each year supposed to avoid these increases?”

***Portions of this post are reprinted from my Metals Core Category Detail in this quarter’s SupplyWatch report. The full article is here and a free subscription to the electronic version is here.***

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.

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