Raw Material Price Surge... Bleak Q2 Earnings for Auto Parts Companies

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Hyun-seok] An automotive parts manufacturer in Gyeonggi-do, which supplies parts to domestic and international automakers, is recently going through a difficult period. Due to the sharp rise in raw material prices, the supply of materials is not smooth, and the factory is not operating properly.

The hardships faced by automotive parts companies are expected to continue into the second quarter following the first quarter. The rise in raw material prices has been compounded by a surge in crude oil prices. Moreover, the prices at which parts are supplied do not reflect the increase in raw material costs, making it difficult to improve performance.

According to FnGuide on the 2nd, securities firms forecast Hyundai Mobis’s consolidated sales and operating profit for the second quarter to be KRW 11.7793 trillion and KRW 511.6 billion, respectively. Sales are expected to increase by 14.53% compared to the same period last year, but operating profit is projected to decrease by 9.23%.

The same applies to other major parts manufacturers. Hanon Systems is expected to achieve sales of KRW 2.0047 trillion and operating profit of KRW 68.5 billion. Sales are forecasted to increase by 8.24% year-on-year, but operating profit is expected to decline by 31.83%. Securities firms also predict that Mando and Hyundai Wia will see sales growth but a decrease in operating profit. These companies already experienced operating profit declines ranging from 9% to over 20% in the first quarter.

Additionally, the Russia-Ukraine conflict has caused crude oil prices to surge, significantly increasing logistics costs. Hyundai Mobis’s first-quarter report shows that the price of nickel was $26,872 per ton, a 45.43% increase from $18,478 per ton last year. As a result, the cost of raw materials and merchandise purchases rose from KRW 4.710044 trillion in the fourth quarter of last year to KRW 5.530388 trillion. During the same period, logistics costs jumped from KRW 100.75 billion to KRW 258.346 billion.

Not only large parts manufacturers but also small and medium-sized automotive parts companies suffered losses in operating profit due to the sharp rise in raw material prices in the first quarter. An analysis by Korea Investment & Securities of the combined first-quarter sales of 45 small and medium-sized parts companies showed a total sales increase of 9.0% year-on-year. However, operating profit decreased by 22% during the same period. Cost increases had a greater impact than price hikes.

In particular, these factors are expected to continue into the second quarter, putting pressure on the performance of automotive parts companies. Although raw material prices have fallen in the second quarter, they remain high compared to last year. On the 27th of last month (local time), the three-month aluminum futures price on the London Metal Exchange (LME) was $2,494 per ton. The average price in the second quarter was $2,918.09 per ton, higher than the average of $2,413.65 per ton in the same period last year.

Crude oil prices show a similar trend. The August West Texas Intermediate (WTI) crude oil price recorded $109.57 and fluctuated between $96 and $120 in the second quarter. In contrast, WTI was between $60 and $73 in the second quarter of last year, so the burden on logistics costs remains.

An industry official from the automotive parts sector said, "The rise in raw material and crude oil prices affects the cost of goods sold. Since it is difficult to immediately reflect these costs, we are currently in a situation with no solution."

Another automotive parts company official explained, "Automakers can maintain their profitability by raising vehicle prices, but parts suppliers like us provide fixed parts and find it difficult to reflect the increase in raw material costs, so our profits are not compensated at all."

This content was produced with the assistance of AI translation services.