Exploding Commodity: New Headwind For The Auto Industry?

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Commodity

Understanding How Rising Costs Hit Profits

In any industry, the biggest fear is not just lower sales but shrinking profit margins. When input costs rise and selling prices cannot keep up, profitability starts eroding, even if revenues remain flat.

Consider a simple example:

A company sells goods worth 100.
Its cost of production (raw materials, labour, energy, etc.) is 40.
Operating profit before tax is 60 (100 – 40).

Now assume sales are still 100, but the cost rises from 40 to 45 due to higher raw material prices:

New cost of production: 45.
Profit before tax: 55 (100 – 45).

Because cost increased by 5, profit declined by the same 5. The margin compression is immediate and visible in quarterly results. When this cost pressure is broad-based across a sector, the entire industry’s profitability can fall simultaneously.

In markets, this is exactly what investors fear:

Rising input costs
Stable or slow-moving selling prices
Result: Margin pressure and earnings downgrades

What Is Happening In Commodity Markets Right Now

Commodity markets are very different from equity markets. Unlike thousands of listed stocks, there are only a limited number of actively traded commodities, broadly grouped into three segments.

Key Commodity Segments

Bullion: Gold, silver and their contract variants (mini, micro, guinea, etc.).
Base metals: Aluminium, copper, lead, nickel, zinc, with mini contracts available for some of them.
Energy: Crude oil, natural gas, electricity, with mini contracts in crude and gas.
Agro commodities: Cardamom, cotton, cotton seed oil, crude palm oil, kapas, mentha oil and others.

In the current phase, the action is clearly visible in metals:

Gold is trading near record highs, supported by safe-haven demand and central bank buying.
Silver has surged to multi-year or record levels, driven by both investment flows and industrial demand (EVs, solar, electronics).
Copper prices have risen sharply on the back of AI data center buildouts, EV expansion, and supply constraints.
Lead and zinc have also seen upward moves, even if not as dramatic as copper, as part of the wider metals rally.

This broad rally across bullion and base metals signals both strong structural demand and potential inflationary pressures for downstream industries.

Why Rising Commodity Prices Are A Problem For Automakers

Every finished automobile is essentially a bundle of raw materials: steel, aluminium, copper wiring, electronic components, plastic, glass, rubber, and in the case of EVs, battery metals and much more sophisticated electronics.

How Raw Material Inflation Transmits To Auto Costs

Metals like steel, aluminium, copper, lead, nickel, and zinc are used in body panels, chassis, engines, motors, wiring harnesses, and batteries.
Precious metals such as silver are critical for electrical contacts, sensors, circuit boards, and power electronics.
Energy commodities like crude oil and natural gas influence logistics, plastics, tyres, and overall operating costs.

When prices of copper, silver, aluminium, and related metals rise together, the total cost per vehicle climbs. Automakers can temporarily absorb some of this through:

Existing low-cost inventory
Cost-cutting in other areas
Efficiency gains and platform sharing

But if commodity prices stay high for long, three things usually happen:

Margins get squeezed.
Companies start increasing vehicle prices.
Demand gradually softens as ownership costs rise.

This is exactly the new concern for the auto industry today: the commodity boom is quietly turning into a margin and pricing problem.

Silver, Copper And EVs: Double Demand, Double Pressure

The shift from ICE (internal combustion engine) vehicles to EVs has made the auto sector even more sensitive to certain commodities, especially silver and copper.

How Much Silver Do Cars Use?

Industry studies provide a useful range:

Typical ICE car: around 15–28 grams of silver, used in wiring, contacts, sensors, switches, and some catalytic components.
Battery electric vehicle (BEV): roughly 25–50 grams of silver per vehicle, mainly in battery management systems, power electronics, and high-voltage circuits.

This means an EV can use roughly 67–79% more silver than an ICE vehicle, effectively close to “2x-type” demand depending on model and features. As global EV penetration rises, silver demand from autos is expected to grow at around 3–4% annually, with EVs overtaking ICEs as the main automotive silver consumer by 2027.

Copper: The Lifeblood Of Vehicle Wiring

Copper is used extensively in wiring harnesses, motors, inverters, charging systems, and infrastructure like fast chargers.
EVs require significantly more copper than ICE vehicles due to higher wiring density and power electronics.

