Rising Metals Costs Flattening the Tires on Automotive Companies

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There has been an awful lot of coverage, both here and in more famous columns (you notice I didn’t say better just more famous) about commodity price increases. You can’t open a newspaper or turn on the TV without seeing yet another record high price for precious metals, or agricultural products, or steel. But we have not reported so regularly on the effect these price increases are having so it was interesting to come across various sources discussing the impact on the US automotive industry.

The struggling big three automakers are being hit by about $350 raw material cost increases per vehicle compared to the average for 2007 and $421 per vehicle compared to February of last year according to Lehman Brothers.

The cost increase figures per OEM vary with estimates at GM of $892m and Ford $459m depending on the product range. Key component prices are continuing to rise with steel up 24%, platinum used in catalytic converters up 73% and aluminum up 10%. The average vehicle in the US weighs just under 4,000 pounds. Steel accounts for 2,200 pounds making it the most expensive single component in dollar terms, followed by aluminum.

It is unlikely US automakers will be able to pass costs on as they face the worst sales market in a decade. Tier one automotive suppliers are facing the same problems but in a break from the past, many are passing on these costs to their OEM or walking from the contracts – Timken, automotive component and steel supplier to major OEM’s, was reported as saying at a recent Reuter’s summit.

Nor is product substitution much of an option. Following surging platinum pricing, US auto makers have instigated a transition to palladium for use in catalytic converters on engines. Many of these transition strategies are 90% complete just as palladium prices have increased, up 47% since October 2007.

Sales performances are mixed however, as GM dropped 13% and Ford 6.9% Honda sales are up 4.9% from a year earlier but they will all be fighting for market share in what is predicted to be the worse automotive sales year since 1998.

Even a recent strike at an axle manufacturer which halted production at six GM plants, four of which make GM’s light pick up did not phase GM’s Mark LaNeve VP of Sales “It will be a long time before we run out of pick-ups to sell” – sure will, GM have five months inventory in stock!

US automakers are – not surprisingly – looking at alternative locations to make their cars. They can’t directly impact the material costs but they can affect the labor costs. Though production in the US is on a decline, production in Mexico is rising at 15% annually. GM, Ford, Chrysler, Nissan and VW, Mexico’s big five producers, plan further expansion plans. More intriguing is a new joint venture between Mexico’s Elektra and China First Auto due to start production in 2010 of a small car, initially for Central America but of course via NAFTA the US market is accessible tax free.

OEM’s have tried via product substitution to avoid some of the cost increases but progress has been slow. So far weight reduction has been a bigger driver than product substitution, for example thinner steel sheet for bodywork panels, aluminum instead of steel bodies, aluminum cables instead of copper in some battery connections. But even though aluminum wire harnesses are technically feasible they have not been adopted as a substitute for copper. With few options available to take costs out of existing designs OEM’s are likely to begin a new wave of innovation around design and material selection, particularly for the mass market.

–Stuart Burns

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