Lehman Report: Precious Metals Are Killing Automakers

In an April 9 report for investors, Lehman Brothers auto analyst Brian Johnson outlines why soaring commodity prices are leaving car makers a tough state of stagflation. Commodity prices in March, according to the report, were up $424 per vehicle year-over-year in North America. That includes price hikes for basic materials like steel, copper and lead; and for precious metals like platinum, palladium and rhodium, used in emission-reducing catalytic converters. (Rhodium alone, which goes for a cool $9,000 per ounce, has made catalytic converters a prized target for theft rings much more interested in the converter than the car itself.)

Johnson estimated that total material costs per vehicle were about $2,400 in March. That's more than double what per-vehicle costs ran in 2001, at the start of the last recession. The increased cost of steel is the biggest single contributor, since cars contain so much of it. But the biggest percent increases are for the small amounts of precious metals inside catalytic converters.

At the same time, due to weak demand and competitive pressure, car makers have little or no ability to pass along those increased costs via higher sticker prices. Small wonder, then, why manufacturers are trying to hedge against the impact of higher commodity prices by switching materials to less-expensive alternatives -- and by reducing the amount of precious metals used in each vehicle, according to Johnson.

For instance, "palladium can be substituted for platinum, a switch many manufacturers have made over the last ten years as platinum prices have risen materially more than palladium prices," he said in the report. That works for catalytic converters for gasoline engines, but emissions systems for diesel engines are more dependent on platinum, Johnson said. "In addition, catalyst manufacturers have focused on 'thrifting' the catalyst by using a thinner coat of catalyst while maintaining emissions control effectiveness."