Car Prices to Rise

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Speaking at a shareholders’  meeting in Japan, Nissan’s Carlos Ghosn warned that car prices would rise regardless of the strength of the market because of the soaring cost of steel. Prompted by Baosteel’s agreement with Rio Tinto to accept a near doubling in iron ore prices, Ghosn was warning that all steel makers would feel the increase in one way or another and in turn they would pass this on to automakers around the world. Earlier this year, we similarly reported that the price of steel could hurt the price of cars.

We are not so sure the knock on effect of Rio’s record breaking price increase is quite so dramatic, though. Rio’s contract sales deal with Baosteel is FOB Pilbara and the increase over the price Vale agreed with the Chinese earlier this year was justified on the basis that freight rates from Australia to  Asia are very much less than from Brazil. The total landed cost for the Chinese (and Japanese, Korean, Taiwanese, etc) steel mills will therefore be no more on material purchased from Rio (and probably BHP which is still in negotiation) than it is from Vale. Indeed with freight rates for bulk carriers rising this year it may actually be cheaper than the Brazilian material.

One has to sympathize with Carlos Ghosn. Automakers like Nissan are caught between falling sales driven by a weak consumer market in the west, the worldwide move to smaller more economical cars due to the high cost of fuel (smaller cars mean lower profits per unit sold) and the rising cost of not just steel but plastics and non ferrous metals. Steel price increases alone are estimated by Nissan to result in a 3% increase in car costs this year.

Better order that convertible you had your eye on for the summer now, before the price rises!

–Stuart Burns

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