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Russia war escalates auto prices and shortages

DETROIT (AP) – BMW has halted production at two German factories. Mercedes is slowing work at its assembly plants. Volkswagen, warning of production stoppages, is looking for alternative sources for parts.

For more than a year, the global auto industry has struggled with a disastrous shortage of computer chips and other vital parts that has shrunk production, slowed deliveries and sent prices for new and used cars soaring beyond reach for millions of consumers.

Now, a new factor – Russia’s war against Ukraine – has thrown up yet another obstacle.

Critically important electrical wiring, made in Ukraine, is suddenly out of reach.

With buyer demand high and materials scarce, vehicle prices are expected to head even higher well into next year.

Supply problems have bedevilled automakers since the pandemic erupted two years ago, shuttering factories and causing shortages.

The robust recovery that followed caused demand for autos to vastly outstrip supply – a mismatch that sent prices for new and used vehicles skyrocketing.

An e-Golf electric car with the VW logo on a rim in Dresden, Germany. PHOTO: AP

In the United States (US), the price of a new vehicle is up 13 per cent in the past year, to USD45,596. Used prices have surged far more – they’re up 29 per cent to USD29,646 as of February. Before the war, S&P Global Mobility had predicted that global automakers would build 84 million vehicles this year and 91 million next year.

Now it’s forecasting fewer than 82 million in 2022 and 88 million next year.

One factor behind the dimming outlook for production is the shuttering of auto plants in Russia. Last week, French automaker Renault, one of the last automakers that continued to build in Russia, said it would suspend production in Moscow.

The transformation of Ukraine into a war zone has hurt, too. Wells Fargo estimates that 10 per cent to 15 per cent of wiring harnesses that supply vehicle production in the vast European Union were made in Ukraine.

In the past decade, automakers and parts companies invested in Ukrainian factories to limit costs and gain proximity to European plants.

The wiring shortage has slowed factories in Germany, Poland, the Czech Republic and elsewhere, leading S&P to slash its forecast for worldwide auto production.

Ukraine is the world’s largest exporter of neon, used in lasers that etch circuits onto computer chips. Most chip makers have a six-month supply; late in the year, they could run short. That would worsen the chip shortage, which before the war had already been delaying production.

Likewise, Russia is a key supplier of raw materials like platinum and palladium, used in pollution-reducing catalytic converters. Russia also produces 10 per cent of the world’s nickel, an ingredient in electric vehicle batteries.

But Russia also is a big aluminium producer, and a source of crude iron, used to make steel.

Nearly 70 per cent of US crude iron imports come from Russia and Ukraine, so steelmakers will need to switch to production from Brazil or use alternative materials. In the meantime, steel prices have rocketed up from USD900 a tonne a few weeks ago to USD1,500 now.

Even if a deal is negotiated to suspend fighting, sanctions against Russian exports would remain intact until after a final agreement had been reached.