Autos remain the world’s largest manufacturing industry, and the single biggest source of demand for chemicals and plastics. According to detailed analysis by the American Chemistry Council, each new US auto is worth $3,539 in terms of sales – and involves a wide range of products including antifreeze, plastic dashboards, bumpers and windows, as well as upholstery fibres, tyres and coatings.
So the chart above, which summarises sales in the world’s 7 largest markets since 2007, is cause for concern. These markets account for over 80% of all auto sales:
- Including China (yellow), sales have increased 18% from 47m to 55m
- But excluding China, they have fallen 2% from 41m to 40m
Equally of concern is the detailed picture:
- US sales (green) have fallen 4% over the period, EU sales (red) are down 18%
- The smaller markets have done well until recently, but have now slowed
- Brazil is up 42%, but fell 1% in 2013 (pink) despite the boost from soccer World Cup and Olympics activity
- Russia is up 4% (orange), but fell 6% in 2013: India is up 77%, but fell 7% in 2013 (blue)
- Japan is up only 4%, and was flat in 2013 (dark blue) despite the Abenomics stimulus
So a lot depends on China to power future growth. This, however, looks most unlikely to happen, for reasons discussed in the blog’s detailed analysis last week. The new leadership are already cutting back lending in the shadow banking sector, which has been the main source of finance for auto sales.
Supporting evidence for this analysis comes from developments in those countries who had been major suppliers of raw materials to China. Brazil and others have all seen their economies go into reverse as China cools.
Equally, the blog is quite doubtful about the bullish forecasts for US sales this year. It continues to believe these have been largely driven by financing deals – which made new cars more attractive than used cars. Only 42m used cars were sold in 2013, as the average price has risen 18% since 2007, due to relatively few new cars being sold in 2008-11. But now more cars are now coming on the market, and dealers expect prices to fall again.
Globally, analysts WardsAuto also report that manufacturers’ inventory in the major markets in December was 9% higher than in 2012 in both the US and Asia-Pacific, and 4% higher in Europe.
Of course, policymakers’ optimism over a sustained recovery may still turn out to be well-founded. But behind the hype, the detail of current auto industry performance suggests that any company without a Plan B risks finding themselves in a difficult position by the middle of the year.
The blog continues this week’s special series on chloralkali and PVC markets by looking at EU developments on PVC.
Historically the EU has had strong export positions into markets such as Turkey and Russia, which lack major local production. More recently, as in the USA, strong export demand for caustic soda and weak domestic demand for PVC into housing led to an increased focus on PVC exports.
This created direct competition with US exporters. And helpfully, the US switch to ethane as an ethylene feedstock provided a silver lining for EU producers. US output of propylene and butadiene has been reduced by the switch to ethane feeds, and so overall EU cracker margins have been supported by higher co-product prices for both products.
Thus as the chart shows, based on GTIS (Global Trade Information Services) data, the EU has also been able to increase PVC exports:
• EU net exports of PVC rose 24% from 508KT to 631KT between 2006-8
• They then grew a further 51% to 954KT by 2011
• Overall, net exports rose 88% between 2006-11
GTIS data also provides a fascinating picture of the main battlegrounds:
• The US maintained net exports of ~325KT into China between 2009-11 (yesterday’s post gives details). EU volumes have fallen from 108KT to 17KT over the same period
• The US has also boosted net exports to Russia from 30KT to 209KT, whilst EU volumes grew only 35KT
• But the EU has done better in Turkey. Its net exports more than doubled from 221KT to 494KT, whilst the US saw only a 60KT increase to 192KT
Overall, therefore, China’s stimulus programme has compensated for the downturn in US/EU housing markets. It created major demand for caustic into mining-based economies, as well as for PVC in their housing markets and in China itself.
Today, however, there are worrying signs that this virtuous circle is ending, as China’s economy slows. GTIS data shows EU 2012 PVC exports to the end of February were slightly down at 171KT. This confirms the slowing trend seen for US caustic and PVC exports discussed on Tuesday and Wednesday.
Autos are the largest single market for chemical and polymer sales. And the USA, China and EU are the 3 largest markets, accounting for 2/3rds of global sales last year.
Disappointingly, as the above chart shows, their sales were up just 1% overall in Q1 versus 2011 at 10.6m. Even this gain was only due to March being the strongest month on record with 4.25m sales.
Each market also showed quite different trends:
• US sales were the most encouraging, up 13% at 3.5m
• China’s sales were disappointing, down 1% at 3.8m
• EU sales were awful. They were down 8% at 3.3m, with March sales the worst since 1998
Optimists can point to recent strength in the USA, and the need to replace older vehicles as a driver for future demand. They can also hope that China’s demand may resume its growth later this year. In Europe, they can take comfort from Germany’s continuing strength, with sales up 1%.
Pessimists can instead argue that US strength in Q1 was supported by the return of Japanese cars to the market after the supply problems last year. They can also argue that China’s growth curve has now been flat for some months. Whilst in Europe they can speculate that China’s slowdown will soon impact Germany’s economy, as its exports slow.
Reasonable people can see merit in both sides of the argument. We can all hope that the optimists are right. But we may also worry that the pessimists have good arguments too.
The auto market is thus another example of the general uncertainty that continues to hang over the global economy.
