Thanks to sky high gasoline prices, most people are reeling from the cost of driving their cars. But that was just the first jolt. Now we're going to see a big jump in the cost of buying cars, both new and used.
Why am I so sure car prices are going up? Easy. All you have to do is look at the cost of the materials needed to make a car.
John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
Let me give you an example. Steel is by far the most common material used in today's vehicles. It takes nearly a ton of steel to manufacture the average car.
Well, to make steel you need iron ore. Over the last decade three companies have pretty much cornered the global market for iron ore. Almost all of the major integrated steelmakers in the world have to buy their iron ore from BHP of Australia, Vale of Brazil and Rio Tinto, which is headquartered in London.
Last year the iron ore cartel decided it would be a nice time to raise the price of iron ore by 30%. And then earlier this year they decided it would be even nicer to raise prices another 70% on top of that. As a result, steel prices are soaring. They've gone up so much, so fast, that a ton of scrap steel now sells for more than a coil of finished steel did a year ago. That also hurts the mini-mills because scrap is the raw material they use to make new steel.
So how come car prices haven't skyrocketed along with that? First of all, there's so much competition out there it's hard for any automaker to boost the price of its vehicles. Amazingly, the Bureau of Economic Analysis reports that cars have never been cheaper. They measure prices in terms of the number of weeks of income the median household needs to buy one. Last year it took the median household (with a combined income of $75,000) a little over 16 weeks to buy a new car. That compares to 21 weeks in 1967 (median household income was $8,000), which is when the BEA first started doing this comparison.
But another reason that car prices haven't skyrocketed yet is because automakers protected themselves by locking into long-term contracts with the steel producers. However, those long-term contracts are starting to run out.
And the same sort of scenario is playing out with every other material that goes into making cars. You name it-copper, zinc, aluminum, platinum, magnesium-they're all soaring in price. And because oil is soaring, so too are the prices for plastics.
Wait! It gets worse! Skyrocketing commodity prices couldn't come at a worse time for the car companies. They're under the gun to boost fuel economy and cut CO2, and that's going to require expensive technology to achieve. Put the two together and my guess is that the average MSRP in the American market is going to come close to $40,000 in just a few years.
Will the average household be able to keep up with that kind of price hike? No way. And that means they're going to hold onto their old cars longer, which is why used car prices will go up, too.
It's all about supply and demand. Fewer new cars ultimately translate into fewer used ones. And with people holding onto their old ones there will be fewer used cars available for sale. Like I said, up goes the price.
Back in the early 1990s when it took 24 weeks of income to buy a new car you heard people complaining about "sticker shock." I think we're about to start hearing that term used again.
Autoline Detroit
Airs every Sunday at 7:00AM on Speed and 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Last week's show: "Inside Honda"
Why am I so sure car prices are going up? Easy. All you have to do is look at the cost of the materials needed to make a car.
John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
Let me give you an example. Steel is by far the most common material used in today's vehicles. It takes nearly a ton of steel to manufacture the average car.
Well, to make steel you need iron ore. Over the last decade three companies have pretty much cornered the global market for iron ore. Almost all of the major integrated steelmakers in the world have to buy their iron ore from BHP of Australia, Vale of Brazil and Rio Tinto, which is headquartered in London.
Last year the iron ore cartel decided it would be a nice time to raise the price of iron ore by 30%. And then earlier this year they decided it would be even nicer to raise prices another 70% on top of that. As a result, steel prices are soaring. They've gone up so much, so fast, that a ton of scrap steel now sells for more than a coil of finished steel did a year ago. That also hurts the mini-mills because scrap is the raw material they use to make new steel.
So how come car prices haven't skyrocketed along with that? First of all, there's so much competition out there it's hard for any automaker to boost the price of its vehicles. Amazingly, the Bureau of Economic Analysis reports that cars have never been cheaper. They measure prices in terms of the number of weeks of income the median household needs to buy one. Last year it took the median household (with a combined income of $75,000) a little over 16 weeks to buy a new car. That compares to 21 weeks in 1967 (median household income was $8,000), which is when the BEA first started doing this comparison.
But another reason that car prices haven't skyrocketed yet is because automakers protected themselves by locking into long-term contracts with the steel producers. However, those long-term contracts are starting to run out.
And the same sort of scenario is playing out with every other material that goes into making cars. You name it-copper, zinc, aluminum, platinum, magnesium-they're all soaring in price. And because oil is soaring, so too are the prices for plastics.
Wait! It gets worse! Skyrocketing commodity prices couldn't come at a worse time for the car companies. They're under the gun to boost fuel economy and cut CO2, and that's going to require expensive technology to achieve. Put the two together and my guess is that the average MSRP in the American market is going to come close to $40,000 in just a few years.
Will the average household be able to keep up with that kind of price hike? No way. And that means they're going to hold onto their old cars longer, which is why used car prices will go up, too.
It's all about supply and demand. Fewer new cars ultimately translate into fewer used ones. And with people holding onto their old ones there will be fewer used cars available for sale. Like I said, up goes the price.
Back in the early 1990s when it took 24 weeks of income to buy a new car you heard people complaining about "sticker shock." I think we're about to start hearing that term used again.
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Autoline Detroit
Airs every Sunday at 7:00AM on Speed and 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Last week's show: "Inside Honda"
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