The Ford F-150 pickup truck
Previously in this series, we discussed how reducing fleet sales could have a positive impact on automakers’ profit margins. Meanwhile, another factor that bodes well for automakers is the recent correction in commodity prices. Prices for steel, copper, and aluminum have corrected steeply in the last couple of months. This trend should also reduce unit production costs for auto component manufacturers like Delphi (DLPH).
Automakers’ raw material costs
As per estimates, raw material costs make up more than 45% of a vehicle’s production cost. Steel, aluminum, and copper are widely used in vehicle manufacturing.
Approximately 22% of an automakers’ operational cost depends on steel. The automobile industry uses higher grades of steel products like galvanized steel and high-strength steel for a vehicle’s body. These products are costlier compared to standard grades of steel. Lower steel prices should benefit companies like Fiat Chrysler (FCAU) and Honda Motors (HMC).
Aluminum prices correct
The chart above shows the recent correction in aluminum prices. The all-in aluminum price, which includes both aluminum prices and physical premiums, has corrected sharply. This correction should be music to Ford’s (F) ears, as the company has placed huge bets around its full-aluminum-body F-150. The vehicle could clock in higher profits for Ford in the coming months as unit production costs come down.
Please note that Ford currently forms 2.43% of the Consumer Discretionary Select Sector ETF (XLY).
However, automakers are still reeling under the impact of a strong US dollar. We’ll discuss this in detail in the next part of this series.