Russia’s war could escalate car prices and shortages

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DETROIT – BMW has halted production at two German plants. Mercedes is slowing down work on its assembly plants. Volkswagen, warning of the halt in production, is looking for alternative sources of spare parts.

For more than a year, the global auto industry has suffered a catastrophe computer chips shortage And other vital parts that slashed production, slowed deliveries, and sent prices for new and used cars Rising beyond the reach of millions of consumers.

Now, a new worker – Russia’s war against Ukraine – He threw another hitch. Very important electrical wires, made in Ukraine, suddenly became out of reach. With buyer demand soaring, materials becoming scarce, and war causing new disruptions, car prices are expected to head upwards well into the next year.

The damages of the war to the automobile industry first appeared in Europe. But it is likely that US production will eventually be affected as well if Russian exports of metals – palladium catalytic converters To nickel for electric car batteries – broken.

“You only have to miss one part until you can’t make a car,” said Mark Wakefield, co-head of the global automotive unit for consultancy Alex Partners. “Any bump in the road becomes either a disruption to production or a largely unplanned increase in cost.”

Supply problems have plagued automakers since the pandemic broke out two years ago, at times closing factories and causing vehicle shortages. The strong post-recession recovery has caused car demand to outpace supply – a mismatch that has pushed prices of new and used cars up dramatically well beyond high general inflation.

In the United States, the average price of a new car increased 13% last year, to $45,596, according to Edmunds.com. Average prices used are up much more: it’s up 29% to $29,646 as of February.

Before the war, S&P Global expected global automakers to build 84 million cars this year and 91 million next year. (By comparison, they built 94 million in 2018.) Now you’re expecting less than 82 million in 2022 and 88 million next year.

You only have to miss one part so you can’t make a car.

– Mark Wakefield, Global Automotive Unit of Alix Partners

Mark Folthorpe, CEO of S&P, is among analysts who believe that the availability of new cars in North America and Europe will remain very tight – and prices will remain high – until 2023. The auto market will intensify the demand for used cars and keep those prices high as well – which is Which bans a lot of families.

Ultimately, high inflation across the economy – for food, gasoline, rent and other necessities – is likely to leave a large number of ordinary buyers unable to afford a new or used car. request then from. And so, in the end, prices.

“Until inflationary pressures begin to erode consumer and business capabilities, it will likely mean that those who are willing to buy a new car, will be willing to pay top dollar,” Folthorpe said.

One of the factors behind the gloomy outlook for production is the closure of car plants in Russia. Last week, French carmaker Renault, one of the last automakers to continue building in Russia, said it would suspend production in Moscow.

It hurt Ukraine’s transformation into a besieged war zone, too. Wells Fargo estimates that 10% to 15% of the core harnesses supplying automobile production in the vast European Union are made in Ukraine. Over the past decade, auto and parts manufacturers have invested in Ukrainian factories to reduce costs and get closer to European factories.

The lack of wires has slowed factories in Germany, Poland, the Czech Republic and elsewhere, prompting S&P to cut its forecast for worldwide auto production by 2.6 million vehicles for this year and next. The shortage could reduce German car exports to the United States and elsewhere.

Wire harnesses are bundles of wires and connectors that are unique to each model; It is not easily re-sourced to other maker parts. Despite the war, equipment makers such as Aptev and Leoni were able to intermittently reopen factories in western Ukraine. Joseph Massaro, chief financial officer of Aptief, still admits that Ukraine “is not open to any kind of normal business”.

Dublin-based Aptiv is trying to move production to Poland, Romania, Serbia and possibly Morocco. But the process will take up to six weeks, leaving some automakers short of parts during that time.

“In the long term, we will have to assess whether and when it makes sense to return to Ukraine,” Massaro told analysts.

BMW is trying to coordinate with its Ukrainian suppliers and is developing a wider network of parts. The same is true for Mercedes and Volkswagen.

However, finding alternative supplies may be next to impossible. Most parts factories are operating near capacity, so a new workspace has to be built. Companies will need months to hire more people and add shifts.

“The process of training to create a new workforce is accelerating — it’s not an overnight thing,” Folthorpe said.

Folthorpe said he expects supplies to be further reduced from both Ukraine and Russia. Ukraine is the world’s largest exporter of neon, a gas used in lasers that etch circuits on computer chips. Most chipmakers have a six-month supply; Late in the year, it can shorten. This will exacerbate chip shortages, which before the war were delaying production more than automakers expected.

Similarly, Russia is a major supplier of raw materials such as platinum and palladium, and they are used in catalytic converters to reduce pollution. Russia also produces 10% of the world’s nickel, which is a key component of electric car batteries.

Mineral supplies from Russia have not yet been closed. Recycling may help alleviate the shortage. Other countries may increase production. And some manufacturers stockpiled the metal.

But Russia is also a large aluminum producer and exporter of iron ore used to make steel. Almost 70% of iron ore imports into the United States come from Russia and Ukraine, so steelmakers will need to switch production from Brazil or use alternative materials, Alex Partners says. Meanwhile, steel prices have risen sharply from $900 a ton a few weeks ago to $1,500 now.

So far, negotiations for a ceasefire in Ukraine have gone nowhere, and the fighting has continued. The upsurge of the new virus in China could also cut off supplies. Industry analysts say they don’t have a clear idea of ​​when parts and raw materials will flow into vehicle production normally.

Even if a deal to stop the fighting is negotiated, sanctions on Russian exports will remain in place even after a final agreement is reached. Until then, supplies will not start flowing normally. There will be “more booze due to the disruption that is going to occur in the pervasive supply chains,” Folthorpe said.

Wakefield also noted that due to intense pent-up demand for vehicles worldwide, even if automakers restart full production, the process of building enough vehicles would be a long-running process.

When might the world produce enough cars and trucks to meet demand and keep prices low?

Wakefield does not state that he knows.

“We are in an environment of rising prices, a constraining environment (production),” he said. “This is a strange thing for the auto industry.”

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