TORONTO, OTTAWA -- Auto makers and steel companies are heading for a showdown over surcharges that steel makers want to impose to compensate for soaring prices on natural gas, scrap steel and other commodities.

Steel prices are surging but so are prices for scrap, natural gas and coal, to the extent that several steel makers in both Canada and the United States have announced surcharges of $25 (U.S.) a ton and are threatening another levy of $50 or more beginning next month, steel industry sources said yesterday.

Auto makers are balking. "If any non-negotiated extra charges (example: premium freight, mill surcharges) are included on your invoice, your invoice will be rejected and will not be paid," Beverley Snyder, purchasing manager for metals at General Motors of Canada Ltd., said in a memo to some steel suppliers this week.

GM Canada spokesman Stew Low described the memo yesterday as an administrative reminder to suppliers that invoices must conform to original contracts.

He pointed out, however, that the auto maker negotiated agreements with steel makers last year that settled prices for 2004.

"If there are deviations to that, that has to be negotiated with General Motors," Mr. Low said yesterday. "The price is the price unless both parties agree to change what was previously negotiated."

Gord Forstner, a spokesman for Dofasco Inc., acknowledged yesterday that the company has pushed through surcharges on steel sold on the spot market and is "working it through now with our contract customers." He wouldn't discuss specific negotiations, but Hamilton-based Dofasco's contract customers include General Motors Corp., the Chrysler group of DaimlerChrysler AG and the Honda of Canada Manufacturing division of Honda Canada Inc.

One Bay Street analyst warned yesterday that auto makers and steel mills are on a collision course.

"We have heard of mills planning to halt shipments if surcharges are not paid," CIBC World Markets steel industry analyst J.P. Benson said in a note to clients yesterday.

"In the short term, the steel mills appear in the driver's seat, but we expect some mills will break ranks on surcharges in the interest of protecting long-term relationships."

Tim Huxley, vice-president of corporate affairs for Stelco Inc., said he doubts there will be a collision over the issue, especially when it comes to contract business, which involves long-standing relationships between steel makers and customers.

"I don't think it's a collision course in Canada. I think it may be in the U.S.," added one steel industry source. "The U.S. guys are trying to take a tough stand and they're being led by U.S. Steel."

United States Steel Corp. has announced a $30-a-ton surcharge on all shipments beginning Feb. 1, Daniel Roling, steel industry analyst for Merrill Lynch & Co. Inc., said in a research note yesterday.

Given that North America is essentially one market for both auto makers and steel companies, fallout from a battle between U.S. mills and auto companies will have an impact on Canada.

An executive at one Canadian steel service centre said yesterday that surcharges are being imposed only on spot market customers, not on customers with contracts already in place.

Any spot customers refusing to pay the surcharge won't get steel, he said.

That affects mainly smaller stamping companies, but if they refuse to pay, they can't go elsewhere for their steel because the market is so tight, the source said.

One observer familiar with the dispute noted that auto parts makers are feeling squeezed by the refusal of customers such as GM to pay surcharges.

"The car companies are always trying to squeeze them on price -- every year they're looking for deductions -- and so it's very difficult for them to pass on increases and that's why this [dispute] is generating such a high state of emotion in Canada, and probably in the United States," the observer said.

"It's pretty tough for them to absorb. . . . They are between a rock and a hard place."

GM drew the ire of parts makers in the 1990s for ripping up contracts with parts makers.

Annual reductions of 3 per cent or more are now a standard negotiated feature of contracts between parts makers and the Big Three auto companies.

Steel demand throughout the world is so strong that Canadian mills have put customers on allocation, which means buyers only get a percentage of the steel they want.

The dispute comes at what should be a time of recovery for steel makers that have been battered by years of low prices.

Prices for April delivery of hot-rolled steel are being quoted at $410 a ton, Mr. Roling said in his note, up from $320 a ton in December and $260 last May.

But natural gas prices jumped 22 per cent in December from November levels. Prices for a key grade of scrap soared to $153 a ton last month from $95 in January, BMO Nesbitt Burns analyst Randy Cousins said in a report this week.

For more than a decade, steel makers absorbed cost increases, Mr. Forstner of Dofasco said.