Cars keep getting pricier and the commodity boom makes it worse

Worries ahead: Autonomous robots assemble an X model SUV at the BMW manufacturing facility in South Carolina. BMW expects US$1.2bil headwinds from rising commodity prices for the year. ─ Reuters

MANCHESTER: Cars are back in vogue courtesy of the pandemic. They’re also getting more expensive, thanks in part to surging commodity prices.

Many of the essential ingredients for automakers, such as copper, steel and aluminum, are hitting or approaching record highs this year as the lagging supply can’t keep up with stimulus-driven demand. The Bloomberg Commodity Spot Index jumped to its highest since 2011, with metals up 21% so far this year.

Should the current rally morph into a supercycle, rising car prices could forebode inflation across the board. Analysts at JPMorgan Chase & Co estimate the price of an auto’s raw materials have climbed 83% in the year through March. Those pieces typically make up about 10% of the cost of building a vehicle, meaning the price tag for a US$40,000 (RM164,499) car would have to increase 8.3% to offset the rally, analysts for the bank wrote.

“We’re definitely feeling the commodity headwind, ” Jim Farley, chief executive officer of Ford Motor Co, said last week. “We’re seeing inflation in a variety of parts of our industry, kind of in ways we haven’t seen for many years.”

Carmakers usually struggle to pass on higher costs, but demand is booming as major economies reopen and many consumers continue avoiding public transportation. The global semiconductor shortage also is inhibiting production, keeping inventory tight and driving up vehicle prices.

In the US, car supply is so limited that rental companies are resorting to buying used vehicles at auction rather than new ones.

The main contributor to higher commodity costs hitting the industry is the steel needed for chassis, engines and wheels. The metal’s recent rally has smashed records as China – by far the biggest producer – took measures to curb output.

The boom in copper prices adds to the costs of electric vehicles (EVs) just as the industry implements an energy transformation to meet tighter emissions standards. EVs use nearly 3½ times more copper than gas guzzlers because of the larger amount of wiring inside.

The increases may hurt automakers like Tesla Inc and Volkswagen AG that are trying to make EVs more price-competitive with traditional cars. They also may encourage automakers to explore alternative chemistries for their EV batteries. The majority of cells use some combination of lithium, cobalt and nickel, which have jumped a minimum of 47% each in the past 12 months.

Ford and BMW AG were among those investing US$130mil (RM534mil) this month in battery startup Solid Power Inc, which is working on cells that would remove the need for those metals, leading to a 10-fold decline in power pack costs.

BMW expects headwinds from rising commodity prices of as much as €1bil (US$1.2bil or RM4.93bil) for the year, chief financial officer Nicolas Peter said during an earnings briefing. The luxury-car maker singled out rhodium, steel and palladium as particular worries in the coming months.

BMW is working to be less exposed to price squeezes in raw materials. From 2025, it plans to produce vehicles on a new architecture that will allow recycling of materials such as steel and aluminum to make new cars. “We’re seeking partnerships” to refine the necessary technologies, CEO Oliver Zipse said. ─ Bloomberg

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