A Looming Problem for Auto Stocks

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It's not a crisis yet, but it could become one: A looming global shortage of an obscure but important chemical critical to new-car manufacturing could possibly disrupt automotive production lines around the world in coming weeks.

If you own shares of Ford (NYS: F) , General Motors (NYS: GM) , Toyota (NYS: TM) , or any of the other global automakers, you need to be watching this story, because there's a chance your company's manufacturing -- and its stock -- could be affected.

A damaged factory with global significance
Here's the story in a nutshell: On March 31, a chemical plant in Germany that produces a substance critical to the manufacturing of certain auto parts experienced an explosion. That plant will be shut down for several months, and in the meantime, global supplies of the substance in question will be insufficient to meet demand.


The substance, called cyclododecatriene, is necessary to the manufacture of a kind of nylon, called PA-12, that is used in brake and fuel system parts for new cars and trucks made around the world. One of the leading makers of those parts, privately held Michigan firm TI Automotive, warned its clients last week that it was likely to run short of parts sometime in the next few weeks.

That's a problem: TI's clients include just about every big name in the global auto business. Other suppliers of the critical chemical are maxed out and won't be able to cover the lost production.

That leaves all of these automakers -- all of the ones I listed above, plus Volkwagen, Honda (NYS: HMC) , Hyundai (OTC: HYMTF), Chrysler, and most of the others you've heard of -- scrambling for alternatives.

What's happening and what to expect
On Tuesday, representatives of key auto-industry suppliers, chemical manufacturers, and most of the major automakers with a presence in the U.S. met near Detroit to discuss the situation and explore alternatives.

The takeaway from the meeting was both good news and bad news. The good news is that alternatives to PA-12 exist and will probably work just fine. The bad news is that it will take weeks of preparation and testing before those alternatives can enter production, and existing supplies of PA-12 may run out in the meantime.

In fact, some shortages are all but certain unless a quick fix is implemented, say analysts -- and that's unlikely. The problem is this: Even if a replacement for PA-12 is identified quickly, automakers will be concerned about the new product's quality and durability, and they will insist -- rightly, given the safety implications -- on extensive testing before putting the new parts into production.

Long story short, it seems likely as of this moment that some automotive production lines will be stopped due to parts shortages within a few weeks.

But whose? We don't know yet.

How should investors prepare?
Ford spokesperson Todd Nissen, like his counterparts at most of the other automakers, has been quick to point out that this shortage hasn't had any impact on his company's production so far. That's true, and it bears emphasizing: As of today, no automotive production has been lost as a result of this shortage.

It's also true that it may have no impact down the road. But as of now it looks like there's a good chance that at least some companies will lose some manufacturing for an indeterminate period of time -- weeks or perhaps months.

That will result in lost profits, and that could impact share prices -- perhaps harshly, depending on the severity of the shortage and the companies affected. But shareholders should keep this in mind: This is a temporary shortage. Any lost production, and any share-price drop, is likely to be made up in time.

The upshot is this: If shortages hit the company you own, hold tight. I plan to do the same with my Ford and GM shares (and if I change my mind, I'll say so here before I sell and explain why). You may not like the headlines or what happens to the share price in the near term, but things should recover in time. In the meantime, it may be prove a good opportunity to add to your holdings.

PA-12 isn't the only auto-related substance in short supply. As global demand continues to rise, gas prices seem set to follow. On the flipside, the oil industry is poised to profit as the global price for gas gushes higher. To gain a better understanding of investing in a volatile energy market, check out The Motley Fool's new special report, "The Only Energy Stock You'll Ever Need." It's completely free for Fool readers, but only for a limited time -- so get your copy now.

At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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