How the Iran conflict and Strait of Hormuz blockage could raise car prices

The escalating conflict in Iran is affecting far more than fuel and energy prices, and it could feed straight through into what motorists pay for cars.

Alongside the sharp rise in Brent crude, the automotive industry is coming under heavy strain because of the blockage of the Strait of Hormuz. This crucial shipping lane for global trade has become the centre of a logistics shock that threatens to push up manufacturing costs and, ultimately, showroom prices.

That is because Hormuz’s strategic relevance goes well beyond oil. The channel is one of the main exit points for Liquefied Natural Gas (LNG), aluminium and key polymers such as polyethylene and polypropylene. For a car sector still trying to steady supply chains after the pandemic, this blockade risks creating a fresh rupture scenario.

“Each crisis piled on top of another becomes exponentially harder to deal with,” warned Dan Hearsch, global co-leader for the automotive and industrial sector at AlixPartners.

Caught in the crossfire

Today, the Middle East accounts for roughly 10% of global aluminium output. With vessels rerouting to avoid conflict zones and sea mines, insurance premiums and transit times have soared.

Figures from S&P Global and PwC show logistics costs across the sector have already risen by between 25% and 40% compared with pre-pandemic levels, reflecting elevated energy prices and higher labour costs.

The disruption also hits the most basic inputs. Analysts at Roland Berger estimate that instability in polymer supply could increase the cost of the plastics and chemicals used in vehicles by 15% to 25%. In a modern car, which contains an average of 150-200 kg of plastic components, that increase could deal a severe blow to profit margins.

A new chip crisis on the horizon?

Beyond aluminium and polymers, carmakers are also watching supplies of semiconductors and battery cells with growing concern. The reason is that a critical share of the noble gases required for chipmaking comes from the Middle East.

According to Peter Klimek, director of the Austrian Supply Chain Intelligence Institute (ASCII), around one third of the world’s helium needed for this production originates in Qatar.

“Everything will depend on how quickly manufacturers secure alternative sources,” Klimek cautions. He also warns that if shortages emerge, the automotive industry will be first in line to feel the pain: “Priority will be given to vital sectors, such as medical equipment.”

Measures to reduce the impact

To limit the damage in the short term, manufacturers are looking to broaden their supplier base, while also trying to bring the components they need closer to the plants where vehicles are assembled, reducing exposure to unstable routes.

On the commercial side, strategy could revert to the approach used during the pandemic: putting profitability ahead of volume. With parts and capacity constrained, manufacturers may start focusing output on their top-end models, which deliver higher margins, rather than on cheaper vehicles.

As Stefan Bratzel, director of the Center of Automotive Management, points out, buyers may ultimately have to absorb the additional costs. S&P Mobility also sees a genuine risk: “If the rise in raw material prices spreads through the economy, the impact on household budgets will create a domino effect in the drop in vehicle sales”.