Car prices expected to drop as raw material costs plummet

The ongoing cost increase of raw materials such as steel and lithium that have driven up car prices over the past year or more has come to an end, car makers have said. “Headwinds for raw materials have disappeared,” Thierry Piéton, Renault’s chief financial officer, said on the company’s first-half financial results call. “We are going into a period where costs should gradually get better.” Renault’s note of optimism about material costs was picked up by other car makers as they told financial analysts of a more settled environment after multiple price shocks delivered first by Covid and then Russia’s war on Ukraine. Other inflationary pressures remain, but there was a sense of relief that the bill of materials for each car was on a downward trajectory for a change. Renault has even acted on the falling raw material prices to make its cars cheaper, while promising investors it wouldn’t damage the company’s vastly improved profit margins. By way of reference, Renault CEO Luca de Meo singled out the newly facelifted Renault Clio and upcoming revamp of the Renault Arkana SUV. The price of the facelifted Clio E-Tech hybrid in the UK starts at £21,295, a £900 cut from the outgoing model. “When there is an opportunity to give some pricing back while continuing to improve margins, that is what we’ll do,” de Meo said. The falling price of lithium was a big talking point, both for the likes of Tesla selling exclusively electric cars and for more traditional players struggling to achieve anything close to price parity with combustion-engined cars. “Lithium prices were absolutely insane there for a while,” Tesla CEO Elon Musk said on his company’s earnings call. The price of lithium carbonate, the form of the metal that battery makers buy, has halved since November on the Shanghai Metals Market, a key trading platform. All this of course takes a while to filter through to the price of the car, given prices have to be agreed in advance with suppliers. “Typically, we see this coming about a quarter before it actually is realised in our financials,” Zachary Kirkhorn, Tesla’s outgoing finance chief, said on the call. Kirkhorn also reference the falling price of steel and aluminium. “It’s not as large as the lithium impacts, but they contribute nonetheless,” he said. Raw material prices might be coming down but the long-tail of high pricing continues to affect car companies. One reason is that companies often ‘hedge’ or bet on the side of a rise to ensure that they’re better insulated if prices do crazy. This means they can’t immediately benefit. The other problem is that the price falls have to be passed on by suppliers too. At BMW, that still means prices are high. “Yes, we benefit from falling raw material prices, but on the supply chain, we are paying more for material costs than we paid last year,” Walter Mertl, BMW new chief financial officer, said when asked at which point BMW would start to benefit. “I hope that the raw material pricing is still coming down even further in order to get on par with the extra bills we are paying to the supplier side,” Mertl added. The new Stellantis CFO, Natalie Knight, said something similar: “Raw material pricing was higher due to the carry-over effects of first-half 2022 increases”. Some suppliers – for example, Spanish metal parts giant Gestamp – operate what it calls a pass-through system, where falls or rises in base metal costs are immediately passed onto the customers. Others don’t, however, and many suppliers are looking to claw back margins after a tough few months during which they feel excluded from the higher profits earned by car companies switching to a ‘value over volume’ strategy, which reduced the order intake from suppliers. Car makers have been looking to avoid the whiplash on costs and potential shortages that comes from being at the tail end of the supply chain by getting involved with sourcing further along that chain, particularly for battery materials as well as semiconductors. “That is why we started deep sourcing on the chip side, and also have started deep sourcing on the battery raw material side,” Ola Källenius, CEO of Mercedes-Benz, said on his company’s earnings call. Other inflationary pressures remain. “Inflationary factors will continue to be felt in areas outside of raw materials,” Knight at Stellantis said, citing potential wage increase demands from its workforce. Ford, meanwhile, spoke of rising warranty and repair costs as dealers put up prices. Whether car companies will pass on falling raw material costs depends on how confident they are about maintaining record profit margins as part supply returns and competition hots up again. Renault was confident enough to drop the price of the Clio E-Tech hybrid, but in the UK, it also cut the entry 0.9-litre model, meaning the starting price of the car actually rose from £18,590 to £21,295. All eyes will be on lithium prices as countries including the UK mandate greater numbers of EV sales. Fisker chief financial officer Geeta Gupta-Fisker lauded the recent drop in prices for raw materials going into the batteries made by China’s CATL for the company’s new Fisker Ocean SUV. She said: “For us to make affordable EVs and for prices to stabilise, battery cost has to go down. There is no other way.”