General Motors, the largest U.S. automaker, said Wednesday that it expects full year profits to be around 5 to 10 percent lower due to higher raw materials costs and unfavorable foreign exchanges rates in South America.
GM cut its full-year profit guidance to about $6 per share in 2018, down from its earlier forecast of $6.30 to $6.60 a share. GM shares fell by around 5 percent in premarket trading.
“Recent and significant increases in commodity costs and unfavorable foreign exchange impact of the Argentine peso and Brazilian real have negatively affected business expectations,” the company said in its earnings release.
The automaker said its commodity costs in the quarter were about $300 million higher than in the year-ago period. GM said it expects the combined effect of higher commodities prices and unfavorable foreign exchange rates to add about $1 billion more in costs than it previously forecast.
According to GM, it’s biggest metal exposure is to steel.
Despite the higher costs, GM profits rose. The automaker’s net income attributable to common shareholders rose to $2.4 billion for the second quarter, up 44% from a year earlier.
Although tariffs on steel and aluminum that took effect on June 1 are likely responsible for some of the higher materials costs, GM did not mention tariffs in its earnings release. Even before the tariffs took effect, prices of the metals were rising, in part because metals-using businesses went on a buying-spree before the tariffs applied. Steel and aluminum make up about half the content in a typical automobile.
The improvement in the U.S. economy over the past 18 months have boosted U.S. auto sales to near record levels. Improved confidence of American consumers also seems to be increasing purchases of larger vehicles such as pickup trucks and SUVs. These larger vehicles are more profitable for the automakers.
GM is also benefitting from the tax cuts crafted by the Trump administration and Republican lawmakers. GM said its adjusted tax rate for the three-month period was 16 percent, down from 20.5 percent in the period a year ago.
GM earned $1.81 per share, after adjustments, beating analyst expectations that the company would earn $1.78 per share. Revenue of $36.7 billion also came in higher than expected, although slightly below last year’s second quarter.
The company will hold an earnings call with analysts at 10 a.m. It will likely face questions from analysts on the role of tariffs in bringing down earnings guidance.