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An Ironclad Deal With Gm

News: Analysis & Commentary: Steel

An Ironclad Deal with GM

Steelmakers trade a low price for a long-term contract

Curtis H. Barnette, CEO and chairman of Bethlehem Steel Corp., claimedhe was very happy to sign a four-year contract with his biggest customer, General Motors Corp. But the $11.7 billion order--split with 39 other steel producers, mostly in the U.S.--set in stone until 2004 about the lowest price for cold-rolled steel seen this decade. So, what's there to smile about?

The GM order--the largest of its kind, at 18 million metric tons--is a potent symbol of just how powerful steel buyers are and how eager to please steelmakers have to be. GM negotiated between a 3% to 5% decrease in prices and a longer-than-usual contract--four years, vs. the more normal one year. That's a pattern other customers will try to follow. So steelmakers may hear demands for GM-like terms when Ford, Caterpillar, John Deere, Maytag, and others renew orders later this year.SILVER LINING. Still, Barnette does have reason to be cheerful. Locking into a low price may be risky, but it's outweighed by the benefits of long-term commitments, which, he says, provide "a great stability in your business plan." With a clear picture of revenues, steelmakers can plan a transition to higher-tech ways of making the high-quality steel that customers demand, he says.

Such deals could also lock companies such as Bethlehem into the future of the global auto industry. Carmakers such as GM prefer increasingly better grades of cold-rolled steel and have been reducing their list of steel suppliers to those capable of meeting tougher specifications for such metal. In fact, much of the cheap imported steel has been of the hot-rolled variety, which carmakers use less. Carmakers are also demanding tough just-in-time delivery schedules, which upstarts have trouble meeting.

Perhaps most significant, companies locked into long-term deals may be in better shape to survive as an industry awash in overcapacity shakes out. The prices of hot- and cold-rolled steel have plunged in the wake of the emerging-markets crisis as imports flowed from Russia, Brazil, Korea, and elsewhere. The GM contract itself could further lower prices, ultimately setting off a long overdue restructuring. "The longer term implications of this deal will be another drive to consolidate the U.S. steel industry," says Michael F. Gambardella, a steel analyst at J.P. Morgan Securities.

GM-style contracts may also give lev- erage to the largest U.S. producers--USX-U.S. Steel Group, LTV, and Bethlehem--when they sit down this summer to bargain with the United Steel Workers of America. "This might make (steelmakers) take a tougher stance in labor talks," says Richard Aldrich, a senior metals analyst at Lehman Brothers Inc.

If suppliers can learn to live profitably under GM's terms, they may emerge as survivors. And by the time the deal expires, that might be enough for any steelmaker to smile about.By Peter Galuszka in ClevelandReturn to top

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