Daimler, VW, suppliers forecast falling profits as commodity prices surge
FRANKFURT/PARIS (Bloomberg) – Europe's largest carmakers and auto suppliers forecast that raw material prices, pushed up by increasing demand and tight supply, will eat into 2011 profit.
Daimler AG, the producer of Mercedes-Benz cars, and German supplier Continental AG both expect higher prices for goods such as steel and rubber to wipe 700 million euros ($975 million) from earnings this year. PSA/Peugeot-Citroen SA anticipates a 500 million-euro hit.
"It's definitely one of the headwinds in an otherwise good environment," Daimler CEO Dieter Zetsche said this week at the Geneva auto show.
Rubber prices may advance as much as 32 percent to 605 yen a kilogram ($7,407 a metric ton) by December, according to the median estimate of 10 analysts and traders. Steel prices will rise faster than raw-material costs in the first half of 2011 as steelmakers themselves cope with higher iron ore costs, European trade association Eurofer said last month.
Raw materials which have an impact on carmakers, such as steel, are close to record levels," said Michael Palatiello, a commodities analyst at Wings Partners in Milan. "The increase in raw materials is linked to low interest rates. The turning point will be when central banks start to raise rates."
Carmakers don't have much choice other than to pay the higher steel prices as rising car demand in the U.S. and China, the world's two largest auto markets, tightens supply.
U.S. light-vehicle sales in February ran at a seasonally adjusted 13.4 million annual rate, the fastest pace in 18 months, Autodata Corp. said March 1. Chinese car sales in January, the most recent month available, gained 16 percent.
Volkswagen AG forecast Feb. 25 that higher "commodities prices will weaken the positive volume effect" of a gain in revenue this year on increased profit.
"The entire raw material market has become more volatile," Rupert Stadler, head of VW's Audi brand, said at the Geneva auto show. "Of course we are concerned about this because at the end of the day we have to buy these materials."
PSA's forecast for a 500 million-euro negative earnings impact represents a 10 percent increase in raw material costs, CEO Philippe Varin said in Geneva March 1. PSA is currently negotiating second-half steel contracts.
"We're on six-month contracts so our costs for the first half are locked in," Varin said. "At one point steelmakers wanted to move us onto three-month contracts, but we resisted."
The price of iron ore, the raw ingredient used to make steel, at the end of February rose to the highest since at least 2008 on stronger Chinese demand and speculation that India, the world's third-largest exporter, will further curtail supplies.
Rubber harvests in Thailand, Indonesia and Malaysia, the biggest growers, will fail to meet demand for a second year in 2011, leaving stockpiles equal to 69 days of demand, the lowest in more than a decade, Goldman Sachs Group Inc. estimates. Continental, Europe's second-largest tiremaker, said at the current rubber price of $5.50 per kilogram material costs will rise 700 million euros.
"They have more or less exploded in the last 1 1/2 to 2 years," Continental CEO Elmar Degenhart said Thursday in a Bloomberg TV interview. "We need to increase prices in the market and increase efficiencies in our own production" to help offset the rising costs.
Michelin & Cie., the world's second-largest tiremaker, raised prices March 1 in Africa, the Middle East and India by 8 percent for passenger tires and 12 percent for truck tires.
BMW worried about oil prices
Carmakers are also challenged by the price of oil, which has surged beyond $100 per barrel due to political unrest in Libya, Africa's third-largest supplier. Crude oil hit $102.23 in New York trading this week, the highest since September 2008.
"It's going to be a real challenge for the car industry," BMW AG CEO Norbert Reithofer said in Geneva. "We have forgotten in a very short time that U.S. petrol prices were higher than $4 per gallon -- that can come back sooner than we think."
The price of regular gasoline has gained 27 percent in the last year to an average $3.43 per gallon in the U.S., AAA, an organization for driving enthusiasts, said on its Web site.
Consumers are likely to shift to purchasing smaller, more fuel-efficient vehicles, which are less profitable for carmakers, if the price of oil remains high, Morgan Stanley analyst Stuart Pearson said.
Threat to premium carmakers
"The most obvious impact of higher fuel prices is a weaker mix," Pearson, who is based in London, said in a note to investors this week. "Profitable SUVs, MPVs and pickups fare badly, while unprofitable compact cars find new customers."
The oil-price surge also threatens sales for premium carmakers that haven't invested in smaller engines. Nissan Motor Co.'s Infiniti brand, which currently offers nothing below a V6, is racing to introduce smaller models and more efficient four- cylinder engines supplied by Daimler under a partnership deal.
"The days of the big V8s are clearly in decline," Nissan senior vice president Andy Palmer said in an interview in Geneva. "Like all luxury carmakers, Infiniti is working very hard to improve fuel-efficiency and reduce emissions."