Honda Motor Co's chief financial officer said on Thursday automakers' need for a stable supply of steel meant negotiating prices with steelmakers every quarter was out of the question.
Japan's steel and car makers, which usually set prices for one year around the beginning of the business year in April, are in heated negotiations over pricing as global miners press steelmills to move to more market-sensitive quarterly pricing.
Honda, Japan's No.2 automaker, last week issued what most analysts said was a conservative forecast for a 10 percent rise in operating profit to 400 billion yen ($4.26 billion) in the year to end-March 2011, saying projecting the year ahead was more difficult than usual due to uncertainty over input prices.
There are materials we can buy at market prices, like platinum and aluminum, Chief Financial Officer Yoichi Hojo told Reuters in an interview.
But there are others that we can't buy directly from the market, and for those products, such as steel or tires, we need a certain level of stability. Otherwise, we couldn't be in this manufacturing business.
It's not logical to negotiate on a quarterly basis, Hojo said.
Big global miners such as BHP Billiton and Rio Tinto are pushing steelmills for quarterly pricing, but steelmakers worry this will squeeze margins as they will find it harder to pass on the extra costs.
Hojo declined to disclose how much negative impact from rising raw materials prices Honda had factored in to its forecasts for 2010/11, but said it assumed that suppliers would shoulder part of the rise in surging iron ore and coal prices.
We can't be expected to have everything passed on to us, he said.
Despite the uncertainty over materials costs, as well as the uncertain outlook for demand with the end of scrappage incentives and other government-backed subsidies in various markets, Honda has forecast a rise in profits and a 6.6 percent increase in car sales this year, driven principally by the U.S. market.
Last month, Honda reported a 12.5 percent rise in U.S. sales, underperforming a 22.7 percent rise in the overall market as its incentives trailed Toyota's by some $700 per vehicle, according to Edmunds.com.
But Hojo said that was due to difficult comparisons from the year before, when Honda offered a round of generous incentives timed with the retirement of former executive vice president of American Honda Motor, Richard Colliver.
Our market share was 11.6 percent in April -- that was the highest in seven or eight months, since it shot up with the cash-for-clunkers program, Hojo said.
He added, however, that Honda expected competition to remain tough in the United States this year, with Toyota extending its heavy discounts into a third month to offset any damage from its quality crisis.
Hojo said Honda planned to keep its sales incentives at around $1,400 per vehicle in the United States, flat from last year but at least 40 percent higher than what it used to spend about a decade ago.
In Europe, Hojo said Honda expected its 250,000 units-a-year UK factory to work at about 55 percent of capacity, up from 40 percent last year, with production reaching 137,000 cars.