Of the many metals involved in automotive parts and components, palladium is a crucial rare earth metal used in catalytic converters. Butsch says that palladium has experienced about an 80% price hike, driving converter prices - and thefts - through the roof.   -  Automotive Fleet

Of the many metals involved in automotive parts and components, palladium is a crucial rare earth metal used in catalytic converters. Butsch says that palladium has experienced about an 80% price hike, driving converter prices - and thefts - through the roof. 

Automotive Fleet

This article is based on a State of the Fleet Industry video interview by Mike Antich, editor of Automotive Fleet, who interviewed Mike Butsch, business development manager for Primrose Alloys, on the current pricing trends with various commodities and their ultimate impact on end-user fleets. Below are excerpts from the video interview. 

AF: One of the biggest variables today in terms of commodity pricing is the ongoing, unpredictable war between Russia and Ukraine and its impact on pricing volatility. While Russia and Ukraine are not major importers of finished products from the U.S. and other Western countries, they are very large exporters of raw materials, in particular metals, that are critical to the global supply chain. How are these geopolitical pressures and market dynamics impacting the pricing for key metals that are used in many finished products crucial to fleet operations and fulfillment of the fleet application?

BUTSCH: We’ve seen a significant uptick in steel prices since the war started. Steel prices seemed to have leveled off last fall into the early winter months. Because of the impact of the war on steel production in Ukraine and Russia, we’ve once again seen an upward spike in steel prices, Additionally, the price of aluminum is up about 35% since the beginning of the 2022 calendar-year.
Stainless steel, which is used in exhaust pipes and for catalytic converters and parts underneath a vehicle to prevent rust, has seen its price increase about 45% since Jan.1, 2022. Along with the catalytic converter housing, which is made of stainless steel, we also have a real issue with palladium, which is experiencing strong upward pricing pressures. The price of palladium is up over 80% since the beginning of the year and is currently trending at roughly $800 an ounce.

AF: You mentioned aluminum prices are up 30% since the start of the year, but these prices were already been trending upward last year. It is important to point out that aluminum prices were already escalating in calendar-year 2021 and since the start of the 2022 calendar-year, they’ve escalated another 30%. 

BUTSCH: That’s correct. Another metal to watch is palladium, which is critical to the functioning of a catalytic converter. It’s a big issue because there is a limited quantity of palladium - it’s called a rare earth mineral. There’s a reason these minerals are called rare. There’s not a lot of palladium in existence, but it’s critical for the functioning of catalytic converters. Pricing for palladium is in the neighborhood of $2,293 an ounce as of April. It is a very limited resource found in only a few countries. Russia is one of the larger producers of palladium.

Once  mined, the processed palladium is consumed by the catalytic converter manufacturers. The unknown is what a catalytic converter is going to cost in the future with an 80% increase in that raw material cost. 

AF: That’s a concern for me because when the price of palladium starts going up, that’s going to catch the attention of thieves. Catalytic converter theft is a huge business, and is a borderline epidemic with a lot of fleets. With prices for these raw materials going up, I foresee an increase in catalytic converter thefts. And the big concern is when you try to replace the stolen catalytic converter with an aftermarket product, it may be hard to source if there’s a supply constraint of  palladium. I fear the lead time to get a replacement, catalytic converter is going to be very lengthy.

BUTSCH: Correct. Not only is palladium in scarce supply, but once it is mined you also have to transport it to market, typically by rail. Let’s talk about that. Rail constraints is another area where the supply chain may be impacted and this is important because the amount of rail traffic between Asia and Europe has increased exponentially.

AF: You’re right and this rail volume was growing prior to the start of the fighting in Ukraine. I believe rail volume rolling across Ukraine from East Asia to Europe by year-end calendar-year 2021 reached the milestone of 50,000 full train loads. 

BUTSCH: But since the war occurred, all of these trains now have to be rerouted, which will add to their transport costs because many of them went through Ukraine. And now that the war has started there really aren’t that many alternative routes. Because of this you are going to see increased cost because the trains are going to have to operate longer routes to divert around the war zone.

You’re also going to see disruptions because now you have reduced the amount of traffic that you can negotiate for these longer trains. Therefore, there’s going to be increased delays as trains wait for the tracks to clear and so forth. And additionally, the war has affected the maritime routing of ships that used to go to Ukraine to haul its commodity exports via the Black Sea to other markets.

AF: Another commodity that threatens to be impacted by the war and the subsequent economic sanctions against Russia is the price of natural gas. In addition to the increased cost to European consumers, it threatens to increase the cost to produce finished metals. Natural gas is a is a key component in the manufacturing of these finished metals. Could you expand upon this?

BUTSCH: From the time metals comes out of the ground, it starts to get mixed together as the raw log and then  moves on to the finishing process. In Europe, in particular, and even in the United States, the primary way of heating this material is by burning natural gas. We’re also in the wintertime, which is peak season for natural gas use for home heat in Europe.

We’ve seen energy costs continue to rise, particularly in Europe. Now, thinking of how metals are produced and where it’s produced, a good quantity of metal comes directly out of Ukraine and also out of Russia. They’re the primary suppliers of the starting point for finished aluminum, steel, and stainless steel. As we see that source disrupted, we’re going to see higher price costs for the finished metals that go into vehicles. Another thing that we forgot to mention is that Ukraine is also a primary producer of copper, which is a key ingredient in assembling wiring harnesses that are used in vehicles. A wiring harnesses is just one more piece of the puzzle to build a production vehicle. You can’t build a vehicle without it. The current supply chain disruption in assembling wiring harnesses will probably impact the European automotive industry more so than the North American automotive industry.

AF: Yes, Ukraine is to the European auto industry as Mexico is to the U.S. automotive industry. It’s a low-cost supplier of products that are very labor intensive, such as assembling wiring harnesses. This is very labor intensive component. And the war in Ukraine has impacted the production volume of those assembled wiring harnesses to be shipped to European manufacturers who, in turn, will also export some of that production to North America. The constraints in sourcing wiring harness from Ukraine is impacting overall automotive production, just like the microprocessor shortage is impacting overall vehicle production.

BUTSCH: That’s an interesting point you bring up. Another thing that we don’t pay too much attention to is how microprocessors are manufactured. Russia provides 90% of the world’s neon that’s used in the lithography of these microchips. Ironically enough, Ukraine purifies the neon so it can be used for the process, and they purify about 60% of that 90%.

So now, at a very basic level, our microchip supply is being dramatically impacted by these two countries fighting each other. This has taken offline the starting point for the creation of automotive microchips. 

AF: It very true. And this neon is used to power lasers used to create the lithographic etchings that create the circuitry within the microchips. Now with  neon being in shorter supply, it’s going to have a direct impact on the volume of microprocessor production. 

BUTSCH: Despite this, neon will be found elsewhere, but there will be disruptions as a result of this shortage. Just as we saw at the end of the pandemic, when something gets shut down, it doesn’t come right back up the next day. For every day you’re shut down, you’re probably looking at an additional three to five days to recover. So even if everything were to be resolved tomorrow, hypothetically, the lag time to actually resume normal production will be much longer than that. If you take a look at an automobile today, it took a year to get that vehicle to that point. From the time you dig the metal out of the ground, to the processing of the metal, to the fabrication of the part, to the shipping of the part to the assembly of the vehicle – you’re looking at a year’s time. But we’re still experiencing delays and shortages of supply. Theoretically, we’ve been out of the pandemic state for about a year, but we’re nowhere near pre-pandemic output.  

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