The pandemic has made the cars popular and needed again. However, they are getting more and more expensive, mainly due to the surging commodity prices.
Supply cannot keep up with stimulus-driven demand. Many essential elements of automakers (such as copper, steel, and aluminum) are approaching record highs. The commodity spot index jumped to its highest level since 2011, and metals have risen 21% so far this year.
Rising car prices might increase inflation across the board. Till March, the price of automotive raw materials rose by 83%. These parts usually account for about 10% of car manufacturing costs. It means the price tag of a $40,000 car must increase by 8.3% to offset the increase.
Automakers are generally struggling to bear higher costs. However, as major economies reopen and many consumers continue to avoid public transportation, demand is booming.
In the U.S., the supply of cars is so limited that leasing companies can only buy second-hand cars through auctions, not new ones.
The main factor leading to the increase in commodity prices is the steel need for the chassis, engines, and wheels. The metal’s recent rise has broken records as the world’s largest producer China is taking measures to curb production.
Electric Car Prices Are Also Rising Due to The Copper Price Growth
The soaring copper price has increased the cost of electric vehicles. It is because the industry has implemented energy conversion to meet stricter emission standards. Electric cars use nearly 3.5 times more copper than fuel consumers because of the extensive wiring inside.
The price increase may hurt automakers such as Tesla and Volkswagen, making electric cars more price-competitive with traditional vehicles.
However, it could be beneficial for the companies. The auto producers can start searching for alternative mechanisms for electric car batteries. Most batteries use some mixture of lithium, cobalt, and nickel. These metals have jumped by at least 47% in the past 12 months.
Ford and BMW invested $130 million in battery startup Solid Power this month. Solid Power is developing a battery that will eliminate the need for these metals. As a result, it will ten times reduce power supply costs.
BMW expects this year’s increase in commodity prices to have an adverse effect of 1 million euros. The luxury car manufacturer is particularly worried about rhodium, steel, and palladium in the next few months.
In the long run, BMW is working hard to reduce the impact of falling raw material prices. According to BMW’s plan, it will start producing vehicles on a new structure from 2025. It will allow recycling materials such as steel, aluminum, and plastics to make new cars.