Why aren’t automakers welcoming the first signs of cooling commodity prices?, Auto News, ET Auto


Although the prices of a handful of commodities have started to fall, industry experts doubt they will see a significant change in the situation in the months to come.

New Delhi: The cost of producing a vehicle over the past 12 months has skyrocketed due to rising commodity prices, but some of them are showing signs of slowing down.

Copper prices, often used as an indicator of global economic health, slipped in June and traded below $ 9,100 / tonne on China’s measures to curb the rise in prices and the strengthening of the dollar. In a rare move, China has announced a plan to sell state reserves of copper, aluminum and zinc, in a bid to curb a sharp rise in commodity prices.

The global decline in base metal prices was also reflected in Indian futures markets. At the Multi Commodity Exchange of India (MCX), the price of copper had corrected 7.29% in mid-June. Since the beginning of July, prices have been tight between 730 INR and 716 INR.

Notably, the non-ferrous metal fell more than 11% after hitting a record high of INR 797.5 on May 10.

Copper rate (per kg) vs Months
Copper rate (per kg) vs Months

Likewise, the prices of palladium and rhodium fell by more than 11% and 36% respectively in July.

Although the prices of a handful of commodities have started to fall, industry experts doubt they will see a significant change in the situation in the months to come.

According to data from SIAM, the price of copper has increased from around USD 10,200 per tonne in May 2021 to around USD 9,600 per tonne in June 2021. However, about a year ago, in June 2020, copper prices copper were around $ 5,800 per tonne.

“Copper prices are still about 66% higher than they were a year ago. Businesses are already strained by the very high prices of raw materials, as the prices of steel, which is a major material for the manufacture of vehicles, will continue to rise unabated in June 2021. We hope that commodity prices will moderate sooner or later, in the general interest of the auto industry, ”said Rajesh Menon, SIAM’s managing director at ETAuto.

As commodity prices continue to support their bull run from the depths of the pandemic, in steel-dominated industries, such as automobiles, its cascading effect becomes much more pronounced across the chain. supply.

According to Shashank Srivastava, Senior Executive Director, Maruti Suzuki, there has been a dramatic increase in material costs over the past 12-14 months, especially steel and precious metals. The country’s largest automaker has pointed out that steel prices have risen from INR 38 per kg to INR 68 per kg while rhodium has risen from INR 19,000 per gram to around INR 66,000 per gram.

“So far, only a small part of this increase has been passed on to consumers. We have decided to increase the prices of all models and it is unlikely that a small change in material costs will change this situation, ”Srivastava told ETAuto.

Hot Rolled Coil (HRC) and Cold Rolled Coil (CRC) are two varieties of flat steel widely used in industries such as automotive, home appliance and construction. Thus, any rise in steel prices impacts the prices of vehicles, consumer goods and construction costs.

In addition, rhodium and palladium are used in catalysts and their demand has increased significantly due to the introduction of more stringent emission standards around the world.

Raw material costs make up a large percentage of the cost of automotive OEMs, which makes forecasting particularly important. The variety of basic inputs for automakers has increased with the development of products such as advanced batteries, biofuels and synthetic chemicals. These products subsequently created new growing markets for raw materials such as cobalt, lithium, nickel and used oils.

Expressing similar views, ACMA President Deepak Jain said it was very premature to conclude anything on such short-term swings. “In the short term, we believe the situation will remain volatile, especially due to the supply problem due to the shortage of chips, the cost of inputs will remain high. Rising logistics costs will continue to put pressure on the industry, ”Jain said, adding that the container shortage situation may ease around the second quarter, but that may not have a very big positive impact as the India’s logistics cost remains high.

With input costs rising, companies such as Maruti Suzuki India, Honda and Tata Motors have already announced that they will increase prices for their product portfolio in the September quarter. In addition, soaring bulk shipping costs are further aggravating the situation.

“Our input costs keep rising and few of us can raise prices as quickly as those costs rise. At the moment, we can’t keep up. On the other hand, materials outsourcing lower costs add higher transportation costs, with often fluctuating exchange rates making the situation worse, ”an industry expert said on condition of anonymity.

Why aren't automakers welcoming the first signs of cooling commodity prices?
Ocean freight rates have increased steadily since July 2020 and have reached such levels that automakers have found it almost impossible to maintain normal business operations. Due to the realignment of global trade routes after COVID, companies are also seeing delays in container arrivals, leading to shortages.

As manufacturing accelerates after the second wave of COVID-19 in the second quarter, SIAM DG said, it is important for container availability to normalize.

“The first quarter cannot be compared at this time, as most businesses have closed their doors and therefore the impact of shortages, if they continue, could be felt in the coming months. With government intervention, Discussions are underway with the liners to increase the availability of Containers. We sincerely hope that this shortage of Containers is temporary ”, underlined Menon.

OUTLOOK

In April, the World Bank’s Commodity Price Outlook Report indicated that 2021 will be a broad recovery for all commodities in general, after which there will be a decrease in 2022.

Aluminum prices are expected to increase by around 29% in 2021, before falling 7% in 2022. Copper prices are expected to increase by an average of 38% in 2021 compared to last year. Precious metal prices are expected to fall in 2022 as investment demand recedes.


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