The Brave New World of Rising Commodity Prices

Scrap metal. The phrase may not mean much to you, a pistonhead who takes pride in his ride. But scrap is one of the most lucrative industries in the car business today. That old junk car in the neighbor's yard that would have been lucky to get $50 seven years ago is now going for over $200– on the steel content alone. When you throw in the recyclable platinum, aluminum, copper and lead into the mix, the revenue on an average junker is anywhere from $350 to $600 per vehicle. This inflation has implications for both the average Joe and the entire American automobile industry.

The environmental benefits of this market for dead cars are obvious. Vehicles that were once put out to pasture– with toxic fluids spilling into the soil and the surrounding landscape– are now, thankfully, a rarity. Companies are draining, crushing and recycling aluminum and copper radiators. Old batteries now go for $15 in many areas of the country. Even the rims that were once left on the beasts of old are being recycled and re-used by everyone from GM to the People’s Republic of China.

In short, simple economics has motivated both mature and developing automotive markets to do what environmentalists have been calling for over many decades: clean-up the remnants of our past consumption.

The other far smaller benefit to recycling is local, or, to put it another way, industry-specific. The American scrap dealer buying all that leftover refuse is making some serious cashola. China has a nearly insatiable appetite for industrial junk, and they are far from alone in that demand. Japan's scrap iron and steel prices rose to $460 per ton this week. This competition for any old iron is putting some immediate money back into the hands of the recyclers. These local business’ neighborhood communities are enjoying the benefits of record prices for copper and steel. Many recylcing companies are investing in new technology.

Unfortunately, the seller’s market for scrap pretty much leaves everyone else in the proverbial lurch. Despite the current downturn in automotive sales, worldwide demand for car-building commodities has not, and can not, be satisfied by recycling. Commodity prices are still soaring. And that means that today's automakers have to juggle three not-so-pleasant options: raise product prices, find new ways to reduce their costs (usually through “design improvements”) or simply accept a lower level of profit. Others in the automotive food chain are even less lucky.

For low-income consumers, the high prices for raw automotive materials trigger far worse consequences. For starters, rising raw materials prices have forced some parts makers to the wall; they can’t simply pass on their costs to the manufacturers. (This is what precipitated GM's and Chrysler's recent attempts to sue and seize the assets of many of these faltering firms.) We’re already hearing reports of replacement part shortages due to the American Axle strike. The harder it is to get low-cost replacement parts for your car, the less it’s worth.

Meanwhile, long term, rising commodity prices hit manufacturers hard. How do you justify selling cars whose loss levels are getting worse by the day? This is not an easy question to answer. You can only sell your products at a loss for so long. Whether or not you believe any of the domestic carmakers are on the brink of disaster, the lack of affordable raw materials certainly helps speed these embattled automakers towards bankruptcy.

Needless to say, that possibility would whack American consumers but good. A bankrupt automotive company has virtually no responsibility to anyone. You want the warranty honored? Too bad. You want parts now? Hold on a sec/minute/month/eternity. While it is certainly true that a bankrupt automaker would continue to do business, the chain of customer responsibility (such as it is) would be severely damaged. And the customer would literally pay the price.

If you think that I'm being alarmist, keep in mind that I've literally seen thousands of Daewoos stuck at auctions– for years on end– because the courts had to decide their rightful owner. Even today, few cars in the market are worth less in their market segment than a Daewoo. All things being equal, there are few events that can hurt a car owner more than bankruptcy (hence Detroit’s unwillingness to consider the nuclear option).

So we’re living in a new world, where old cars are less of a blight on the landscape but car owners and car makers face significant new risks. It’s no wonder Toyota’s heading to Africa for new sources of exotic metals and a GM exec was convicted of commodity related fraud (that cost GM some $80m). In this business, it's no longer the one who owns the gold that rules. It's the one who owns the steel, copper, lead, petrochemicals and lithium.