Which way for vehicle commodity prices in 2010?

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While doom and gloom faced auto makers sales and marketing staff in 2009, their colleagues in purchasing and money management should have been upbeat. Key commodity prices collapsed between June 2008 and January 2009 enabling astute buyers and money managers to lock in low prices for the whole of the year. 
 
Steel and plastics prices were both down 65% on 2008; aluminium dropped 50%. Even crude oil prices – averaging $90/b in 2008 fell to $60/b in 2009. Depending on when they made their contracts – or how well they hedged  – car makers could have made spectacular material cost savings  per unit in 2009.   
 
Motor vehicles use four essential input commodities: steel, aluminium, plastics and oil. They all have one factor in common: volatile prices, whose impact auto makers try to minimise by hedging,  purchasing and volume. In 2009 the price collapse worked in their favour. But with 30% of global vehicle capacity still unused, lower volumes and relentless demands for cash, can auto makers cope as 2010 shapes up to be one of the most difficult auto markets to forecast?
     

A 2008 study for World Auto Steel – a consortium of major automotive steel producers – by the University of California gave the average weight and materials mix for three types of cars: a car made of traditional mild steel, another with a high aluminium content and one using advanced steels. Leaving aside the manufacturing costs, which could be higher for both aluminium and advanced steels, the combined potential materials costs savings, by buying at the best time rather than the worst time in 2009, were between $725 and $800 per vehicle (see table). Savings on this scale could offset some of the costs in sales and marketing.

Steel

Steel accounts for between 40% to 60% of a car’s total weight, even in one described as having an ‘aluminium’ bodyshell. Less used is the ‘mild sheet steel’ that consumers traditionally associate with motor vehicles. Almost 40% of vehicles now employ the ‘Ultra-light steel body structure’ (ULSAB) using advanced high strength steel (AHSS) – more expensive to buy than traditional mild steel, but still cheaper than aluminium, and, with comparable weight savings, AHSS is less expensive in manufacture. Overall the entire materials and ‘body in white’ manufacturing cost for AHSS is in the $9,000 to $10,000 per unit range, which is on a par with traditional mild steel. 

Between July 2008 and January 2009 the price of steel fell 65%, down to $1,100/tonne, on the back of the global recession. Throughout 2009 production slowly picked up, but, with between 25% – 35%

Steel prices in 2009 Source:LME

of global capacity out of use, prices remained below long run trend, only reaching $1,800 by the year-end. Prices are expected to rise only slightly in 2010 on the back of demand in China, and other Asian markets.

One special case is scrap steel – particularly ‘shredded’ cars – which can substitute for some newly made steel after smelting. In July 2008 this was selling at $600/tonne and being shipped to the far east. When demand fell, so did the price, down to $155/tonne by January 2009. It recovered steadily throughout 2009 and now stands at $335/tonne. In the US and EU prices could rise slightly if the glut of scrap steel from scrappage schemes is used up.     

While the evidence is that steel prices are set to be flat or up just a little in 2010, auto makers may not be cheering. It signals the underlying level of demand for steel is weak, and in turn that probably

Low grade steel prices in the doldrums

means weak consumer demand for vehicles and other consumer durables. 2009 offered great savings which are unlikely to repeat themselves in 2010. Auto makers could buy steel at $1,100/tonne in Q1 2009 which had risen to $1,800/tonne by Q4 2009. In cash terms a car maker could have saved as much as $575 per car by buying steel at the best price in 2009.

Aluminium

For some years auto makers have been turning to aluminium, as a substitute for steel, in an effort to reduce vehicle weight. Although recent studies suggest aluminium’s total emissions reduction claims are overstated, converts to its virtues suggest that a 10% reduction in vehicle body weight leads to a 5% reduction in fuel and lower emissions.

In the second half of 2008 aluminium dropped almost 50% in price down to $1,100, due to a mix of recession and overproduction, mostly in China – the globes largest producer. Throughout 2009 global capacity was mothballed allowing the price to recover slowly to its long run trend – around $2250/tonne.

Given that the average ‘aluminium rich’ car contains about 300 kilos of aluminium, an astute materials buyer could have saved up to $325 per vehicle. For steel focused cars the savings potential was still significant: $85 – $100 per body.

 Plastics

According to US researchers the average car contains 338 pounds of plastics and composites, 8.4 percent by weight. This is up from 286 pounds in 2000 and 194 pounds in 1990. The 75% increase in plastic content in two decades underscores its importance to auto makers and suppliers.

