Rise in raw material prices worries auto firms

So how much is the steep rise in raw material costs hurting auto companies?

In a recent report on the sector, India Infoline analyst Jatin Chawla has broken key raw material costs for manufacture of passenger cars and found that even though steel takes much of the voice share, prices of other components are also up sharply and have begun to hurt margins.

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Over the last several quarters, prices of raw materials like steel have risen sharply. Combined with the inability of auto companies to fully pass on these increases to the customer, they have led to margins coming under severe pressure.

Although steel continues to account for 60% of a car's weight and 65% of its material costs, usage of other materials like plastics, aluminum, rubber etc has been increasing over the years. These materials are also facing severe inflationary pressures. "...as a ballpark, about 70% of the cost of a car is steel, plastics account for about 12-15%, while rubber makes up about 4-5%," said P Balendran, VP, General Motors India.

Taking Maruti as an example, Chawla estimates that carmaker's per car EBIDTA (earnings before interest, depreciation, taxes and ammortisation) could be hit by 28% from the year-ago period due to commodity price rise and the recent 1% price (in car prices) would not be enough to nullify it.

Over the years, usage of plastics in cars has risen sharply to about 100 kg per car. They are used in instrument panels, interior trim, lighting, bumper systems and other parts. Chawla said three 'families' of polymers–polypropylene, polyurethane and PVC – make up 66% of the total plastics used in a car. Due to surging crude oil prices, plastic prices have risen by a quarter over the last one year, increasing per car cost by Rs 1,100.

Likewise, aluminum usage has also risen four-fold to around 20 kg per car. Aluminum prices are up 30%, representing an increase of Rs 600 per car. Rubber prices have risen by over 30% in the last six months, adding Rs 800 to each car's production cost.

"Steel is our biggest expense head and it has risen by over 30%. Plastics are up 30% over the last six months. Rubber prices are seasonal and have been up sharply. Internally, our view is we haven't seen the worst yet and there could be further escalation in raw material prices," said a senior official from an automotive company.

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Chawla found increases in price of steel and others translate to increases of Rs 6,200 and Rs 3,300, respectively, in a car's production cost. "Considering that Maruti's EBITDA per car was Rs 33,878 in Q1FY08, this Rs 9,500 increase in costs could potentially take 28% off EBITDA per car," he said.

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However companies are working on 'alternate' substances to reduce dependence on precious metals. "Our R&D is working on initiatives aimed at reducing consumption of precious metals," said an automotive firm official.

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