Ballooning Steel Costs Bring Pain for Wisconsin's Auto Suppliers

From Milwaukee Journal Sentinel

MILWAUKEE — Skyrocketing steel prices already have pushed two automotive suppliers with plants in Wisconsin into bankruptcy, and industry observers say more companies could go under yet.

For an auto industry already awash in debt from consolidations, pummeled by health care and retirement costs, and losing market share, the upward spiral in commodity prices is sure to spur more industry fallout, analysts say.

“Clearly the restructuring is not over with,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. “It’s getting to the point where we’ll see some big things happening over the next couple years.”

The doubling of steel prices in the past year has hit home for many suppliers. Citation Corp. and Intermet Corp., both of which have plants in Wisconsin, are now in bankruptcy.

Others are reporting losses, seeing their market value dwindle and restructuring to survive the downturn. Since April, suppliers’ stocks have fallen about 20 percent, compared with a market decline of 2 percent to 6 percent, said David Leiker, automotive industry analyst at Robert W. Baird & Co. in Milwaukee.

In recent weeks, Citation of Alabama and Intermet of Michigan have filed for bankruptcy, and analysts say the fallout could spread to other companies. Citation has two plants in southeastern Wisconsin; Intermet has plants in Racine, Wis., and Sturtevant, Wis.

Suppliers are struggling even though automotive sales remain strong — sales are up 1 percent through September — and despite massive restructurings.

At stake with suppliers are thousands of manufacturing jobs in Wisconsin, which has lost 67,500 factory jobs since January 2001.

“The metal-bending business has always been a tough business; it’s not one with huge margins to begin with,” said Chris Struve, a Fitch Ratings analyst. “If you’re seeing massive increases in your costs and you’re unable to pass it on to your customers, that causes stress.”

Suppliers dependent on steel, which has doubled in price the past year, are feeling the biggest hit. That includes both suppliers that recently filed for bankruptcy.

Tower Automotive spends $1 billion a year on steel. The maker of frames and steel components for pickup trucks and other vehicles said this month its loss would be double earlier projections.

The company warned Oct. 5 that earnings were being hurt by lower vehicle production, launch costs and steel prices. The company said it can’t pass on to its customers about $100 million of its higher steel costs.

Baird analyst Leiker said Tower isn’t likely to be a bankruptcy candidate because it has enough liquidity, its debt is far from maturing and Tower is able to pay its interest costs.

Several auto parts makers in southeast Wisconsin are facing challenges: Strattec Security Corp., Glendale, Wis., is paying higher prices for brass and zinc, but has offset those increases with cost-cutting measures elsewhere. Modine Manufacturing Co., Racine, said last week that earnings from its automotive business fell during the recent quarter, even as net income tripled. Johnson Controls Inc. is expected to report record earnings and sales on Tuesday. But the company is cutting costs to cope with high raw material costs and other industry challenges. Johnson is eliminating 350 white-collar jobs at its automotive business. The cuts affect workers at three offices in Michigan but won’t affect the company’s Glendale and Milwaukee plants, spokesman Glen Ponczak said.

Analysts say Johnson Controls’ experience at cutting costs will serve it well, as does a business model that’s so diversified that it’s not overly dependent on any one customer — or one part of the world — to sustain sales growth.

“JCI has rolled with a lot of punches in the last 10 years,” said Struve, the automotive analyst.

Modine, which sells cooling equipment to customers like BMW and DaimlerChrysler, is seeing growth in its automotive business as well as its other businesses, Chief Executive Dave Rayburn said. A key reason for its success is not having too much business with any one company — or even any one industry, he said.

“If you take our four largest customers, they’re in three different markets — in truck, automotive and construction,” Rayburn said. “We work very hard at keeping our thermal game from being too dependent on any one customer or any one market, so we don’t have to play the game of chicken that somebody may have to do when your primary customer is Ford Motor Company or Chrysler. When you have some diversification you can look at things a little more differently than it’s feast or famine if you lost an order.”

Many suppliers are able to pass along price increases of commodities such as steel or aluminum to their original-equipment customers, the car and light truck manufacturers. But the price increases keep coming, now hitting resins — petroleum-based products used in plastic products that are found in cars.

Another concern is the effect of price increases and rising costs on consumers. Will high oil prices and high prices in other parts of the economy slow consumer spending, taking a bite out of sales in the remaining months of 2004 and into 2005?

That’s a concern at Glendale-based Actuant Corp., which makes products used in cars and recreational vehicles, and electrical supplies found in hardware stores.

“When you look at fuel prices, whether it’s putting gasoline into your car or paying our utilities, certainly over the last five years they’ve popped up. And we may pay a lot more this winter,” Actuant Chief Financial Officer Andrew Lampereur said.

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