The plastics price soared to almost $1,900/tonne in H1 2008 on the back of rising oil prices, transportation costs and restricted capacity. By Q1 2009 it had fallen to $650 and steadily climbed to its current level of $1115/tonne. For car makers the timing of their buying strategy was crucial. Keeping in mind that 1 tonne of material will end up in 6 cars on average, the potential cost difference between buying forward early in 2009 or late, was roughly $135 a car on plastics alone.

Oil

Oil prices are driven by a complex web of factors: producers, such as OPEC, who control supply, speculators who hoard stocks in the hope of future price rises, real world demand, exploration and production costs. The recession showed that, while domestic consumption of oil is relatively inelastic, industrial consumption is strongly linked to economic growth.

In the face of falling demand, OPEC successfully cut output even faster. The result was that the average price of an OPEC barrel actually rose 5% each month throughout 2009.

OPEC prices in 2009 Source: OPEC

It opened the year at roughly $40/b and closed it at almost $80/b. Way down on the dizzy heights of 2008 of over $100/b, but – at least for OPEC – going in the right direction.UK consumers could be forgiven for not noticing that the average price of oil had fallen by a third in 2009. UK supermarkets, arguably the cheapest unleaded pump prices available, hiked prices by an average of 2% a month throughout 2009.. In fact the chart below shows that OPEC prices have been on an upward trend for years.

OPEC prices rise…and rise…since 1997 Source: 2009

 Outlook:

Steel:

The key to steel prices in Europe and the US lies in China. There, the government stimulus package has caused demand to rise by around 25% year on year, way more than China’s own steelmakers can produce. Rising demand in China has two knock-on effects: potentially steep rises in iron ore and a rise in imported scrap. Iron ore price hikes will raise China’s steel output prices and potentially could dampen their output. Keep in mind that the demand could evaporate when China’s infrastructure stimulus package expires. A rise in scrap imports might help EU and US smelters to improve profitability – and could eliminate the glut caused by scrappage schemes. In turn, reduced supply could raise prices.

Metals analysts predict that the China led  revival of the global economy will trigger a rise in steel input prices. Iron ore price rises of between 30% to 50% are expected, which would reverse 2009’s 33% price cut. Coal has already jumped 30% and coking coal has risen by 13% so far in 2010. But, overcapacity and the glut of scrap steel does not mean that steel transaction prices will rise far, although global output is expected to increase by 10 per cent to 1.4 billion tonnes in 2010

Government investments in steel-intensive infrastructure and recovering consumption of consumer durables, supported by government stimulus and improving consumer and business sentiment, has prompted many steel producers to restart mills idled in late 2008 and early 2009. This too will dampen any transaction price rises.

Aluminium

In 2009, the world aluminium price averaged around US$1650 a tonne, 34 percent below the 2008 average price. This is the largest annual decline in aluminium prices on record, mainly as a result of consumption falling faster than production and stocks increasing to around 10 weeks of world consumption.

The LME aluminium futures price shows small increases from its January 2010 cash level of $2189. 3 month aluminium is $2,216 while 15 month is priced at $2,305 and 27 month at $2,365. These modest gains reflect the view that new demand can easily be met by existing unused capacity. More bearish sentiment is expressed by producers who suggest that 2010 production is expected to exceed consumption for the fourth consecutive year and, hence, stocks are forecast to increase further to around 8 million tonnes (12 weeks of consumption). Reflecting the continued increase in stocks and lower forecast import demand from China, the Australian aluminium price in 2010 is forecast to average around US$1950 a tonne, 18 per cent higher than 2009, but lower than its current price.

Plastics

Automobiles account for 36% of global demand for polyproylene, followed by electrical products (18%) and consummer appliances (13%). So the present outlook for slowly rising global demand – in the 2% to 3% range for 2010 -signals limited list price rises.

Two factors may limit these however. Firstly, China and other Asian producers invested heavily in extra capacity, which is currently under-utilised. If demand rises, supply may more than match it, putting downward pressure on price rises. Producer’s ‘list prices’ may not translate into transaction prices.

Secondly, rising oil and gas prices – the main ingredient of polypropylene resin – signal that producers will have only three options: become more efficient, raise prices or leave the industry. Although, historically, the polyproylene price closely tracks the crude oil price, there are a number of high-cost producers who may not be able to pass on costs to their customers.

On the basis of these forecasts, 2010 remains a year of opportunity for auto makers who can afford to buy forward at current prices. Potentially, they could see static materials costs coupled with rising sales volumes. Happy days!

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