Steelmakers are passing on costs after Vale SA, the largest iron-ore producer, scrapped a four-decade system of setting annual prices and boosted prices for Japanese steelmakers as much as 90 percent. Carmakers, the biggest users of steel, are crying foul. The European Automobile Manufacturers’ Association, which represents companies including Volkswagen AG, PSA Peugeot Citroen and Fiat SpA, said yesterday members want European Union regulators to “tackle distortive developments” caused by the changes from mining companies.

Lakshmi Mittal, chief executive officer of ArcelorMittal, the world’s biggest steelmaker, stoked a row over how global prices are set by telling consumers that raw-material costs may push steel rates up 21 percent.

“The cost of producing steel is going to go up and will be passed on to customers,” Mittal said in an interview in London yesterday. Benchmark European hot-rolled coil prices will rise by $150 a metric ton in the second quarter, he said.

Benchmark hot-rolled coil currently costs about $700 a ton, based on Metal Bulletin data. The coiled steel is used by firms from Toyota Motor Corp., the world’s biggest carmaker, to Royal Philips Electronics NV, the largest lighting company.

Eurofer, a group representing steelmakers in Europe, said a shift to shorter contracts for iron ore at higher rates may boost costs for their customers by as much as a third.

“Steel producers will have to pass these rises onto the consumers,” Eurofer Director-General Gordon Moffat said in a phone interview. “It’s going to create a great deal more volatility in prices.”

Daimler, Volkswagen

Producers will attempt to counter those swings by forcing automakers to abandon annual supply contracts, making changes in car prices more extreme, Moffat said. European auto businesses are “very concerned” about the increase in the price of iron ore, industry association ACEA said in a statement.

Steel accounts for about 10 percent to 15 percent of the manufacturing cost of a car, ACEA said.

Daimler AG, the largest truckmaker and second-biggest maker of luxury vehicles, has partly insured itself against increased steel costs this year through long-term and hedging contracts, spokesman Sebastian Wahle said, declining to elaborate.

Ford Chief Executive Officer Alan Mulally told reporters at the New York International Auto Show that a run-up in commodity prices has already been “baked into our plan.”

Winners and Losers

Volkswagen AG, Europe’s largest carmaker, is seeking to minimize the effect of price swings by securing supplies in short-, medium-, and long-term contracts, the Wolfsburg, Germany-based automaker said in an e-mailed response to questions.

Without higher prices, profit margins at steelmakers, still recovering from the worst slump in demand in six decades, will be squeezed after Brazil’s Vale won a benchmark 90 percent increase for iron ore from Sumitomo Metal Industries Co. for the quarter starting today. and BHP Billiton Ltd., the world’s biggest mining company, said it will sell most of its output to Asian mills on shorter-term contracts.

“The winners in the short term will be the miners,” said Colin Hamilton, an analyst at Macquarie Group Ltd. “The losers are probably the ones that haven’t adapted their systems to this change. I would suggest some of the European steelmakers.”

U.S. producers of the metal benefit from being based in the only nation that’s a net exporter of all three key raw materials, iron ore, metallurgical coal and steel scrap, Michael Gambardella, a New York-based analyst with JPMorgan Chase & Co., said in a March 11 interview.

Scrap Metal

Charlotte, North Carolina-based Nucor Corp., the largest U.S. steelmaker by 2009 sales, will be less affected than some by the move away from annual iron-ore contracts as it uses scrap metal in its electric-arc furnaces, according to Chief Executive Officer Dan DiMicco.

The shift “moves iron ore pricing variability closer to the monthly variability for scrap buying,” he said in an e- mailed response to questions. “It lowers any competitive advantage that users of iron ore might have had in rising markets over scrap based steel makers.”

In Asia, Su Jiangang, general manager of Maanshan Iron & Steel Co., the second-biggest Chinese steelmaker listed in Hong Kong, said shorter contracts will put the company “under great pressure.”

Posted by Shayne Heffernan on Apr 1st, 2010and filed underEquities, Latest News, Markets, USA.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site