FocusUS 'clunkers' programme spurs car sales, chemical demand

06 August 2009 19:31  [Source: ICIS news]

HOUSTON (ICIS news)--The US government's "cash for clunkers" vehicle rebate programme was widely praised as the catalyst for the strongest month of auto sales this year, one that could boost domestic auto production and demand for chemicals as a result, sources said on Thursday.

"Certainly it pulled some undecided buyers off the fence who resisted buying a car," Paul Taylor, the chief economist at the National Automobile Dealers Association (NADA) said about the programme, which offers up to $4,500 (€3,105) for consumers through the Car Allowance Rebate System (CARS). 

The "cash for clunkers" programme, initiated by the US Department of Transportation (DOT), allows buyers to trade in older, gas-guzzling vehicles for a more fuel-efficient cars and trucks.

The three US-based car manufacturers singled out "cash for clunkers" as the reason for July being the most robust buying month of the year.

The effect of more cars leaving US car lots could reverberate up the supply chain to increase the need for chemicals, said Kevin Swift, chief economist at the American Chemistry Council (ACC).

"Maybe this helps jumpstart light vehicle sales," he said. "Maybe that helps [auto makers'] purchases of rubbers and plastics. We'll take anything at this point."

Automotive sales provide a barometer for chemical demand, with 331 lb (150kg) of plastics going into every US-made vehicle, the ACC estimated.

Acrylonitrile-butadiene-styrene (ABS) plastic resins, styrene butadiene rubber (SBR) tyres and isopropanol (IPA), methyl ethyl ketone (MEK) and methyl isobutyl ketone (MIBK) are all used in making automobiles.

Also, each vehicle made in the US contains nearly $2,700 worth of chemical products or chemical processing value, according to the ACC.

An ABS supplier in the US midwest said the auto discount initiative by the government could frontload sales to the detriment of auto demand in the next few years. But the programme is a good financial bridge for the industry until natural demand returns.

"Extending cash for clunkers wouldn’t hurt anyone," the supplier said. "And it would stimulate the economy."

The programme began on 27 July, and the popularity of the incentives drained the $1bn allocated for "cash for clunkers" in the first week. All indications suggest that the US Senate would approve a $2bn replenishment to extend the programme.

Taylor, at NADA, forecast that $2bn could sustain rebates for up to 4 months, which would stretch the programme to its original expiration at the end of November.

Taylor said that the government rebates were put towards 100,000-140,000 of US vehicle sales last month. Sales from the six major car makers in the US totalled 798,590 units in July, according to data compiled by ICIS.

As of 5 August, 184,304 vehicles had been traded in and qualified for the rebate, according to DOT figures. That total accounted for $775.2m in rebate money.

Stronger sales figures and inventory control have cleared out the previously clogged pipeline of automobiles. That should spur more production from car makers, Taylor said, pointing specifically to General Motors (GM).

The Detroit-based company, which recently went through bankruptcy restructuring, announced that its third-quarter production outlook of 535,000 units is 44% higher than the first quarter and 35% above output in the second quarter. The forecast is still 42% below production levels in the third quarter last year.

Bruce Belzowski, an assistant research scientist at the University of Michigan’s Transportation Research Institute, said "cash for clunkers" will really start making an impact on the industry if it starts accounting for more sales than just over 100,000 units.

"If they extend it and they get 500,000, then you're talking about some numbers," he said.

The real benefits of "cash for clunkers" are the positive influence on the US buying public's psyche and the potential it has for the Obama Administration, Belzowski said.

"It has a psychological effect that you don't want to deny that has a potential," he said.

(Additional reporting by Ben Lefebvre)

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