INTERACTIVE: Global automotive sector continues to shrink, hitting chemicals profits

BARCELONA (ICIS)–The global automotive sector continues to shrink and act as a brake on demand for chemicals across most regions, leading to industry warnings of lower 2019 profitability.

Skoda Auto factory in Mlada Boleslav, Czech Republic. Source: Shutterstock

With no end in sight to the US-China trade war, and other factors such as Brexit hitting consumer sentiment, sales of big-ticket items like automobiles are falling as people hesitate before making purchases. Figures for June show a worsening year-on-year situation compared with May in all main markets except China.

In China, the world’s largest car market, June sales fell by 9.6%, an improvement on May’s disastrous 16.4% collapse. However companies have resorted to steep discounting which means many are selling vehicles at a loss.

This is unsustainable and has caused a liquidity crisis for manufacturers, many of whom are selling shares to finance operations.

Early implementation of tougher “stage 6” emissions standards in some Chinese cities is forcing retailers to offload older “stage 5” stock in a hurry.

China’s economic growth slowed to a 28-year low of 6.2% in the second quarter of 2019.

Although China is now the world’s largest car market, its per capita car ownership remains a small 0.14, far below 0.79 in the US and 0.59 in Japan, highlighting the huge long-term potential.

EUROPE SWITCHES TO DECLINE
Registrations of passenger cars in the EU fell by 7.8% in June year on year, following signs of recovery in May when they rose 0.1%. This contributed to an overall decline in passenger car registrations of 3.1% for the first half of 2019.

The European Automobile Manufacturers Association also reversed its 2019 growth forecast from positive growth of 1% to a -1% decline.

US IN CONTRACTION
Although US June sales of new light vehicle edged up by 0.4% year-on-year, they were down compared to May. And for January to June sales were down 1.3% compared to the previous year.

INDIA COLLAPSE ACCELERATES
India’s vehicle market has been in decline since the end of 2018. For June this decline accelerated with a 13.0% fall in production (-8.0% in May) and 12.3% collapse in sales (-8.6% in May).

India’s car market has been badly affected by a squeeze on liquidity. The non-bank or “shadow” finance sector was hit by a default in 2018, shrinking availability of credit for vehicle purchases into 2019.

Weak demand from the automotive sector has continued to pull down the markets ICIS reports on. Automotive is one of the most important downstream markets for many chemicals and polymers.

In the seven days to 19 July alone ICIS reported on poor automotive demand for markets including Europe styrene acrylonitrile (SAN), China polypropylene (PP), US glycol ethers , Europe adipic acid , US methyl methacrylate (MMA) and polymethyl methacrylate (PMMA)  , Europe toluene diisocyanate (TDI) , Asia base oils , US butanediol (BDO) , US epoxy resins, Asia epoxy resins, and North America titanium dioxide (Ti02) .

FINANCIAL RESULTS HIT
Poor automotive markets have hit chemical company financial results too. As the second quarter earnings season gets underway there have already been full year profit warnings from BASF, the world’s largest chemical company and Brenntag, the world’s largest distributor.

BASF highlighted the automotive sector in particular, which declined 6% globally in the first half of 2019 and by 13% in China. Analysts estimate BASF’s exposure to automotive at around 20% of sales.

Brenntag experienced a noticeable slowdown in demand in June and it expects to see a continued difficult macroeconomic environment for the rest of the year.

US coatings group PPG reported that overall automotive original equipment manufacturer (OEM) coatings volumes fell in the high single-digit percentage range year-over-year in the second quarter, with notable weakness in China and Europe.

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

Many chemical companies have based their full year profit forecasts on an improvement in the second half of the year. With the automotive sector in trouble, and economic growth stalling, we can expect to see more industry profit warnings.

Additional reporting by Joseph Chang, Fanny Zhang, Stephanie Wix, Dora Xue, Larry Terry, Peter Gerrard, Alex Snodgrass, Fergus Jensen, Morgan Condon, Whitney Shi, Jessie Waldheim, Tarun Raizada, Ai Teng Lim and Nurluqman Suratman.

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Focus article by Will Beacham