Not just semiconductors, steel is getting more expensive, car prices could go up

Car prices are expected to increase in many parts of the world as shortage in semiconductors and rising prices of raw materials dent margins to a point that car manufacturers can no longer absorb. In some countries like India, the increase in car prices has already happened.

A report by Japan’s Nikkei says Toyota has concluded a new round of price negotiations with Nippon Steel, with the agreed price to be USD 182 higher than before, the largest increase in 10 years.

To get the lowest cost, Toyota negotiates the wholesale price and do the purchase of steel rolls on behalf of its suppliers. Prices are negotiated semi-annually based on the prices of iron ore and coking coal, the main raw materials used in making steel.

Steel is one of the biggest contributor in the sum of raw materials cost for a car. An average family car has about 700 kg of steel.

The cause of increase in steel prices is similar to the shortage in semiconductor parts – with the rapid recovery of economic activities post-Covid-19 lockdowns around the world, steel foundries can’t keep up with demand and many manufacturers have not placed their orders earlier, due to difficulties in making projections for an economic recovery.

Orders for manufactured goods typically need to be locked in at least 6 to 9 months in advance and suppliers will in turn, make their own forecast based on the orders receive. So a shortfall in forecast will cascade through the supply chain.

Korea, another major steel producer, is also seeing price increase from Hyundai Steel and POSCO, which the Korea Economic Daily reports to be up by USD 46 per tonne – the first increase in Korea in 4 years.

Prices of copper, another key material in automotive electronics, have more than doubled.

A survey by the Korea Automobile Manufacturers Association (KAMA) in May revealed that cost for Korean car manufacturers are now paying up to 20 percent more for semiconductor parts.

Even Korean tyre makers Hankook, Kumho and Nexen, have either raised prices of their products, or have announced plans to do so soon.

Meanwhile in India, Tata, Toyota, and Honda have all raised prices of their cars slightly (low single digit percentages), citing increase in raw material cost as the reason.