March 13 (Bloomberg) -- Hyundai Motor Co., South Korea's largest automaker, agreed to pay as much as 20 percent more to its suppliers for parts as higher steel prices increase manufacturing costs.

Hyundai Motor's Vice Chairman Kim Dong Jin and a suppliers' group today agreed on the price increase retroactive from Feb. 1, said spokeswoman Song Mee Young.

The higher prices paid to suppliers may undermine Hyundai Motor's plan to cut costs by 20 percent by 2009. China's economic growth has pushed up prices for raw materials, forcing Posco, Asia's biggest steelmaker by market value, to raise prices by as much as 12 percent in February.

``The higher prices come at a difficult time,'' said Kim Jae Woo, an analyst at Mirae Asset Securities Co. in Seoul. ``Hyundai won't be able to pass on the higher costs to customers as the slowing global economy is already damping auto demand.''

More expensive parts will cut Hyundai's annual operating margin by about 1 percentage point this year, he estimated.

Hyundai dropped 1.8 percent to 66,600 won at the close of trading in Seoul compared with the benchmark Kospi index's 2.6 percent fall. The stock has lost 7 percent so far this year.

South Korea's cast-iron producers last week threatened to stop supplying goods to companies such as Hyundai if they were unable to raise prices to recoup rising costs.

Iron Ore

Nippon Steel Corp., JFE Holdings Inc. and Posco in February agreed to a 65 percent increase in contract iron ore prices for the 12 months starting April 1.

``The problem is, Hyundai may have to increase part prices further after April when the steel price hike is materialized,'' Mirae Asset's Kim said.

The expected rise in steel prices are reflected in this year's business plan, Park Dong Wook, a director at Hyundai's treasury department, said on Jan. 24 in Seoul. The cost of steel plates for car bodies and other parts was about 5 percent of Hyundai's sales last year, he said.

Hyundai last year had an operating margin of 6 percent, the company said on Jan. 24. It forecasts an operating margin of more than 6.5 percent this year, it said at that time.

Kia Motors Corp., South Korea's second-biggest automaker, will also pay more for parts as part of joint negotiations with Hyundai, which owns 39 percent of Kia.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

Last Updated: March 13, 2008 03:32 EDT