Auto retailers poised to handle inflated vehicle prices on rising materials costs

Emptying car lots have been a challenge for dealerships in the hot selling season, but higher profits have been a boon on the backs of incredible demand. There are stories of consumers paying thousands of dollars over MSRP to buy the model and trim level they want, and those inflated prices might be crucial going forward. On top of the chip shortage, raw material prices have been climbing to all-time highs.

One of the benchmark valuations for raw material is US Midwest Domestic Hot-Rolled Coil Steel Futures. As of August 2020, that price had bottomed out at around $402 per ton. Today, the price per ton has skyrocketed to $1780 per ton, and it’s climbing. Over that same period, aluminum has increased from approximately $1,720 per ton to more than $2,550 per ton. High-grade copper has more than doubled since April 2020. 

The increases on raw materials is hitting almost every facet of auto manufacturing. PPG, the US-based paints and coatings producer has said they expect third-quarter costs to increase 20% year-over-year and that prices will be rising at roughly the same level. 

These raw material price increases follow shortages on foam and rubber that have hit the industry in recent months. For steel production, Bank of America analyst Timna Tanners said in a CNN Business interview this spring, “This is going to be short-lived. It’s very appropriate to call this a bubble.” 

She expressed confidence that the shortage and resultant price of steel was nearly over and that steel stocks tend to peak about a month ahead of the price of steel. However, the expectation that the futures price had peaked in May at around $1,500 hasn’t proven accurate. It’s continued climbing, and that likely means it will be months before the price of steel starts to dip again.  

High costs translate to higher retail prices 

It seems inevitable that rising costs for raw materials will affect the MSRP on the window sticker as new cars return to lots in the future. But if and when it does, car dealerships across the country are already poised to take it in stride. There’s no sign that consumer demand is easing anytime soon, and selling at or above MSRP has become normal – especially for an industry that formerly thrived on making a front-end deal to earn on the back end.

Consumers are prepped to bear the brunt of higher cost already. Even when steel prices and other commodities begin to slide as supply catches up to demand, it’s unlikely that it will return to its pre-pandemic prices. It will keep manufacturing costs elevated from where they were a year ago before the shortages were evident.  

What it means for dealers 

For dealerships, the higher manufacturing costs might mean slightly thinner profit margins on MSRP as carmakers try to soften the blow to consumers somewhat, absorbing some of the cost increases. With sales levels remaining as strong as ever seen and a burgeoning economy, it doesn’t appear that car buyers are scared away by paying a little more. 

The same is proving to be true for the used car market. With today’s shortages and high prices, used car buyers do not seem reluctant to pay 30% more for a vehicle than would’ve been normal a year ago. 

Perhaps 2022 will once again have record transaction prices for both new and used cars.

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