2016 data highlights one startling statistic about the world’s Top 7 auto markets. They are 85% of total world sales and as the chart shows, their overall sales growth since 2007 has been entirely due to China:
China’s sales have risen nearly four-fold since 2007, from 6.3m to 24.2m
Sales in the other 6 markets were exactly the same in 2016 as in 2007, at 43m
This has been very good news for those who were in China. Everyone has seen their sales rise – the car companies, the component suppliers and all the service-based industries that supported this fabulous expansion.
There have also been good opportunities in other parts of the world over the period, but also major risks:
US sales hit a new record in 2016, after a great run since 2009 following GM and Chrysler’s bankruptcy
The 27-member European Union (EU) has done well since 2013, up nearly a quarter to 14.6m, but is still below 2007′s 15.6m. (The market peaked back in 1999, when 14.6m cars were sold to the then 15 EU members)
Japan did well to 2013, but has since fallen to 4.2m; well down on 2004′s peak of 4.8m. (It is back to 1992 levels)
India set a new record at 2.9m in 2016, double 2007′s level, but fell 19% in December as demonetisation impacted
Brazil did well till 2012 when sales hit 2.8m, but are now below 2007′s level at 2m
Russia also soared from 2009, hitting 2.8m in 2012, but has since halved to just 1.4m in 2016
Now global sales are likely heading for a fall. They would already have been much lower without the support of major stimulus measures. Governments have been desperate to keep auto sales rising, due to their impact on jobs:
When China’s sales began to slow in 2015, the sales tax was cut from 10% to 5% for smaller cars with engines below 1.6l – which are mostly produced by Chinese manufacturers. But now China has raised the tax back to 7.5%, leading the manufacturers’ association to forecast sales growth will fall from 21% in 2016 to just 3% in 2017
Europe has seen widespread and continuous discounting. Ford’s European profit was just $259m in 2015: it and Fiat Chrysler made operating margins of less than 1% of sales, and GM continued to lose money. UK sales have relied on $25.8bn ($28bn) of payments since 2011 for insurance mis-selling, as many claimants used their average £3k compensation as a deposit on a car loan. VW’s diesel scandal will also have long-term negative impact, given that over half of all European new car sales have been diesel vehicles for the past decade. Paris, Madrid and Athens have already decided to ban diesel cars completely by 2025.
The USA has seen discounts reach an average $4k in December, up 20% on 2015. Leasing and financing deals have also been critical in maintaining auto sales. Experian data shows 86% of new cars were bought with financing in Q3 2016; the average loan amount is at a record high of $30k, and loan terms average 68 months
Logic therefore suggests the consensus is being extremely optimistic in ignoring today’s increasingly uncertain political background, and assuming global sales will continue to grow in 2017:
China faces political uncertainty ahead of the critical 19th National Party Congress in Q4. President Xi is almost certain to be re-nominated for a second 5-year term, but cannot currently rely on maintaining control of the critical Politburo Standing Committee – China’s main decision-making body.
Europe also faces major political uncertainty, with elections due in The Netherlands, France and Germany – and possibly Italy. In addition, the UK is highly likely to table its decision to leave the EU in the next few weeks.
In the US, every two-term Presidency for 100 years has been followed by recession. President Trump is highly likely to take difficult decisions this year, before next year’s mid-term elections and his own re-election bid in 2020
Another key issue is the impact of falling prices for used cars. Their volumes are already increasing as all the new cars sold in recent years come back for resale. China’s Auto Dealer Association expects used car sales to equal those for new cars by 2020, whilst Barclays has warned that US new car “prime and subprime net loss rates are close to multi-year highs because of softening used car values.”
Then there is the growing impact of taxi services such as Uber and Did, and the rise of car-sharing business models and self-driving cars. Most Americans, after all, waste a week of their lives in traffic jams each year, and many auto manufacturers are now introducing more service-driven business models as BMW have argued:
“Our core business in the ’70s was selling cars; in the ’80s, late ’70s came the great innovation of leasing and financing. Now you can pay per use of a car. It’s like the music industry. You used to have to buy an album, now you can pay per play.”
It is not yet clear how bad the downturn will be. But it would seem prudent to plan for at least a 5% global decline this year, given today’s rising levels of uncertainty and global interest rates. It will be too late to panic later in the year, once the detail of the downturn has become more obvious.
Plastics consumption in US autos is going down, not up. Steelmakers and glass manufacturers have recaptured ground lost in the years to 2009, and are capturing new sales as auto standards demand lighter-weight cars. And yet, if you had asked polymer suppliers about future demand in the US auto market a few years ago, they would have all been very optimistic:
- In 2009, President Obama mandated a major increase in the Corporate Average Fuel Economy (CAFE) standard from the current 25 miles/gallon to 35.5 mpg by 2016
- 2 years later, a further increase was announced, with the aim of reaching 54.5 mpg by 2025
These major improvements in fuel efficiency would inevitably require the manufacture of much lighter-weight cars. And in turn, it was widely assumed that plastics demand would be further boosted, adding to the impressive volume gains of the previous decade:
- Taking 2009 = 100, polycarbonate volume had doubled from 50 in 1996; polyethylene volume had risen from 68;
- PVC had risen from only 60, and polypropylene from only 61
As a result, the total percentage of plastics in the average car had risen from 8.4% to 9.7% between 2004 – 2009 – whilst the percentage of regular steel had fallen from 40.8% to 38%; glass’s share had fallen from 2.6% to 2.2%. It seemed success was assured.
