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Rising Commodity Prices Threaten to Increase Truck Prices

July 21, 2008, by Mike Antich - Also by this author

 By Mike Antich The high cost of raw materials, in addition to the high cost of fuel, is starting to make a financial impact on fleets by increasing costs for truck chassis, bodies, trailers, liftgates, and other upfit equipment. On July 9, Navistar announced that rising commodity costs have forced the company to increase prices of International truck models. The price increases vary by model, with some model increases as much as $1,600 per truck. Is this another in a series of commodity-related price increases that we will see from other OEMs, upfitters, and trailer manufacturers?

Earlier, on June 23, GM announced a 3.5-percent average price increase for 2009 models. GM attributed the price increase to increased commodity costs, such as oil and non-ferrous metals, along with increased fuel economy and mandated safety equipment and increased content that was not fully cost recovered.

“Hyper-inflation in the commodities markets is rivaling the U.S. housing collapse and the global banking crisis as the biggest threat to the world economy,” said Gary Dorsch, editor of the Global Money Trends newsletter. Prices have soared for commodities used in vehicle manufacturing, such as steel, aluminum, copper, zinc, crude oil, magnesium, and platinum. Since the beginning of 2008, steel prices have increased 100 percent, aluminum by 22 percent, platinum by 32 percent, and copper by 23 percent. The increased cost of crude oil has caused tire manufacturers to make multiple price increases since 2006.

Runaway Commodity Prices

Commodity prices across the board are increasing. One example is the cost of plastics. Due to record oil prices, the cost of polypropylene, the plastic frequently used in vehicles, has jumped 54 percent in the past year.

Likewise, steel prices have doubled to $1,125 per ton (as of press time). It takes about a ton-and-a-half of steel to build a mid-size car. GM alone buys more than 7 million tons of steel annually from about 40 suppliers. Up to now, automakers protected themselves by locking into long-term contracts with the steel producers; however, those contracts are up for negotiation. Steel prices are steadily rising due to the spiraling costs of iron ore and scrap metal, two major components for making steel, and higher energy prices. There has been much consolidation in the mining industry and currently three companies supply the global market for iron ore - BHP of Australia, Vale of Brazil, and Rio Tinto, headquartered in the UK.

Steel makers have already agreed to pay 65 percent more for iron ore from Brazil and face a possible 85-percent increase this year for Australian iron ore. Recently, Chinese steelmakers agreed to pay 96 percent more for iron ore from Rio Tinto, a five-fold increase since 2003. As a result, steel prices have soared as iron ore prices climbed and global demand shows little sign of abating. Recently, Toyota agreed to pay Nippon Steel and other Japanese steel makers 30 percent more for sheet steel. Like iron ore, scrap is at record prices. A ton of scrap sells for more than finished steel did a year ago. Scrap now sells for $690 to $710 a ton, 70 percent higher than in March.

Aluminum is another commodity experiencing price increases. On average, about 327 lbs. of aluminum is used to manufacture a vehicle. On July 15, Goldman Sachs Group raised its aluminum price forecasts by 21 percent after China, the world’s biggest producer, cut its output to curb power shortages in its economy. Aluminum is the most energy-intensive metal to make and the energy used by China’s aluminum smelters each week is enough to provide power for 2 million people for a year, hence the cutback in output. Another factor putting upward pressure on aluminum prices is that Chinese aluminum demand will rise 20 percent next year and 15 percent in 2010, putting more demand on constrained capacity.

The depreciation of the U.S. dollar also makes it more expensive for U.S. companies to pay for oil and raw materials sourced from overseas. One silver lining for the U.S. economy is that rising steel prices (and the undervalued dollar) have made U.S. steel makers more cost-competitive than foreign-produced steel.

One-Two Punch

This isn’t the first time commodity prices impacted fleet. In 2004, upfitters, such as Utilimaster and Supreme, increased prices 6 to 8 percent on all truck body and walk-in van product lines due to the increased cost of aluminum, steel, wood, and petroleum-based products. What makes today different than 2004 is a much weaker new-vehicle market and a 100-percent increase in fuel prices. Also, expensive new technology to comply with the 2010 diesel emission standards will increase future truck prices.

It’s a powerful one-two punch – soaring commodity prices and expensive regulatory compliance. Together, these will increase truck prices. In the final analysis, both fixed and operating fleet costs are increasing. It’s getting more expensive to operate a fleet, and it may become even more expensive in the near future.

Let me know what you think.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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