New cars, up to 17% more expensive than before pandemic

Gone are those days where you could buy a car with less than 250 thousand pesos. The best known new sedans like the Versa They have a base price of 276,900 pesos; Vento, 259,990; Aveo, 255,200, and River, 259 thousand 900 pesos.

Traditionally, materials such as steel, aluminum and plastic resins were those that determined the cost of production of a car and its final price.

However, in the last two years, as a consequence of the lag in the production of some inputs and bottlenecks in the distribution network due to the pandemic, in addition to the migration towards the manufacture of electric cars, there are other materials that are putting pressure on the automotive industry to increase the price of their vehicles such as cobalt, lithium, nickel, zinc and magnesium.

According to the consulting firm Kaso y Asociados, from February 2020, before the pandemic, to September 2021, the price of cars in Mexico has increased 12%; SUVs, 15%, and trucks, 17%. This is due to pressures from higher commodity prices.

Rolled steel, essential for the manufacture of the body, soared 156% from February 2020 to September 2021.

Aluminum became 68% more expensive; plastics and resins, 41%; iron ore, 30%, and rubber, 13% in the referred period.

All this has caused the price of vehicles to be located above the inflation.

Armando Soto, CEO of Kaso y Asociados, explained in a forum that last year, as the opening of the economies progressed after months of confinement, it was thought that the supply of raw materials was going to stabilize.

However, the vaccination process has been uneven throughout the world and several countries that provide raw Materials they are far behind in controlling the pandemic, which makes raw materials and their availability more expensive.

In addition, the automotive industry faces higher logistics costs. A container is now priced seven times more than before the health crisis.

“We have seen important adjustments that we were not used to. The conditions are going to soften, but we are still going to live with this situation for a year, ”said Soto.

The price of cars in Mexico is also pressured by the lower production of subcompacts by semiconductor shortage, this being the best-selling segment in the market.

Steel

Last year, steel production declined worldwide as a result of the pandemic, except in China.

The auto industry restarted unit production in July 2020 and began to demand more steel, but steelmakers did not recover their manufacturing levels as quickly as other industries, nor were they able to reactivate around the world.

John Anton, Director of Pricing and Purchasing at IHS Markit, said the steel demand it recovered quickly, but production was slow, mainly in the United States and Europe, which caused a reduction in inventories and, therefore, a rise in costs.

“The price of steel has never been so high since 2011. There is a shortage especially for the automotive industry,” he explained.

In the United States, the metric ton of iron ore, that is, the raw material for making steel, is around $ 210, compared to $ 120 last year.

Steel manufacturers lack the ability to meet the increased demand on a global scale, as they have logistical limitations, as there is not as much capacity to export in ports and containers.

Demand is driven by manufacture of household appliances and toolsNot so much for the automotive industry, which still does not exceed pre-Covid production levels.

China also causes fluctuations in the market because of its high iron ore requirements and because it is the main steelmaker.

“There is a shortage of semiconductors, iron ore and many inputs for the production of goods. We are experiencing a supply crisis precisely at a time of peak demand and the result is an inventory crisis on a global scale, causing delays and price rises ”, explained Oxford Economics.

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Aluminum

The price of aluminum is around $ 3,000 per ton, almost double what it cost in 2020. This essential metal for lightening the weight of vehicles is trading at its highest level since 2008.

The economic recovery boosted the demand for aluminum, while the electricity crisis in Asia and Europe has reduced its production.

The rise in aluminum mainly affects the construction sector, but also to the manufacture of solar panels and electric vehicles.

China contributes about 57% of the world’s aluminum generation and production has been affected by new policies to reduce polluting emissions and save electricity, so mining companies have adjusted their production.

In the manufacture of aluminum, large amounts of tar, sulfur dioxide and fluoramine vapors, in addition to requiring a lot of electricity and gas consumption.

A possible coup in Guinea also triggered the alerts, since this African country is the second largest producer of bauxite, one of the main sources from which aluminum is extracted, so the paralysis of its exports threatens to deeply affect world supply.

Nemak, one of the leading manufacturers of aluminum components for Automotive industry, consumes large amounts of aluminum scrap and aluminum ingots as raw material.

To mitigate the risks related to the volatility of the prices of this input, the company established agreements with its clients in which the variations in the price of aluminum are transferred to the sale price of the components through a pre-established formula.

This directly impacts the production costs of a vehicle and its final price.

Also read: Lack of inventory sinks new car sales

Cobalt

The trend towards electrification of the automotive industry is also putting pressure on the prices of certain essential raw materials for the manufacture of electric batteries such as cobalt, lithium, nickel, zinc and aluminum.

Five years ago, 2 million electric cars were marketed in the world, but this number is estimated to reach 40 million units by 2040.

This represents a challenge for manufacturers, as they need to ensure the long-term supply of raw materials.

Cobalt is essential to make lithium-ion batteries from Tesla, Nissan and Chevrolet, so all three are exposed to price movement.

In the last year, the price of cobalt rose 80% and it is estimated that the demand will multiply by 11 by 2025, which can cause an effect similar to what happens with semiconductors: a high demand with little amount of raw material .

Currently, more than 60% of cobalt is mined in the Democratic Republic of the Congo, one of the poorest and most politically volatile countries in Africa, representing a risk.

Volkswagen has tried to negotiate a long-term agreement with cobalt suppliers to ensure a stable price for the next five years, but has not been successful.

Given this uncertainty in cobalt, several electric battery manufacturers are developing new technologies to use more lithium and nickel and less cobalt. This has made nickel a crucial new material for the industry, costing one sixth of cobalt and 20 times more abundant.

Nickel demand for the manufacture of electric batteries is expected to go from 40 thousand tons in 2016 to 220 thousand tons in 2025.

Unfortunately, this has driven the price increase of this material 24% during the last year, to settle at 19,845 dollars per ton.

Lithium

Demand for lithium is expected to increase to 779 thousand tons per year in 2025. And although it is a more abundant material than cobalt, there may also be a shortage in some years.

The price of lithium is at its highest level in the last three years, around 19 thousand dollars per ton.

Chile’s second-largest lithium producer, Albemarle, has warned that global supplies of the input are headed for a significant deficit if prices do not reflect the cost of financing massive expansions by producers to meet automotive demand.

Also read: Morena has plan B for the nationalization of lithium

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