Lower commodity prices
So far in this series, we’ve seen how the recent decline in the U.S. Dollar Index will benefit US-based automobile companies. In this part, we’ll see how the recent correction in commodity prices, especially steel, will benefit all automobile companies. According to estimates, raw material costs make up more than 45% of a vehicle’s production costs.
Lower steel prices
On average, an automobile is 47% steel, 8% iron, 8% plastic, 7% aluminum, and 3% glass. Other materials account for the remaining 27%.
Approximately 22% of an automaker’s operational costs depends on steel. The automobile industry uses higher grades of steel like galvanized steel and high strength steel for the vehicle’s body. These products are costlier compared to standard grades of steel.
The above chart shows the trend in spot prices of hot rolled (or HR) steel. HR coils are the most standard form of steel. At times, HR prices act as a benchmark for other grades of steel. Prices of most steel grades have corrected in the last couple of quarters. However, automobile companies have long-term contracts for their supply of steel products. This means there’s a time lag before they can enjoy the full benefits of lower steel prices.
Ford expects its raw material costs to decline in 2Q15 on the back of the correction in commodity prices. Unit production costs for other companies like Honda Motors (HMC) and Tesla Motors (TSLA) could also come down.
Ford currently forms 2.65% of the Consumer Discretionary Select Sector SPDR ETF (XLY).
Higher aluminum content
Lately, automobile companies have shown a preference for aluminum in their automobile bodies. Aluminum is lightweight compared to steel and helps automakers reduce the weight of their vehicles. This increases a vehicle’s fuel efficiency.
Ford and Toyota Motor (TM) are planning to replace steel with aluminum in some of the structural parts. Aluminum prices have been steady so far in 2015.
You can learn more about the automobile industry by visiting our Autos page.