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US automakers expect Q2 to be production trough amid chip shortage

Highlights

Ford, GM expect lowest production in Q2

Additional chip supply expected in July

US automakers expect the second quarter of 2021 to be the trough of year for production as they continue to adjust output amid a global shortage of semiconductor chips.

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"Our expectation is that Q2 will be the weakest quarter of the year as we increase plant downtime and continue to build vehicles without modules, impacting Q2 EBIT adjusted and working capital as we hold vehicles in inventory to wholesale later in the year once the semiconductors are received," General Motors CFO Paul Jacobson said during the company's first quarter conference call May 5.

GM is managing the shortage through select downtime in Q2, which may extend into the second half of the year, however, the company plans to operate through the traditional US summer shutdown in early Q3 at select facilities, he said.

"We do not believe this short-term semiconductor headwind will affect our long-term earnings power and we remain committed to our growth initiatives in the EV acceleration we've previously communicated," he said.

GM engineers have been working to alleviate the backlog using chips that are more readily available or by identifying alternatives where possible, maximizing production of the highest demand and capacity-constrained vehicles and reducing downtime, GM CEO Mary Barra said.

GM did not disclose the expected impact of the shortage in terms of production figures, citing the fluidity of the situation.

In its Q1 report, Ford said the global semiconductor shortage reduced its planned production volume by about 200,000 units, or 17% during the quarter.

"The semiconductor shortage and the impact to production will get worse before it gets better," Ford CEO Jim Farley said during the company's first-quarter conference call April 28. The company said it expects to lose about 50% of its planned Q2 production and is assuming it will lose roughly 10% of planned production in the second half of the year. The shortage is expected to drive a loss of about 1.1 million wholesale units for the year, Ford CFO John Lawler said.

While semiconductor supply chains were already constrained, the March 19 file at the Renesas Electronics chip factory in Japan has further limited supply in Q2, with the Renesas manufacturing about two-thirds of all chips in the auto industry, Farley said. Renesas expects it will return to full capacity in July, he said, providing some relief in the second half of the year.

"While most of the chips for our modules for this facility are definitely dual-sourced, Ford and others are facing additional constraints, and we've yet to see significant new chip capacity come online for our industry," Farley said. "Estimates project the full recovery of the auto chip supply will stretch into fourth quarter of this year and possibly even into 2022, making industry volume recovery in the second half of this year even more challenging."

Rising commodity prices are another significant headwind for automakers going forward, with US hot-rolled coil prices at an all-time high.

"We saw very little commodity impact in Q1 [and] that's because we still had our contracts from last year in place, and we had our hedging," Lawler said. "As we go through the year, we expect--as contracts roll off and we've seen the commodity prices increase primarily for aluminum, steel and precious metals--we expect to see about a $2.5 billion increase in commodities Q2 through Q4."

The daily Platts TSI US HRC index has increased $36/st since the start of the week and was set at $1,481/st May 5, steady on day, and reflecting an all-time high.