Bank of America: costs soar 87% in a year profits in the US auto industry are being squeezed sharply

The latest report from bank of America (Bank of America) shows that soaring inflation has caused the cost of raw materials for u.s. car production to soar by 87% a year, the highest level since 2011.

The latest BofA report examines the latest round of inflation in the United States and its impact on the auto industry. One of the important conclusions is that raw material prices have risen sharply since mid-2020.

"the cost of raw materials for ordinary cars in the United States has been rising steadily over the past year, from a low of about $2200 per vehicle in April 20 to about $4125 in May 21, an increase of 87 per cent," the report said. "

At the same time, "the average transaction price of [cars] appears to have stagnated, albeit at a record high, during the period of rising raw material costs." The report says.

The market fears that the rising price of raw materials and the stagnant average trading price of cars will increase the financial pressure on carmakers and suppliers.

In the United States, steel and aluminum account for 39% and 11% of the materials in each car production. Therefore, the rising pressure on raw material costs is mainly concentrated in the rise in steel prices.

The BofA report estimates that the average cost per pound of steel used in car manufacturing rose 106% year-on-year as of last month. This is "relatively worrying" given the high steel content of ordinary vehicles, the report said.

The report predicts that suppliers and original equipment manufacturers (OEM) are expected to bear the brunt of rising raw material costs, while OEM will face greater indirect risks.

In addition to the pressure of rising costs, the damage to the supply chain caused by the epidemic has also caused problems. "the automotive value chain has faced significant headwinds from supply chain disruptions and production disruptions, which continue to put pressure on profit margins, in addition to rising raw material costs," the BofA report said. "

Profit compression

The cost of raw materials has soared so fast that the cost rate of cars has soared.

"at the beginning of the COVID-19 pandemic, driven by the lowest raw material costs in history and the highest average car transaction price (ATP), the average raw material cost per vehicle as a percentage of ATP reached an all-time low of about 6 per cent (5.9 per cent in April 20)." Bank of America reported.

"however, as commodity prices have rebounded sharply from lows and ATP has remained near peak levels, the cost rate has risen sharply and is now about 11 per cent." The report says.

By the end of spring, the cost of automotive raw materials was close to its highest level since 2000, while ATP remained largely unchanged, "posing a major disadvantage to companies at the front end of the value chain," the report said.

Rising inflation has been a concern for months. According to the latest data released by the US Bureau of Economic Analysis, the US core personal consumption expenditure price index ((PCE)) in May was the highest since April 1992, well above the Fed's official inflation target of 2 per cent.

The data show that the demand for cars continues to rise after the economic restart, and the imbalance between supply and demand in the auto industry has indeed made a great "contribution" to recent US inflation indicators such as CPI.