Last year was a difficult year for many Americans. That might have been bad enough on its own, but Russia’s invasion of Ukraine means there’s more of the same to come, experts say.
“New vehicle prices will be pushed up even higher and there doesn’t appear to be any relief in sight,” says Garrett Nelson, North American Auto industry analyst at CFRA. “All the momentum is to the upside.”
Last year, the average price of a brand new car rose by 13%. According to Nelson, this year, car shoppers can expect new American cars to cost at least 10% more than last year, and possibly even 20% more, because auto makers pass the increased costs on to the consumers.
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There seems no way out for those on a strict budget as prices in the used car market rose 40% last year.
Purchase now
Bottom line: Buy a car you need now, or pay more in the future.
At least part of the matter comes down to cost increases for vital car-making materials, for which we can somewhat blame Russia’s invasion of Ukraine. The former is a significant producer of many key commodities—including nickel, palladium, and aluminum—required by auto manufacturers. There is concern that U.S., European and Russian sanctions might reduce the availability of such resources. This has caused speculators and traders to increase prices long before there are any shortages.
The inflation in the materials industry, already rising this year and last year, is only getting worse. Prices for palladium, aluminum, and steel – all vital for automakers – are up 61%, 25% and 40%, respectively so far this year. Other prices have also risen.
Nickel triples
Russia’s economy might be relatively small but it packs a punch in the metals market. It is the world’s third largest producer of nickel, an important ingredient in the manufacture of stainless steel and electric vehicle batteries. The metal’s already high price tripled between Tuesday and Wednesday to hit more than $100,000 per metric ton. The surge could be partly due to the so-called short squeeze, when traders betting on price drops decided to sell their positions. An initial lift in prices likely triggered losses for the short sellers and forced them to buy back futures contracts they’d previously sold, propelling prices higher. However, a fundamental reason for costly nickel is the worry that supplies of the metal will get interrupted, a concern that likely won’t disappear overnight.
Russia is also an important global supplier of aluminum and palladium as well as semiconductor-grade neon gases. They are used in the manufacture of catalytic converters and auto parts as well as computer chips. In some instances, supply problems existed before the invasion.
“Aluminum was already in deficit before the Russia-Ukraine crisis due to a production halt in one of the largest Chinese factories,” writes Nevine Pollini, a senior investment analyst at Syz Bank. Russia is the sixth most important global exporter. This could lead to even more problems. In the two previous years, supply disruptions also occurred in chip production.
“All these things happening in Russia are inflationary,” says Steve Chiavarone, senior portfolio manager, and equity strategist at Federated Hermes. According to him, these supply shocks are easily absorbed by global economies in a low-inflation environment. We are still in an inflationary climate due to many factors, which predate conflict in Ukraine. These include supply disruptions around the globe that began during the COVID-19 Pandemic, and large government spending during 2020 to support the global economy.
Shipping costs jump
Increasing shipping costs associated with seaborne container shipping make matters worse. “Ninety percent of the imported goods Americans buy arrive in a container,” says Zvi Schreiber, international freight booking platform CEO Freightos Group. “It factors into every product you buy.”
These products are auto parts that are made around the globe and shipped back to the place where they are used. The problem now is that there’s an extra cost manufacturers must pay in higher freight rates.
Freightos data shows that the price of a container ship 40 feet from China/East Asia and the West Coast of North America rose more than 12 times in the past two years. It was $1,300 when the pandemic began, but has since risen to $16,000. The surge in shipping prices was not caused by a drop in container or ship supply, but rather increased demand for many products.
Shipping companies simply weren’t prepared for a 15% to 20% jump in U.S. imports, Schreiber says. “In fact, no part of the shipping system was designed for such a surge in demand.”
In short, the steady demand for new vehicles combined with current and future supply worries is increasing auto manufacturing’s cost base. They will likely pass those extra costs on to you as higher prices for cars.