With copper prices hitting record levels on the back of AI, data centers, and energy transition, automakers are facing a structural cost uptrend in this key metal as well.

In short:

ICE vehicles are already exposed to silver and copper.
EVs amplify that exposure materially.
Rising prices in both metals mean higher costs per vehicle, especially for EV-heavy product portfolios.

GST Relief Vs Commodity Shock For The Auto Industry

The auto sector recently benefitted from tax rationalization, but that tailwind is now being partly offset by raw material inflation.

How GST Helped The Auto Sector

Under earlier structures, automobiles in India often attracted:

28% GST plus a compensation cess of up to 22%, taking effective tax as high as 50% for some categories.

Recent GST 2.0 reforms have:

Reduced GST on small cars to 18%, down from 28%, and eliminated cess, making them cheaper.
Placed larger cars and SUVs in a 40% slab without cess, which still results in a lower effective tax burden compared with the earlier 28% + high cess regime.
Retained a favorable 5% GST rate on EVs, supporting affordability and adoption.

This tax rationalization boosted sentiment, improved affordability, and helped revive demand after previous shocks such as the semiconductor and rare-earth supply disruptions.

Now The New Risk: Commodities

However, while tax rates have become more supportive, commodity prices are moving in the opposite direction:

Precious metals (gold, silver) are at or near record highs.
Copper has surged, and analysts see sustained tightness due to structural demand.
Base metals like aluminium and zinc have seen bouts of strength, impacting body and component costs.

If this trend persists, any benefit from lower GST may be partially neutralized by higher ex-factory costs, forcing companies to hike prices or sacrifice margins.

Inventory Buffers, Pricing Power And Demand Risk

In the short term, automakers and auto component suppliers are not fully exposed to today’s spot commodity prices because they typically maintain inventory and enter into contracts in advance.

Role Of Inventory And Hedging

Most large OEMs and Tier-1 suppliers maintain a few weeks to a few months of raw material inventory, often procured at older, lower prices.
Some use hedging strategies or long-term contracts to lock in prices for key metals.

This means:

Short-term results may look comfortable even when spot prices spike.
But once low-cost inventory is consumed, higher commodity prices start flowing through to the profit and loss statement.

Companies with larger inventories or better hedging policies can withstand the shock longer than those that operate on lean inventory.

Passing Costs To Consumers

Ultimately, if commodity prices do not normalize, the industry has limited options:

Increase ex-showroom prices of vehicles.
Reduce discounts and offers.
Rationalize features/trims to protect margins.

All three strategies push more cost onto the end buyer. Over time, higher vehicle prices and total cost of ownership can:

Delay purchases
Shift customers to smaller segments
Slow down replacement cycles

This demand softness can be particularly painful in a sector that had just started to regain momentum after previous crises, including the rare earth and chip shortages that temporarily halted or slowed production at companies like Maruti Suzuki and impacted players like Bajaj Auto.

Check out this article that explains the yen carry trade.

How Bad Can It Get For The Auto Sector?

The current commodity price surge has the potential to become as disruptive for the auto industry as earlier supply shocks, but in a different way.

Parallels With Past Supply Shocks

Rare earth and semiconductor shortages resulted in production cuts, extended waiting periods, and lost sales opportunities.
Today’s metals rally threatens to compress margins and force price hikes, risking demand and profitability rather than capacity alone.

Both situations share a common theme:

External, largely non-controllable factors
Sector-wide impact, not just company-specific
Need for strategic inventory and sourcing management

Key Risks To Watch

Persistence of high silver and copper prices driven by EVs, AI, and clean energy.
Broader metals inflation in aluminium, zinc, and nickel that affects a wide array of components.
The speed at which automakers pass on costs through price hikes, and how consumers react.

If the commodity rally is prolonged, the auto sector could see:

Margin compression despite healthy volumes
Selective demand slowdown in price-sensitive segments
Increased differentiation between companies with strong sourcing, hedging, and pricing power versus those without

In simple terms, a car that costs “x” today is very likely to cost more in the future if these input prices stay elevated, and that extra cost will not be absorbed indefinitely by manufacturers.

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