Comments from Detroit’s Big Three in the Financial Times appear obvious in the face of oil and fuel prices doubling. The Big Three and all U.S. car producers need to adjust the mix of vehicles from minivans and SUVs to smaller cars. Well, no surprise there. That has been obvious for the last year. Sales of small cars are rising in the U.S., while sales of pick-ups are declining. Car sales increased from 53 percent of all vehicle sales in April to 57 percent in May, the highest portion in 12 years. Small cars like the Yaris and Fit increased from 8 percent in May 2007 to 25 percent in May 2008.
The problem in Detroit is that they make an average $9000 pre-tax profit on a pick-up and only $3000 on the average car. The pick-up is a larger vehicle and costs more, so there is more room to pad the price. Buyers see a large vehicle and expect a large price (current massive discounts not withstanding), whereas buyers see a smaller vehicle and prices are intrinsically more competitive.
George Soros may believe the oil price is a bubble set to burst, but even he doesn’t see a return to sub $75/barrel anytime soon. High fuel prices are here to stay. Vehicle sales are down in terms of numbers and value, and they’re not expected to return to last year’s levels before 2009. But even then, what impact will this have on demand for steel, aluminum and the many other metals used in automotive stampings, castings, windings and forgings? As vehicle sizes come down, so does the demand for the metals required.
Ford’s best-selling F-150 pick-up weighs 6500lbs, and sales are dropping off the edge of a cliff. Ford’s new Focus weighs 2588 lbs, and sales have been so good that Ford is investing $3m in their Mexican plant to increase production of the even smaller Fiesta for the U.S. market. Even if sales rebound to 2006 levels next year, demand for steel could be half the level from earlier this decade. Aluminum usage could proportionally be expected to increase as fuel economy and CO2 emission legislation encourages carmakers to decrease vehicle weights. With the exception of nickel, cadmium and in time lithium, demand for the batteries of hybrid vehicles, we can expect the percentage of total metal demand coming from the automotive industry to remain reduced for a long time to come.