Michael SchwartzAutomotive World published an excellent article on the impact of rising and volatile raw material prices on the automotive industry.

A couple of weeks ago, I noted that commodity volatility had hurt Ford’s third quarter earnings.  This article makes the point that raw material prices are creating difficulty for the entire supply chain.

“Materials suppliers struggle to make a profit; Tier suppliers and OEMs find themselves torn between raising prices and suffering the cost increases.  Ultimately, it is the end-consumer who bears the brunt of increased finished product costs.  The automotive industry is particularly sensitive to price rises, especially in emerging markets and in budget and cost-sensitive segments, where the equivalent of a €200 or US$200 sticker price increase can stop potential buyers setting foot on a dealer’s forecourt.”

Woven throughout the article are quotes by industry insiders that add rich supporting material.  Dr Dieter Zetsche, chief executive, Daimler AG states, “We told the financial markets at our annual press conference that Daimler as an entity will see an increase in raw material prices in 2011 of about €700m (US$963m) versus 2010…On the car side there is very little chance to pass over what comes in from the raw material side.”  Tim Bowen of Dow Automotive adds, “From our perspective, this appears to be the new norm.  We are going to be operating under this escalated cost structure for years to come.”

The editor asked Triple Point for its views on how automotive purchasing needs to change.  It feels a little odd to quote yourself, but here it goes: “According to Triple Point’s Michael Schwartz, ‘Automotive companies have some of the most diverse and complex procurement portfolios, which represent equally complex supply networks and a broad series of commodities markets – any one of which can be experiencing severe volatility at any given moment.’  The choice, he says, ‘is stark, but clear: continue to purchase commodities passively as just another link in the supply chain and be vulnerable to huge commodity price; or adopt a proactive approach to commodity procurement that utilises solutions that enable more accurate forecasts and protect the bottom line.’  By using the ‘right approach, tools and risk management set-up,’ vehicle manufacturers can take control of their commodity supply chains. Fail to do this, says Schwartz, and ‘that’s when the commodity supply chain controls you.’”

Here’s a link to the full article. It’s a long article but certainly worth the read.

Michael SchwartzFord Motor Company reported 3rd quarter earnings and noted how commodity volatility hurt margins during its earnings’ call.

In fact, reported earnings were harmed both coming and going; as commodities rose in price and again as they came down.  Ford’s operating margin was down 1.4% from a year ago, and this “margin decline can be more than explained by higher commodity costs,” stated Lewis Booth, Ford’s Chief Financial Officer.  “Contribution costs, which include material cost, warranty expense and freight and duty, increased.  About 2/3 of the increase is due to commodities.”

Okay… margins hurt by rising commodity prices is a familiar story we see these days with manufacturing companies that haven’t yet adopted advanced commodity risk management techniques and processes.  But, in Ford’s case, their earnings were also hit as commodity prices came down.

“In addition to higher commodity cost compared to a year ago, we recognize the unfavorable mark-to-market adjustments of about $350 million on commodity hedges, driven by a sharp decline in commodity prices.”

Ford is not applying hedge accounting treatment so they recognize the loss on the financial instrument in the current period.  “These changes in market value do not have an immediate cash impact, although the change in value is reflected in current earnings.”

The exact problems noted in Ford’s earning conference call are the issues that Triple Point is solving for its clients. Commodity volatility has risen dramatically in the past few years and manufacturing companies need to adopt new techniques to manage commodity risk.  Triple Point introduced its Strategic Planning and Procurement (SPP) module to help manufacturing companies better track, measure, and control commodity risk.  In addition, Triple Point provides the most robust commodity hedge accounting solution.   As we’ve said on many occasion, this is not a wait and see problem.  Those that tackle commodity risk now will gain competitive advantage.

Read earnings call transcript – http://seekingalpha.com/article/302387-ford-motor-s-ceo-discusses-q3-2011-results-earnings-call-transcript

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