China auto demand poised to pop on US-China trade deal – PPG CEO

NEW YORK (ICIS)–China automotive demand is poised for a sharp rebound if a US-China trade deal is reached, said the CEO of US-based coatings producer PPG on Thursday.

Source: BASF

While PPG CEO Michael McGarry expects the China automotive market to return to growth in 2020, the rebound is still too early to call, he said.

“I don’t think the trends we’re seeing right now are going to continue but the single biggest factor in this is the trade war… People have money in their pocket in China and people are employed – it’s [just] a lack of consumer confidence,” said McGarry on the company’s Q2 earnings conference call.

“The fact of the matter is that for major purchases, they’re sitting on the sidelines to see how this all turns out,” he added.

If a trade settlement can be reached, “consumer confidence will flow very quickly” since the consumer has “a lot of firepower to put to work… Whenever this does settle, we will see a pop”, said McGarry.

In the second quarter of 2019, PPG saw overall automotive OEM coatings volumes fall in the high single-digit percentage range year over year, with notable weakness in China and Europe.

Auto OEM build rates were down nearly 20% year on year in China, and remained soft in Europe, said McGarry.

Auto OEM production rates fell more than originally projected at the outset of the quarter due to the unexpected early implementation of Stage VI emissions standards in several large Chinese cities, the company noted.

China launched the Stage VI emissions standards for heavy duty vehicles for several regions in July 2019, a year ahead of the original target date of July 2020 for vehicles nationwide.

On the retail side, China auto sales have picked up recently as dealers in the affected regions scramble to move non Stage VI automobiles off the lots through heavy discounting.

“Sales were up around 6% in June and sales in July appear to be trending positively as well. But it’s hard to parse between how much of that is a change in emissions standards versus actual demand,” said McGarry.

Looking to the third quarter, PPG expects global automotive demand to remain soft in most regions, with greater volatility expected in China.

One positive sign is that global automotive OEM dealer inventories decreased as the second quarter proceeded, “which may help demand in the second half of the year”, said McGarry.

And on the pricing side, auto OEM selling prices were higher in each major region and PPG expects similar trends in the third quarter, he added.

Going into every quarter, PPG typically has 3-6 weeks of “order book in hand” for most of its OEM customers, including auto, which provides some early indication of how the quarter is shaping up, said PPG chief financial officer Vincent Morales.

“We don’t see a significant uptick in Q3 in Asia or China specifically,” said Morales.

Focus article by Joseph Chang