The above chart, based on new American Chemistry Council research, highlights the major reversal that has since taken place. The metal and glass makers didn’t just roll over as expected. They fought back. They spent time with their auto manufacturer customers, understanding what they really needed to meet the new standards. And then they researched and developed new products to meet these needs, to a fast-track timescale:
- As a result, the percentage of high and medium strength steel rose from 13.3% in 2009 to 16.2% in 2014; iron rose from 5.2% to 6.8%, aluminium rose from 8.2% to 10%; and glass recovered to 2.4%.
- 2015′s percentages will be even higher, with the launch of the aluminium version of Ford’s flagship F-150 truck further boosting volume
- Meanwhile, of the polymers, only polypropylene has seen volume gains; polyurethane has held 2009 levels – and all the rest have lost volume
To say this is disappointing is an understatement. Even worse is the fact that the shift back to inorganic materials seems to be accelerating. As my blogging colleague John Richardson noted in an excellent analysis this week:
- Major research is underway in this area, with 60k possible compounds having already been screened for their potential properties – and another 40k are in the process of being tested
- Major work is also underway with 3D printing, following the example of the aerospace industry
Where is the plastics industry effort to counter these gains? Companies have had the cash to spend on employing more sales and technical staff, thanks to the windfall profits generated by oil’s temporary price rise versus natural gas. Why wasn’t it spent?
The good news is that it is not too late. The major impact from the new fuel economy standards is still to come. And technologies such as 3D printing are already becoming available to make the promise of new production methods into reality, as I noted last month.
But companies need to start today. The longer they delay, the more advantage they will concede to competitors from outside the industry, and the bigger the mountain they will have to climb.
To assume, as they say is “to make an ass out of u and me”. That was certainly the case last week, when financial markets assumed that China’s slightly better PMI index was a sign that its domestic economy was stabilising. They had temporarily forgotten the key message of February’s Research Note, namely that the government would aim to preserve growth levels and jobs by boosting exports.
This is a critical distinction. The leadership is giving no sign of intending to do any kind of major stimulus programme. It knows that domestic growth will inevitably head towards zero as it tackles the property bubble. But at the same time, China does need to preserve jobs. And the only possible means, on the scale required, is via exports.
China’s PTA market provides a good example of what is happening, as the chart of the blog’s benchmark prices shows:
- Slowing domestic demand combined with increasing capacity has taken prices down 12% this year (red line)
- ICIS suggests that June’s operating rates will be a further 10% below today’s 76% level as demand slows
- This slowdown is destroying import demand – yet until recently China was the world’s largest PTA importer
- Imports were just 500kt in January-April versus 2MT in 2012, according to Global Trade Information Services data
- Instead an export surge is underway, with 127kt exported in the same period – the first time this has ever happened
This change of strategy is most advanced in PVC. China used to be a major importer when its construction boom was at its peak, buying 255kt in January-April 2012. This year, its trade is balanced, with exports matching imports at 300kt.
China’s new strategy makes great sense – it aims to close down low-margin polluting businesses and instead expand higher-value exports. Thus it is investing heavily to create a technologically sophisticated auto industry, and car exports are poised to take off as the domestic market weakens:
- China’s gas deal with Russia rightly grabbed the headlines last week
- But Russia’s railway is now also ramping up its connections between China and Germany/Central Europe
- Links to India, Thailand, Vietnam and Indonesia are also planned for the next 2 – 3 years
- The aim is to create a ‘through route’ for China’s cars to key export markets
And whilst it is fashionable to mock the quality of China’s domestic car production, JD Power analysis shows manufacturers moving rapidly up the learning curve:
“Chinese domestic brands achieved tremendous improvement in vehicle quality in 2013, with four domestic brands—GAC Motor, Venucia, Roewe and Luxgen —performing above industry average. We have seen the gap with international brands continually narrow during the past 14 years.”
Meanwhile, as the chart also shows, an ominous calm has fallen in other Benchmark product markets. They have hardly moved in months.
But the blog is keeping a close eye on benzene, its favourite indicator (green line). its prices have suddenly weakened, as Asian demand disappoints. As we move into the seasonally weak Q3 period, this could prove an early warning sign that a new downturn lies ahead.
Certainly performance since New Year supports the blog’s own argument that the Demographic Scenario is far more likely to occur than policymakers’ Recovery Scenario. And even they are now warning of potential trouble ahead. Germany’s chancellor Merkel warned of “deceptive calm”, whilst as Bloomberg reports:
“24 hours of warnings where led by New York Fed chairman William Dudley’s acknowledgement that the slide in market volatility “makes me a little nervous”. Bank of England deputy governor Charles Bean said conditions were eerily reminiscent of the pre-Crisis era, whilst Bundesbank borad member Anreas Dombret said “we do see risks despite the fact the markets are calm“.
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 12%. “Several producers are planning to shut their units in June because of squeezed margins, and slower off-take in the downstream markets”
Benzene, Europe, down 4%. “Ample import volumes arriving in Europe.”
US$: yen, down 3%
Brent crude oil, flat
S&P 500 stock market index, up 4%
Naphtha Europe, up 5%. “A recent spike in exports to Asia has been followed by a sharp drop”
HDPE US export, up 7%. “Globally, buyers are buying mostly on an as-needed basis, not wanting to build inventories on the assumption that prices will decline”