OUTLOOK ’17: Automotive industry faces series of challenges in 2017

By Mark Victory

LONDON (ICIS)–The global automotive market looks to 2017 with a greater series of potential challenges than in recent memory.

Will the recent rally in crude prices continue? Will the spread of populist politics continue to cause shock geopolitical results? Will China’s GDP growth continue, or will its increasing debt levels start to weigh on demand? Will a Donald Trump presidency be good or bad for the global economy? Will protectionism increase?  

All of these issues have the potential to reshape the sector – even without factoring in the shift to electric vehicles and lightweight materials, and the longer-term sea-change in demographics.

As always, it will ultimately be macroeconomic conditions that dictate the strength of 2017 auto demand, which are deeply mixed and confused across the globe following a series of shock events in 2016. It is remarkable, given the underlying volatility of conditions, that auto sales in 2016 have been so strong.

One of the key drivers of this has been vehicle sales in China, which have been stimulated throughout the year by vehicle tax subsidies and are due to rise from 5% to 7.5% at the start of 2017.

One need only look at the pre-tax cut China auto sales figures to gauge the impact. China sales are, therefore, likely to decline.

Stripping out China, global auto sales in 2016 to November across key auto producing regions would have fallen. Coupled with this, China continues to have rising debt – estimated at around 250% of GDP. As senior ICIS consultant John Richardson argues and elaborates on in the December issue of the ICIS Global Automotive Report, current liquidity may be enough to keep the China bubble going through 2017, but at some point an end will have to come.

This would have major consequences for the global automotive industry because China is the world’s largest market for automobiles, and imports heavily from other regions.

In the past few years, sales growth in China has been supporting the auto industry elsewhere – meaning that this is perhaps the most serious risk for auto manufacturers heading in to 2017.

Coupled with this, if the crude rally extends, the industry could be faced with the undesired twin spectre of rising costs and falling sales.

While the industry is moving evermore towards globalisation, local issues are pushing individual regions in opposing directions.

This is most clearly shown in the Global ICIS Basket of Automotive Petrochemicals (IBAP), which was broadly stable (albeit at a slight drop compared with the previous month) in November as rises in China were outweighed by dollar-terms falls in Europe and the US.

This is mirrored in the global market price direction expectations from chemical chain players, were views are sharply mixed depending on individual market conditions.

Typical year-end destocking has not been as heavy in several individual petrochemical sectors in 2016.

In Asia, this is because of the approach of the Lunar New Year in late January in 2017, while in Europe expectations of rising feedstock costs in the new year are trumping working capital arguments in several downstream markets.

Typically, players destock towards the new year to reduce working capital on year-end balance sheets.

Although US vehicle sales rose in November 2016 year-on-year  – which was attributed to ‘Black Friday’ deals – passenger car sales continue to fall as the market increasingly shifts to larger vehicle classes.

This leaves the US auto fleet unbalanced, and could be a problem for the industry if a macroeconomic downturn emerges, because, typically, larger vehicle classes are more heavily affected by declining economic conditions than smaller classes.

Nevertheless, early forecasts for 2017 US GDP are positive, and petrochemicals markets are expected to grow, according to ACC predictions. With senior petrochemical figures being nominated for key positions in Donald Trump’s government, the industry could find itself with powerful government advocates as the new president begins his term in 2017.

In Latin America, uncertainty over Trump’s policies and exchange rates is fuelling volatility, as is continued economic and political instability, particularly in Brazil. Nevertheless, Brazil’s GDP is expected to fall less in 2017 than in 2016.

The automotive industry is a major global consumer of petrochemicals which contributes more than a third of the raw material costs of an average vehicle. ICIS tracks the movement of petrochemical raw material costs in auto production both globally and regionally with the weighted ICIS Basket of Automotive Petrochemicals (IBAP).

ICIS produces a monthly Global Automotive report covering the major automotive chemicals markets, the auto-industry, the IBAPs and macroeconomic trends. For more information on the report and details on how to subscribe, please click here