Raw materials prices drop amid Europe and China slowdowns

ERJ staff report (AN)

Detroit, Michigan -- For automotive suppliers, the economic slowdown in Europe and China has a silver lining: Raw materials prices have declined sharply.

Over the past year, a price index of 16 key raw materials has declined about 21 percent, according to a study by AlixPartners, a financial advisory firm based in suburban Detroit.

Prices peaked early in 2008, plunged, then peaked again in April 2011. Since then, raw materials prices generally have declined as the economies of Europe and China softened, said John Hoffecker, a managing director at AlixPartners.

"It is a very global market for these commodities," Hoffecker said. "There has been a good supply of raw materials."

The report gathered pricing data for a variety of commodities and also for fuel and logistics. The report compared the price of raw materials in North America on May 12 to year-ago prices:

• Hot-rolled steel cost 32 cents per pound, down 18 percent.
• Aluminum cost 89 cents per pound, down 27 percent.
• Copper cost $3.37 per pound, down 19 percent.
• Rubber cost 46 cents per pound, down 30 percent.
• Magnesium cost $2.15 per pound, down 17 percent.
• Crude oil cost $86.53 per barrel, down 17 percent.

The report also noted that natural gas prices have plummeted over the past year, although diesel fuel prices have remained high.

For automakers, lower raw materials prices over the past year amounts to $600 per vehicle, according to AlixPartners, but automakers have not fully captured those savings, the report concluded.

In part, that's because automakers use different strategies to adjust their payments to suppliers. Automakers generally index a given raw material if they can monitor price fluctuations through a public price exchange, or benchmark.

Steel, aluminum and copper typically are indexed, and automakers' payments to suppliers will rise or fall in unison with those raw material prices.

Not so with rubber or plastics. If feedstock prices go up or down, automakers call in their suppliers - one at a time - to negotiate price adjustments. It often takes three to six months for an automaker's purchasers to adjust prices paid for those commodities.

Raw materials account for as much as half of suppliers' manufacturing costs, so suppliers' cash flow ought to be rising in unison with production. But suppliers' cash flow has flattened out, and the AlixPartners report blames rising nonproduction expenses.

From Automotive News (A Crain publication)