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New Orleans CityBusiness (New Orleans, LA)
March 21, 2005
Steel Costs Drive Debate over Higher Car Prices
By Chris Price
New Orleans-area auto dealers are bracing customers for higher price tags on 2005 model year
vehicles, but there's some dispute on what's driving up costs.
Manufacturers blame high steel costs for increasing car and truck sticker prices, but automotive
analysts and steel industry representatives say steel prices are dropping and manufacturers are
raising retail prices to fund incentive and rebate programs.
"When manufacturers increase prices, no matter the root cause, they need to attribute it to
something and high steel prices have been out in the media and make an easy scapegoat," said
Bob Kurilko, vice president of communications for Edmunds.com, a consumer automotive Web
site based in Santa Monica, Calif. "Prices of steel are actually going down right now and you'll
continue to see a decrease in steel prices throughout the year."
Kurilko said global steel production is expected to reach an estimated 1.15 billion tons in 2005
compared with 1.05 billion tons produced in 2004.
China, the world's top steel importer the past two years, is expected to export a net 5 million tons
of steel this year because of lesser demand and increased production capacity at Chinese steel
mills, he said.
Charles Bradford, president of Bradford Research/Soleil Securities, a New York metals
consulting firm, said steel prices usually make up less than 5 percent of a vehicle's cost. But auto
makers will renegotiate their three-year steel contracts this year, and are preparing for significant
price increases compared with the 2002 agreements.
In January, hot-rolled steel cost $695 a ton in the United States, down 12 percent from $790 a ton
in September 2004. While steel prices were dropping, they remained double what they were in
December 2003, Bradford said.
American Honda Motor Co. announced last month it will raise prices on 2005 model year Honda
and Acura vehicles by an average of $150. Through February, Honda sales were down 4.5
percent from 195,952 vehicles sold nationally in 2004 to 179,634 this year.
Mike Spencer, spokesman for the Torrance, Calif.-based US division of the Japanese auto maker,
said Honda's first general price hike since 1994 is needed to offset rising steel costs.
The increase in steel costs added about 1 percent to the price of new models delivered to dealers
after Feb. 13, except the Acura NSX and Honda Element, Insight and Civic LX SE, he said.
Metairie-based Royal Honda is urging customers to buy vehicles from its inventory that are
unaffected by the increase.
"Honda sent a letter to its dealers that said the price of steel is affecting manufacturing costs and
that cost would be passed on to consumers," said Steve Brinson, a spokesman for Royal Honda.
"The Brinson family has owned the Honda dealership for eight years now and we've never had a
price increase (midyear) whatsoever."
Kurilko believes Honda is increasing prices to create cash flow to fund incentive and rebate
programs.
"The domestic strategy is to raise retail prices by $100 to $150 dollars and then offer rebates and
incentives within the following months," he said.
In January, Ford Motor Co. increased prices an average of $156 on Fords, $117 on Lincolns and
$158 on Mercurys, and is offering incentive packages of more than $9,000 on some vehicles
through March 31.
"Honda has lagged in the incentive marketplace," Kurilko said. "Right now Honda offers about
$500 in total incentives where their Asian competitors are offering almost double that and
domestic manufacturers are offering up to $2,000."
Honda's average incentive package in January was $551 and $420 in February, whereas Nissan
offered an average of $1,700 in January and $1,555 in February. Toyota increased its incentive
packages to offer an average of $995 in January and $1,169 in February, Kurilko said.
Honda posted $78.2 billion in 2004 sales with a net income of $4.5 billion. Toyota and Nissan
posted sales of $163.6 billion and $70.1 billion with net incomes of $11 billion and $4.8 billion,
respectively.
Historically Honda hasn't had to depend on rebates or incentives to move cars because they keep
production levels close to market demand, Brinson said.
"They haven't mentioned anything about increased incentives or rebates and we're not
anticipating an increase soon," he said. "I've never seen a rebate on a Honda and the lowest
annual percentage rate I've ever seen is 1.9 percent."
Brinson said he hopes the price increase has a limited effect on business. "While $150 doesn't
sound like much, like it could be something we could negotiate on in a deal, it does add up when
you multiply it by the 150 cars a month we average," he said.
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