The war in Russia could further escalate car prices and shortages

For more than a year, the global auto industry has been grappling with a catastrophic shortage of computer chips and other vital parts that has shrunk production, slowed shipments and sent new and used car prices skyrocketing for millions of consumers.

Now a new factor – Russia’s war against Ukraine – has posed another obstacle. Critical electrical wires, made in Ukraine, are suddenly out of reach. With high buyer demand, material shortages and war causing new disruptions, vehicle prices are expected to continue rising well into next year.

The war damage to the auto industry first appeared in Europe. But U.S. production is also likely to suffer at some point if Russian exports of metals — from palladium for catalysts to nickel for electric vehicle batteries — stop.

“You only have to leave one part out to not be able to build a car,” said Mark Wakefield, co-head of global automotive practice at consulting firm Alix Partners. “Every bump in the road becomes either a disruption to production or a completely unplanned increase in costs.”

Supply problems have plagued automakers since the pandemic broke out two years ago, at times closing factories and causing vehicle shortages. The robust recovery from the recession meant that demand for cars far outstripped supply – a mismatch that has sent new and used car prices soaring well above the generally high level of inflation.

In the United States, the average new car price rose 13% last year to $45,596, according to Edmunds.com. Average used prices have risen far more sharply, up 29% in February to $29,646.

Before the war, S&P Global had forecast that global automakers would build 84 million vehicles this year and 91 million next year. (By comparison, they built 94 million in 2018.) Now the forecast is less than 82 million in 2022 and 88 million next year.

Mark Fulthorpe, an executive director at S&P, is among analysts who believe that new car availability in North America and Europe will remain very tight — and prices high — well into 2023. vehicle market will intensify the demand for used cars and also keep these prices high – unaffordable for many households.

Ultimately, high inflation across the economy – for groceries, gas, rent and other necessities – is likely to leave a large number of ordinary buyers unable to afford a new or used vehicle. Then the demand would drop. And finally the prices.

“Until inflationary pressures start to really undermine the ability of consumers and businesses,” Fulthorpe said, “it will likely mean that those who are inclined to buy a new vehicle will be willing to pay top dollar.” “

One factor behind the deteriorating outlook for production is the closure of auto plants in Russia. Last week, French automaker Renault, one of the last automakers to build in Russia, said it would end production in Moscow.

The transformation of Ukraine into a contested war zone has also hurt. Wells Fargo estimates that 10% to 15% of the key wire harnesses that power vehicle production in the vast European Union were made in Ukraine. Over the past decade, automakers and suppliers have invested in Ukrainian factories to contain costs and gain proximity to European plants.

Wire shortages have slowed factories in Germany, Poland, the Czech Republic and elsewhere, prompting S&P to cut its forecast for global auto production by 2.6 million vehicles for this year and next. The bottlenecks could reduce exports of German vehicles to the United States and elsewhere.

Harnesses are bundles of wires and connectors unique to each model; They cannot simply be outsourced to another parts manufacturer. Despite the war, tableware makers like Aptiv and Leoni have managed to sporadically reopen factories in western Ukraine. Still, Joseph Massaro, Aptiv’s chief financial officer, acknowledged that Ukraine “is not open to any kind of normal commercial activity.”

Dublin-based Aptiv is looking 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 run,” Massaro told analysts, “we have to weigh whether and when it makes sense to return to Ukraine.”

BMW is trying to coordinate with its Ukrainian suppliers and is casting a wider net for parts. Likewise Mercedes and Volkswagen.

However, finding alternative supplies can be nearly impossible. Most parts plants are almost at full capacity, meaning that new workrooms would have to be built. It would take companies months to hire more people and add work shifts.

“The training process to bring a new workforce up to speed – it doesn’t happen overnight,” Fulthorpe said.

Fulthorpe said he foresees a further tightening of material supplies 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 chip manufacturers have six months’ supply; At the end of the year they could run out. That would exacerbate chip shortages, which before the war had delayed production even more than automakers had anticipated.

Likewise, Russia is a major supplier of raw materials such as platinum and palladium, which are used in pollution-reducing catalysts. Russia also produces 10% of the world’s nickel, an essential component of EV batteries.

Mineral supplies from Russia have not yet stopped. Recycling could help alleviate the shortage. Other countries can increase production. And some manufacturers have put the metals in stock.

But Russia is also a major producer of aluminum and a source of pig iron, which is used to make steel. Almost 70% of US pig iron imports come from Russia and Ukraine, says Alix Partners, so steelmakers must switch to production from Brazil or use alternative materials. Meanwhile, steel prices have risen from $900 a ton a few weeks ago to $1,500 now.

So far, negotiations on a ceasefire in Ukraine have failed and fighting continues. A new virus wave in China could also affect parts supply. Industry analysts say they don’t have a clear idea of ​​when parts, raw materials and auto production will flow normally.

Even if a deal to suspend the fighting is negotiated, sanctions on Russian exports would remain in place until a final deal was reached. Even then, supplies would not flow normally. Fulthorpe said there will be “further hangovers due to disruptions that will take place in widespread supply chains”.

Wakefield also noted that due to intense pent-up demand for vehicles around the world, the process of building enough vehicles will be lengthy even after automakers resume full production.

When could the world produce enough cars and trucks to meet demand and keep prices down?

Wakefield doesn’t claim to know.

“We’re in an environment of rising prices, a (production) constrained environment,” he said. “It’s a strange thing for the auto industry.”

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Chan reported from London.

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