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Rising iron ore spot price brings up manufacturing cost for commercial vehicles

Automakers are expected to suffer from the outcomes of iron ore price negotiations. Brazil’s Vale, the world’s largest iron ore producer, has officially signaled that it is seeking a market-based iron ore pricing system as an alternative to the current benchmark pricing system. If Vale’s plan is realized, countries like China that lack iron ore resources will hit a triggered crisis. Automakers, consequently, will face major problems, including the increased cost of raw materials and the urge to change the current pricing system.

Impact of price rise for iron ore

Domestic automotive manufacturers have shown concerns with current iron ore prices. If the cost of raw materials rises, automakers have to face a tough call, either to change the price tags of their products, or to digest the cost increase by lowering their profit margins.

Vale is reportedly hiking the Carajas grade of iron ore by 114 percent starting in April. In China, the price of iron ore is about 40 percent of the cost of steel making, which means the price of steel will concurrently rise more than 40 percent as well. Compared to passenger vehicle producers, heavy-duty automakers are more likely to be influenced by the steel price rise, considering their high usage of steel in manufacturing.

An insider at Dongfeng Motor revealed during an interview that the State-owned automaker has already seen an increase in its manufacturing costs of nearly ¥1,000 ($147) per unit on sedans. The company’s medium trucks have experienced a cost increase at somewhere between ¥3,000 to ¥5,000 per unit. With iron ore prices further escalading, heavy-duty automakers are expected to raise their product prices. And considering market competition, home passenger vehicle makers are less likely to increase retail prices of their products, and will rather lower their profit margin.

Impact of market-based iron ore prices

Market experts have raised concerns that automakers’ current pricing system may not stand in the face of market-based iron ore prices.

Under the current system, steel makers get a long-term cooperate rate from iron ore producers. Correspondingly, OEMs and parts suppliers acquire a fixed price from steel makers, from which they are able to calculate production costs and come up with prices of vehicles. However, if the pricing balance is broken and iron ore prices fluctuate according to market changes, the automakers will face different production costs every day. Therefore, a discussion will be necessary to determine how to price vehicles in a rational way.

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