Boom, Gloom and the New Normal

Autos are now the single biggest market for petchem sales. They are also reported very quickly. So October’s EU auto sales provide the best real-time picture of the downturn now underway. As the chart shows:

• October’s sales (red square) were the lowest in recent years
• Total sales since January are also the lowest
• They are 16% below the 2007 peak

It is not difficult to write the script from here. People in the weaker economies such as Spain or Italy will not be buying many new cars in the next few months. Austerity programmes and rising unemployment do not encourage purchases of high cost items.

Equally, as Petromatrix report, consumers are cutting back on their driving, as they worry about high fuel costs. Germany’s diesel demand was down 6% in September versus 2010, whilst gasoline demand was down 3%. Data for the other 4 main markets (France, UK, Italy, Spain) shows similar trends.

Already the auto makers are starting to respond. GM said its results were “not sustainable and not acceptable”, adding that it was looking at ways to reduce costs. Others such as Peugeot have already announced production cuts and layoffs.

Q1 could be very difficult indeed, if current trends continue.

Auto sales in the key global markets of China, USA and Europe present a mixed picture as we look towards year-end (red square):

• China had a strong September, and sales are now up 6% versus 2010
• But the Auto Association claimed this was due to a last minute rush of orders caused by the ending of subsidies on smaller engines
• They forecast Q4 sales will be down 5% as a result, and expect the market overall to be up just 3% in 2011

• Europe’s September sales were steady, and down 1% in 2011
• Germany remains key, with sales up 11% so far in 2011
• In the other major markets, France is stable, whilst the UK is down 5%, Italy down 11% and Spain down 21%

• The US is up 11% versus 2011, but still adrift of the pre-2008 period
• In total, it should meet the blog’s forecast of 11m-13m for the year

Overall, however, these 3 regions, which account for two thirds of global sales, are likely to show only minor growth of perhaps 3% in 2011, if China’s sales fall as forecast. This is really not good news for a market which is of such key importance for the chemical industry.

The good news about US auto sales last month was that they were the highest September sales since 2007. The bad news was that they were still below the 1.1 million level, which was the minimum monthly sale from 2005 – August 2008.

The reasons for the slight increase in sales were also quite prosaic. The average age of autos on the road is now a record 10.7 years, and so people are being forced to replace older vehicles. And even so, a rise in incentives to an average $2716/auto was required to boost sales.

The blog’s EPCA meetings also revealed that the size of the average auto sold is getting smaller, as consumers cut back spending. This reduces the actual amount of chemicals and polymers used per car. In turn, it means the benefit from the impact of greater fuel efficiency standards may be less than the blog had hoped.

Auto sales in the world’s 3 main markets (China, USA, EU), saw much slower growth in the past 3 months.

The chart above shows how they have moved in 2011 (red square) versus previous years. It is clear that the stimulus-led boom seen since 2009 has come to an end:

• Overall, sales in the last 3 months were 9.2m, up just 2% on 2010
• Last year, China’s sales were soaring, and masked the West’s slowdown
• But now the need to fight inflation has ended its credit boom

Thus year to date sales in these 3 major markets were 26m at the end of August. This was only 5% higher than the 2010 level, and looks set to weaken further in Q4. By comparison, 2009 saw a very healthy 10% rise at this stage in the year, even though Q1 had been dreadful.

Last year, these three regions were nearly two-thirds of global auto sales. And it seems other global markets are also slowing: passenger car sales in India actually fell 2% in the April-August period versus 2010.

This slowdown was already evident back in July. Hopefully companies focused on these important markets have now had time to prepare their contingency plans, in case the slowdown continues.

Most of Europe goes on holiday in August, and so it is only now that auto sales for July and August have been reported.

As the chart above shows, the monthly sales figures continued the weak trend seen so far this year (red square):

• July’s sales of 1 million were the lowest in the 2005-11 period
• August’s sales of 750k were lower than any year except 2010
• Total sales of 8.9 million were down 1% versus Jan-Aug 2010

ACEA (Association of European Auto Manufacturers) also note that only Germany is showing any strength amongst the 5 main markets. It is up 11% in 2011, but France is at 0%, the UK down 6%, Italy down 12% and Spain down 22%.

This does not provide much confidence regarding the Q4 outlook for chemical and polymer demand in this important sector.

China’s auto market growth has clearly stalled.

As the chart above shows, August figures (red square) continued the trend of recent months, and were only 5% above 2010 levels (brown line). Rao Da, head of China’s automotive association, also repeated his warning that “there is no sign of a market recovery“.

The reason is not hard to find. Although August data suggests inflation may be peaking, its level of 6.2% is far too high for comfort. And food price inflation of 13.4% is a major problem for a relatively poor country such as China.

Many in the West simply do not realise that the official definition of ‘middle income’ means people who earn just $2/day – $20/day. The rich are those earning over $20/day, and are just 4% of China’s population.

