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Looming Commodity Woes: Another Bump in Autos’ Rough Ride

Zacks

While February’s sales woes are still fresh in one's mind, a new threat is rearing its ugly head in the path of auto companies. President Donald Trump has proposed tariffs on two key commodities – steel and aluminum. Autos, which use both commodities in abundance, will only see their woes being compounded, in case the tariffs are actually imposed.

Autos’ Looming Ordeals

The idea behind the imposition of a steep tariffs – 25% for steel imports and 10% for aluminum imports – may be to provide state protection to the ailing steel and aluminum industries. Given the confluence of several domestic and international actions, and numerous effects and repercussions, the actual net gain or loss of such a huge move is a big economic exercise.

However, any increase — tariff induced or otherwise — in the prices of these two important metals that the automobile space is crucially dependent on, will leave an adverse impact. In other words, the U.S. automotive companies would lose its level-playing competitive capabilities to its global rivals if tariffs are imposed on steel and aluminum.

Notably, the main commodity that is used by big domestic automobile manufacturers such as General Motors Company GM and Ford Motor Company F is steel. Since the automotive companies account for around 25% of total steel consumption in the country, any rise in its price would have serious repercussions.

In fact, the American Automotive Policy Council, a group comprising General Motors, Ford and Fiat Chrysler Automobiles N.V. FCAU, has already cautioned the Commerce Department that any protection on steel imports could potentially have harmful consequences. This can raise the cost of steel in the United States, while making it comparatively cheaper to overseas competitors.

Again, pricey aluminum could hit auto giants like Ford, which is now using more a lightweight aluminum in its top-selling and profitable F-Series pickup trucks. The company is using more aluminum to reduce the weight of its vehicles, keeping in mind the stringent fuel-economy norms. Also, Tesla, Inc.’s TSLA expensive luxury vehicles – the Model X SUV and Model S sedan – use a lot of aluminum. Tesla would also have to make some readjustments in production and pricing to account for the tariff, if imposed.

The Ultimate Sufferer

Presently, auto companies are facing several problems. In February, most of the auto players saw sales decline. Moreover, a boom time for the auto sector is not likely in 2018 too.

For such a sector, which is already on defensive gear, this commodities’ onslaught may come as a big jolt. In fact, there can be two eventual outcomes – first, higher commodities’ price will be passed on to the final consumers and second, auto companies will have to willy-nilly bear the expenses. However, given the declining sales, automakers would hesitate a bit in entirely passing the elevated price to consumers. In such a situation, their profitability would be strained. In the other case, consumers will be the final victims. But in either case, the industry will be the ultimate sufferer.

Currently, General Motors and Fiat Chrysler carry a Zacks Rank #2 (Buy). Among the other stocks, Ford has a Zacks Rank #3 (Hold) whereas Tesla carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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