Cars are becoming more expensive


Analysts estimate that the cost of raw materials for a car has risen by 83 % in the year to March. Cars are back in style as a result of the pandemic. They are also becoming more expensive, owing to rising commodity prices.

Many essential automaker ingredients, such as copper, steel, and aluminum, are at or near record highs this year, as lagging supply can’t keep up with stimulus-driven demand. The Bloomberg Commodity Spot Index has risen to its highest level since 2011, with metals up 21% so far this year.

If the current rally turns into a supercycle, rising car prices could presage broader inflation. According to JPMorgan Chase & Co. analysts, the cost of an automobile’s raw materials has risen 83% in the year through March.

According to the bank’s analysts, these components typically account for about 10% of the cost of building a vehicle. That’s implying that the price of a $40,000 car would have to rise 8.3% to compensate for the rally. “We are feeling the commodity headwind,” said Jim Farley, CEO of Ford, last week. “We’re seeing inflation in a variety of areas of our industry in ways that we haven’t seen in many years.”

Carmakers typically find it difficult to pass on higher costs, but demand is soaring as major economies reopen and many consumers continue to avoid public transportation. The global semiconductor shortage also impedes production, causing inventory to be scarce and driving up vehicle prices.

Because car supply in the United States is so limited, rental companies resort to purchasing used vehicles at auction rather than new ones. Steel, required for chassis, engines, and wheels, is the primary contributor to higher commodity costs affecting the industry. The metal’s recent rally has shattered records like China, by far the largest producer, has taken steps to limit output.

The rise in copper prices raises the cost of electric vehicles when the industry is undergoing an energy transformation to meet stricter emissions standards. Because of the more significant amount of wiring inside, EVs use nearly three and a half times as much copper as gas guzzlers, according to consultancy Wood Mackenzie.

The price increases may be detrimental to automakers such as Tesla and Volkswagen, who attempt to make EVs more cost-competitive with traditional vehicles. They may also encourage automakers to investigate alternative chemistries for EV batteries. The majority of cells use some combination of lithium, cobalt, and nickel. All of which have increased by at least 47 % in the last year.

Ford and BMW are among those who have invested $130 million in Solid Power. This battery startup is developing cells that will eliminate the need for those metals, resulting in a 10-fold reduction in power pack costs.

“They are looking to spread that risk,” said Caspar Rawles, Benchmark Mineral Intelligence’s head of price and data assessments. “Lithium and cobalt have no hedging.”

According to Chief Financial Officer Nicolas Peter during an earnings call on Friday, BMW expects rising commodity prices to cost the company up to 1 billion euros ($1.2 billion) this year. Rhodium, steel, and palladium have been identified as particular concerns for the luxury carmaker in the coming months.

Longer-term, BMW is working to reduce its exposure to price pressures in critical raw materials. The automaker intends to start producing vehicles on a new architecture in 2025, which will allow recycling materials such as steel, aluminum, and plastics to make new cars.

BMW CEO Oliver Zipse stated, “We’re looking for partnerships to refine the necessary technologies.” Stellaris NV, formed by the merger of Fiat Chrysler and PSA Group, noted that it needed to recover some of its higher costs, and the market has been supportive thus far.

“It’s difficult to imagine a better environment in which to pass on the impact of supply shock and price inflation to consumers who are effectively lining up to take delivery of their new car off the car carrier,” Morgan Stanley analysts wrote in a note. “It’s a seller’s market in the auto industry.”

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