And even these figures overstate people’s real earnings. The Asian Development Bank chooses to base them on its own more favourable version of the purchasing power parity (PPP) metric, not the amount actually earned in a pay packet.

What happens next is becoming a critical issue. The blog’s co-author, John Richardson, notes JD Power’s forecast that China is on track to produce 31 million vehicles in 2013, up from 17 million last year.

China boosted sales 32% in 2009 and 46% in 2010. But this was based on its ‘no questions asked’ lending surge. Now lending growth has stalled, due to the inflation problem. Sales are forecast to be just 19 million this year. Continued 5% growth would mean only 21 million sales in 2013.

So what will happen to all this capacity? And what will happen to all the new chemical and polymer capacity built to supply it? It doesn’t take a rocket scientist to deduce that China has only two options:

• Ramp up its export sales
• Shut down surplus factories

Neither seems a very attractive option, given that the world was counting on China’s continued growth to sustain global demand.

The New York Times notes that “any slowdown in growth is likely to shock the world’s automakers“. The prospect of 45% over-capacity by 2013 means such a shock may not be far away.

One characteristic of recessions is that recovery is always ‘just around the corner’. We can see this pattern in today’s US auto market. Since 2009, forecasters have been convinced that sales will quickly return to Supercycle levels of 15-17 million/year. But sadly, by around this time of year, it has become clear that nothing has really changed.

Thus the blog’s own forecast in January, that sales will be in the 11 – 13 million range, looks likely to be achieved, with the annualised sales figures now down to 12.12m. As the chart above shows, August sales (red square) were once again below the 1.1m level, which represented a minimum in the Supercycle days..

The problem is that manufacturers and analysts remain in denial about the impact of the ageing BabyBoomers (those born between 1946-70). Their argument seems to be that ‘demographics has nothing to do with demand’. Until we move beyond this phase, it seems unlikely that we can make much progress.

The pity is that the need to reduce carbon footprint, and improve fuel efficiency, could provide a major new growth paradigm. But it is unlikely to be realised, as long as the ‘experts’ convince themselves that a return to the Supercycle is just around the corner.

Chrysler CEO, Sergio Marchionne, has issued a wake-up call to Western auto companies about the growth of China’s exports. He warns that they “can’t count on dramatic growth in Asia to drive prosperity“, and suggests that China’s plans to increase auto exports pose an “enormous” risk.

Meanwhile, US auto sales disappointed again in July. As the chart shows (red square), they have been back below the 1.1 million/month level since May. And optimism over a seasonal pick-up in August is fading.

Annualised sales this year are only 12.2 million. This is 27% down versus 2000-7′s average of 16.8m. And thus the industry is getting ready to cut prices from current record levels in an effort to stimulate sales.

One problem is that Americans’ love affair with autos has faded. High prices led to a 1.9% reduction in July’s gasoline sales versus 2010. And vehicle miles travelled January-May were the lowest level since 2004.

The move towards the New Normal is also having a major impact. Americans are already spending less, and saving more, as the BabyBoomers (those born between 1946-70) enter the 55+ age group.

The US savings rate was 5.4% in July, versus ~0% by the end of the 1982-2007 supercycle. Sales are therefore likely to remain lower. especially as lending criteria become stricter and fears over job security rise.

China’s auto market has gone ex-growth, as the above chart shows. Monthly sales in July (red square) were the 2nd lowest since July 2010.

The problem is the continuing fall-out from the end of China’s great credit bubble. Inflation hit a new high of 6.5% in July. More importantly, food prices rose by 14.8%, up from 14.4% in June.

This would be bad enough in the West, where average incomes are ~$40k/year. But China is a relatively poor country:

• Average urban household income was $2810 last year
• Average rural household income was just $870

Food and energy costs therefore take up a very high proportion of ordinary people’s income.

This means China will have to do more to control inflation. Bank lending, the main agent of growth since 2008, will have to be further reduced. In turn, the government will therefore likely aim to preserve jobs via increasing exports again.

This is already emerging as a key risk in auto markets, as the blog will discuss tomorrow.

Back in May, the blog suggested that “Chrysler’s bankruptcy marks a ‘tipping point’, when the first major company is finally forced to adjust to a permanently lower level of demand.” Now comes news that Toyota is to follow Chrysler’s lead, and will cut production on a global basis
Toyota produced 9.24m autos last year, but only expects to make around 7m this year. Reports now suggest it is considering cutbacks of between 0.7m – 1m in its total capacity, including the closure of a 220,000 plant in Japan. This is in spite of the support provided by the various auto scrappage schemes, which have increased demand for Toyota’s fuel-efficient vehicles.
History provides little evidence as to what happens after scrappage schemes end, as they have not been tried before on a major scale. But actions tell their own story. If a relatively successful company such as Toyota is cutting capacity, it suggests little confidence in a quick recovery to previous demand levels.