DETROIT (Reuters) -- Faced with soaring prices for basic commodities like steel, aluminum and copper, auto makers are finding it hard to pass those costs on to customers who have come to expect deals when buying a new vehicle.
Instead, the companies are stretching for ways to balance out the costs with other savings, executives said on Monday at the North American International Auto Show here.
"I don't recall a perfect storm like this," said Peter Rosenfeld, executive vice president of procurement and supply at Chrysler Corp. "We've never seen the kind of increase in raw materials that we've witnessed in the past year or so."
Rosenfeld said steel prices have plateaued and probably would not revisit last year's highs. But oil prices could resume their climb because of political instability in the Middle East -- pushing up not just fuel prices but oil related materials like plastics that are heavily used.
Aluminum prices jumped by a quarter last year to their highest level in more than a decade. Copper prices doubled in 2005, ending at a record high.
Deutsche Bank predicts demand from China, which shows no signs of slacking, combined with under investment in mining and smelter operations will support commodity prices into 2007.
Nissan Motor Co.'s Chief Executive Carlos Ghosn on Monday said demand from other emerging markets, like Russia and India, will also add fuel to the fire.
"Frankly, I don't know if the worst is over," Ghosn told Reuters at the Auto Show. "We are entering a period in the medium term where we are going to have to adjust the company to compete with the high price of energy and raw materials."
Prices of palladium and platinum - used in pollution controlling catalytic converters as well as in spark plugs and electronic systems - soared about 50 percent in 2005 and could rise another 10 percent by mid-2006, according to specialty chemicals company Johnson Matthey.
With the electronics content of vehicles growing at about 7 percent a year, demand for these metals goes up even if auto sales do not, said Matthey's market research manager Ellen Zadoff.
Toyota Motor Co. has been one of the best at managing challenges posed by costly raw materials, said James Sourges, who follows the U.S. auto sector for Capgemini.
"You know they're not perfect, but they're doing something right in a tough market," he said.
In terms of pricing, the commodity boom could mean that car makers offer maximum discounts of $4,000 instead of $5,000 per vehicle, Sourges said. But another factor pushing up commodity costs is vehicle over-production, he added.
"If the market right-sizes and we get capacity in line with where demand is, then you'll see relief," he said. "The next two years are going to be rough," he added.
Scourges estimated annual U.S. demand now at about 15.5 million to 16 million vehicles, compared with current annual production of about 17 million or more by strapped car makers.
"The consumer is astute, there is a lot of competition and it does not allow you to increase prices by much more than inflation," Tom Purves, chief executive of BMW North America, added.