June 10, 2022

Automotive manufacturers are experiencing reduced profit margins due to all-time high costs for raw materials such as metals and petrochemicals, according to the Wall Street Journal’s summary of comments from Bank of America. According to BofA’s calculations, raw material costs for the average US vehicle now total $4,950, nearly 86% higher than the 30-year historical average of $2,660. BofA also adds “Record vehicle prices have helped auto makers offset those higher costs. But the bank sees vehicle prices easing in the next few years, compressing margins if raw materials remain elevated.”

HRC Steel and aluminum are two key raw materials for automotive production. Prices for both metals have dropped since early March, and LME Aluminum 3M contract and prompt month (June) CME HRC Steel futures are now nearly unchanged for the year. End users for either metal might consider using the recent dip in prices by applying simple hedges involving swaps and call options. One other possible strategy is a costless collar, meaning a consumer would buy a call and simultaneously sell a put option, thereby creating “zero cost.” These could cap your raw materials costs, guarding against a price recovery. Such positions are standard for consumer hedging, but they can result in opportunity costs or cash costs if metal prices decline. Please contact AEGIS for specific strategies that fit your operations. (6/10/2022)

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