Metal Commodity Price To Eat Car Company Margins, If They Had Any

Cars and Drivers

Published: March 10, 2008 10:48 am

Ford (NYSE: F) is trading near its 52-week low at $5.75. GM (NYSE: GM) came within a dime of its nadir today, trading at $21.43. These figures are not very different from where the shares traded two years ago when ratings agencies said there was some real chance of both companies going into bankruptcy.

Adding to weak sales in the US due to the recession and high gas prices, auto firms are faced with another near-catastrophic increase in the cost of metals used in manufacturing. According to Reuters "commodity prices are rapidly escalating for many of the key components in cars, including a 24-percent increase in steel, a 73-percent increase in platinum, and a 10-percent increase in aluminum." A Lehman Brothers estimate is that this could ad $350 to the price of each car.

Some experts think car sales in the US could be as low as 15 million units this year, compared to 16.1 million in 2007. That could take $30 billion in sales that the car companies had last year completely out of the market.

Auto companies cannot increase retail prices to make up for the rising component costs. Most car companies are already offering incentives to move inventory off their lots.

The Ford and GM dreams of having North American profits in 2009 are now all but gone. The advantages of the UAW contract are already in place along with a multitude of other expense cuts. What is becoming clear is that none of that will be enough.

Douglas A. McIntyre

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