DETROIT, March 10 (Reuters) - Major automakers are at risk of being squeezed by both declining sales and rising commodity prices that are driving up the cost of the average vehicle by about $350, a Lehman Brothers analyst said on Monday.
The combination of weak demand and rising costs for raw materials threatens to bring a kind of “stagflation” to a struggling sector, Lehman Brothers analyst Brian Johnson said in a note for clients.
“If not abated by drops in the commodity market or price increases to the consumer, GM and Ford face additional significant profit headwinds ... in an already dismal 2008,” he said.
Johnson estimated the additional cost resulting from commodity price increases to be $892 million, or $1.58 per share, for General Motors Corp GM.N and $459 million, or 13 cents per share, for Ford Motor Co F.N because of their heavier vehicle sizes.
The U.S. auto industry has been grappling with a slumping economy and high gas prices with industry-wide sales widely expected to drop to the lowest level in a decade.
In addition, commodity prices are rapidly escalating for many of the key components in cars, including a 24-percent increase in steel, a 73-percent increase in platinum, and a 10-percent increase in aluminum, Johnson said.
Johnson said the result is a net cost increase per vehicle of $350, compared with the 2007 average, and an increase of $421 compared to February last year.
Johnson said it would be difficult for automakers to pass on the commodity costs to consumers given signs that sticker prices are under pressure from discounts and other consumer prices intended to clear inventory.
“Recent incentive behavior indicates that the pricing environment is unstable, with Ford signaling for higher pricing while Asian manufacturers are increasing incentives,” he said.
While General Motors Corp has raised prices by about $300, Johnson said, the No. 1 U.S. automaker has partly offset that increase by raising its spending on incentives by $150.
The average vehicle in North America weighs just under 4,000 pounds, Johnson said. Steel accounts for 2,200 pounds of the average vehicle and is the most expensive single component in terms of dollar value, followed by aluminum, the note said. (Reporting by Karey Wutkowski, editing by Maureen Bavdek)
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