A 20 per cent increase in the price of steel is squeezing earnings in Irish engineering and industrial companies and is threatening to halt production in some businesses, according to the body representing the sector.

Mr Paul Kelly, director of the Irish Engineering Enterprises Federation (IEEF), said yesterday that steel prices had increased by between 20 per cent and 40 per cent already this year. He warned that a further 20 per cent hike was likely over the next six months.

"Steel is the primary raw material for large parts of the engineering sector," he said. "These price increases are driving up one of the major input costs, putting increased pressure on engineering companies which are already operating in a difficult market.

"Price increases are only part of the equation. It has reached the stage where many companies are experiencing supply problems. There are late deliveries, suppliers' reluctance to enter into long-term supply contracts and an unwillingness to guarantee supplies.

"There is a risk that in some cases, companies will have to cease production due to a lack of raw materials."

Mr Kelly added that the uncertainty over supplies was forcing companies to stockpile the raw material, which added further to the cost burden.

Mr Domhnall MacDomhnaill, managing director of True Temper, a Cork-based tool manufacturer, said yesterday that the problem was partly rooted in booming demand for steel in China. "The Chinese have been mopping up supplies of steel," he said.

He added that another key factor was an EU-US trade dispute that had resulted in Brussels imposing tariffs on US steel imports. These penalties are increasing every month.

"We operate in a very competitive market, so we don't have the option of increasing our prices, so we are losing money in the sense that our profits are being reduced," Mr MacDomhnaill, said yesterday.

He estimated that his own business was paying 24 per cent more for steel than it was last September. He said he wanted the Government to formally ask the European Commission to drop the steel tariffs.

"There are many businesses in Ireland dependent on US imports as part of their trade," he said. "The competitiveness of these companies is being hit by import tariffs."

Mr Kelly said the IEEF wanted the Government to take a number of steps to alleviate the problem. "The Irish Government should request the European Commission to monitor the situation and ensure the principles of free trade apply to steel products," he said.