The effects of supply and demand are clearly demonstrated in the automotive parts supply industry. Due to the increased consumption of new and scrap steel in China, a relatively new world manufacturing market, the supply of steel for the rest of the world has decreased. This additional and dramatic increase in consumption of a good causes a demand shift in the demand curve or in this case an increase in demand. .
Billions of dollars are being invested in China every year and these new ventures need steel for buildings, machinery and raw materials. Most of the scrap steel that was available in the under developed country has already been used and now they are looking to other countries for their scrap steel. This competition for a finite amount of product is driving up the price. "The price run-up is generally blamed on a shortage of scrap steel caused by China's booming industrial sector. The increases are due to steel distributor surcharges that have ballooned from $20-$60 per ton to $80-$130 per ton" (Hampton, 2004, March 4).
Because of the dramatic price increases automotive parts suppliers are trying to pass the increased costs on to their customers but with very little success. The first stage is to talk with customers and try to negotiate price adjustments even though some customers have locked in prices per some previous contract. "Half of U.S. auto suppliers have talked to at least some of their customers about relief from rising steel prices, but only 20% have firm agreements for some form of recovery" (Hampton, 2004, April 13). Other negotiations have gone much worse with flat out refusals to adjust pricing and threats of shipment stoppages. "Delphi Corp. has obtained a restraining order that forces some of its suppliers to maintain their parts shipments as negotiations continue over the spiraling cost of steel" (Hampton, 2004, March 11). .
Many tiers of suppliers are trying to pass on costs to the next level supplier attempting to lessen the affects of huge price jumps in steel.