January was not a great month for auto sales in the 3 major markets of the USA, EU and China. These amount to over 50% of global auto sales, and are a key indicator of underlying consumer demand.
As the chart shows, sales were just 3m (red square), down from 3.2m (green line) in 2011:
• China’s volumes were down 17% to 1.2m from 1.4m
• EU fell from 1.04m to 0.97k
• Only the USA saw a rise to 0.9m from 0.8m
Of course, China’s sales were much slower than last year due to the Lunar New Year taking place earlier than in 2011, and combining with the Spring Festival. But even so, China’s auto industry is only forecasting 8% growth this year – in line with the 6% seen in 2011. This is well down on the 33% and 49% increases seen during the stimulus period.
It is also difficult to be optimistic about EU sales, with auto companies forecasting sales declines of 6% or more this year. Whilst sales growth forecasts in the USA will be tested by today’s high gasoline prices.
As promised, the blog looks today at the performance of US polyethylene (PE) exporters in Brazil.
It was the fastest-growing of the major markets in 2011, as the wider economy benefitted from China’s demand. Since 2008, Brazil’s PE net imports have grown 78%, from 445KT to 793KT in 2011. But as the chart shows (based on data from Global Trade Information Services):
• NAFTA (red square) has seen its market share decline from 40% to 38%, despite its growing cost advantage since 2010 due to shale gas
• The reason is that China’s changing market dynamics (as discussed yesterday), has led to greatly increased competition
USA net exports have grown 51% over the period, from 171KT to 258KT. Canada’s exports have also increased from 6KT to 32KT. But at the same time, many more players have entered the market:
• Latin American exporters (blue line) have been the big losers
• Their share has dropped from 42% in 2008 to 24% in 2011
• The Middle East (dark blue) has jumped from 2% to 13%
• Europe (green) has maintained its position, rising from 8% to 10%
• SEA (brown) has jumped from 1% to 6%
• NEA (dark green) has increased from 3% to 4%
• India (purple) has gained a 1% share
In turn, this has led to a decrease in relative profitability. GTIS data also shows that Thailand, for example:
• Sold in 2008 at an average $1825/tonne, $100/t above USA levels
• But in 2011 it sold at $1546/t, $50/t below USA levels
Brazil’s market dynamics therefore highlight the increasing challenge being faced by US exporters. Countries no longer able to sell their output to China will not simply reduce production. Instead, they will target new markets, increasing competitive pressures around the world.
Cars are now the largest single market for chemical sales, as housing markets have slowed globally. Each new US car is worth $3297, for example, according to the American Chemistry Council (ACC), making the US market worth $42bn in 2011.
2011 auto sales were ~59m, up 4% from 2010. The West (EU, USA, Japan) still dominates, with 50% of demand. Developing countries showed rapid growth until recently, but the BRICs (Brazil, Russia, India, China) are still only 35%.
The chart above shows performance in the 3 largest markets since 2007:
• China (blue column) remained in top spot at 14m. But its growth rate collapsed with the ending of stimulus spending – from 49% in 2009, and 30% in 2010, to just 5% in 2011. Q4 growth was only 1%, as the last subsidies were removed in September
• The EU (red) was 2nd at 13m, continuing its recent decline. Sales have now fallen for 4 successive years. Without Germany, whose sales rose 9% to 3.1m in 2011, the picture would be even worse
• The USA (green) remained 3rd with sales up 11% to 13m, hopefully having now bottomed, as the blog noted recently. But they are a long way from the 15 – 17m range enjoyed during the 1995-2007 boom years
• Japan was the next largest market at 4.2m, hit by 2011’s tsunami disaster. The other main markets are small by comparison – Brazil at 2.7m, Russia at 2.6m, India at 2m
Overall, growth in the 3 major markets weakened significantly last year.
2009 had equalled 2008 performance, as China’s massive stimulus balanced the US/EU slowdown. Then co-ordinated G20 stimulus led to 10% growth in 2010. But last year saw growth decline to 4%. Q4 growth was only 2%, versus 10% in Q4 2010.
The blog does not rule out a panic reaction by policymakers, as it becomes more apparent that the world has re-entered recession. Co-ordinated stimulus would work for a period, as it did in 2009/10. But the debt overhang afterwards would be even worse than today’s.
In the absence of further stimulus, it is hard to see much growth in 2012, particularly with oil prices at today’s record level:
• Germany’s economy is slowing fast, so EU volumes are likely to continue their decline
• China’s growth will remain slow, as its primary focus is now on controlling food price inflation, rather than boosting demand
• The USA will probably also see only slow growth, even with further stimulus ahead of the presidential election
It is not all bad news, however, as moves to reduce auto weight will boost chemical and polymer demand. The ACC estimates, for example, that 378lbs (172kg) of plastics and composites were used in the average light vehicle in 2010, up from 286lbs in 2000 and just 20lbs in 1960.
But clearly the days of steady SuperCycle growth are now behind us, as the Western BabyBoomers enter the New Old 55+ generation. With 29% of the Western population already in this cohort, their mobility needs now represent a new and potentially very attractive market opportunity.
We highlight these in more detail in Chapter 8 of ‘Boom, Gloom and the New Normal’, to be published next week.