TD Economics has lowered its outlook for the auto industry in the wake of the ongoing war between Russia and Ukraine.

In a report Thursday (March 24), bank economist Thomas Feltmate stated that North American car production is now expected to be 15 million units in 2022, down from a previous forecast of 15.5 million.

Moreover, production in 2023 is predicted to total 16.3 million, which less than the previously anticipated level of 17 million.

Meanwhile, Canadian sales are likely to average 1.7 million and 1.9 million in 2022 and 2023, respectively, which are lower than earlier outlooks.

“At this level,” Feltmate said about car purchases in Canada, “sales will be roughly on par with last year but still well below the pace required to meet replacement demand and a growing population – closer to 2-millon units.”

Russia started what it refers to as a “special military operation” in Ukraine on February 24.

Feltmate explained that both countries are “meaningful producers of key materials used in the manufacturing of semiconductors”.

Semiconductors are parts that perform a number of critical functions in a car.

Feltmate wrote that the conflict has “quickly become the single biggest risk threatening the semiconductor recovery”.

“Ukraine is a major global supplier of both neon gas and krypton while Russia is a major producer of palladium – all key inputs used in the manufacturing of semiconductors,” the TD economist explained.

The longer the conflict lasts, the more the risk becomes greater.

“Removing these supplies from the global market for an extended period of time will certainly dash any hopes of auto production, and by extension, sales, normalizing to pre-pandemic levels anytime soon,” Feltmate noted.

The effects of the war could extend to electric vehicles.

Feltmate explained that the Russia-Ukraine war may “slow electric vehicle market penetration over the near to medium term”.

He noted the over 20 percent of the world’s supply of class 1 nickel, which is vital in the production of lithium-ion batteries, comes from Russia.

“Removing them from the global supply will not only lead to higher EV prices, but may also force automakers to rethink battery structure, which could delay model releases over the coming years,” the economist stated.

Nickel prices have already risen as a result of the European conflict.

“Assuming the recent cost increases in nickel are sustained, the obvious implication is that electric vehicle prices will move appreciably higher over the near-term,” Feltmate wrote.

In Canada, the TD economist noted that vehicle sales so far this year have been “on a relatively somber note”.

Monthly sales averaged 132,000 units through February, which Feltmate noted is 12 percent lower than year-ago levels.

As well, 2022 sales so far are 21 percent below the pre-COVID-19 pandemic rates in 2019.

“Semiconductor shortages, the sharp spike in the Omicron variant, tight dealership inventory, and even the border blockades are all to blame for the recent weakness,” Feltmate explained.

And then the Russia-Ukraine war broke out.

“The situation in Ukraine remains very fluid, and the resulting impacts to both semiconductor supply chains, and the automotive industry are still not fully understood,” Feltmate wrote.