INSIGHT: Conflicting data can’t give the whole auto picture

15 September 2010 16:46  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Macroeconomic data do not give the whole picture of the automotive industry.

There are two piles of paper containing economic data on my desk. One gives a bullish outlook, the other suggests a slowdown. It’s hardly scientific, but the piles are roughly even.

The automotive industry is the major downstream market for the majority of chemicals I write on. The automotive industry is heavily linked to macroeconomic conditions and tends to grow roughly in line with GDP. I’m studying the two piles to try to get an indication of where automotive demand might head in the fourth quarter – they do not help.

On the bullish side, data include: a year-on-year increase in German chemical exports of 24.9% for the first six months of 2010; a 1.1% increase in the eurozone retail sales index in July; a 13.9% increase in Chinese industrial production in August, according to statistics bureau and central bank data; and a revised 2010 economic growth forecast from the European Commission, which predicts that the EU will grow by 1.8% in 2010, up from May’s forecast of 0.9%.

On the bearish side, data include: a downwards revision to 1.5% from 1.75% the expected growth in the Group of Seven countries in the second half of the year from the Organisation for Economic Co-operation and Development (OECD); a cut in the International Energy Agency’s (IEA) prediction of oil consumption in China in 2011, from an August prediction of 4.5% to 4.3% in September; a 6.9% month-on-month decline in new car registrations in the EU, according to the European Automobile Manufacturer’s Association (ACEA); and an unexpected 2.2% month-on-month decline in seasonally and inflation adjusted German factory orders in July, according to the Economy Ministry in Berlin.

The problem during an uncertain recovery is that market volatility dramatically increases. In chemicals this is partly linked to a reduction in stocks on working capital concerns, meaning that consumers increasingly stock and destock in line with perceived market conditions.

“No-one has big stocks, volatility in the market has increased a lot. It can change very fast,” a nylon compounder said.

Since economic data look backward rather than forward, as soon as the data are released they are in danger of being out of date. Statistics from June/July, newly released in September, while revealing for that part of the year, might no longer be relevant.

Nevertheless, economic data are released, equity and commodity markets react instinctively to the news, and the reaction is taken as evidence to support the data in an endless feedback loop. This is one of the major reasons that recovering markets see such strong volatility, as players react to an endless deluge of competing and conflicting information and are pulled first in one direction and then another.

A pure focus on macroeconomic data in volatile conditions can have a bungee cord effect – with the market being dragged back by sentiment into market conditions that it has moved away from.

The strongest example may be the data concerning the automotive industry itself.

According to the latest figures from the ACEA, new vehicle registrations are falling. They have been falling for three months, indicating a declining market. If no-one is ordering European vehicles, then logic dictates that automotive chemical demand should be falling.

But according to chemical players involved in the automotive industry, such as those in the nylon, polyoxymethylene (POM), polybutylene terephthalate (PBT), polycarbonates, caprolactam, methyl isobutyl ketone (MIBK) and styrene butadiene rubber (SBR) markets, consumption is strong, and is expected to stay strong throughout the fourth quarter.

The divergent views are relatively easy to explain. The ACEA figures cover the period from May-June when the automotive industry was affected by the end of government incentive packages, leading to weaker demand.

In the intervening months, though, demand has been increasing, according to industry players. Much of the growth is linked to demand from Asia and South America.

“There is a big pull from Asia for caprolactam... automotive is doing well because Asia is importing cars despite European [manufacturing] figures," a caprolactam buyer said. "We’re more optimistic than a couple of months ago. If Asian demand keeps up, the fourth quarter will be good.”

European consumption is also increasing, spurred by latent demand from 2008 and 2009 when consumers put off purchases due to the global recession.

This is being seen most strongly in the luxury car industry and with lease renewals from corporates. There are also reports that European car manufacturers are now shipping vehicles to Asia in order to meet the strong growth seen in that region.

Some sources in Germany reported a 70% year-on-year increase in August exports to Asia. According to sources, one major European car manufacturer is now shipping 50% of its production into Asia.

“[POM/PBT] demand is automotive driven. That market [automotive] is very strong," a POM/PBT producer said. "It’s because of latent demand, which will continue until the end of the first quarter of next year. Exports to China increased by 70% in August. The automotives industry is not a German market anymore.”

Chinese automotive production increased by 43.64% year on year from January to July 2010, according to the China Association of Automobile Manufacturers (CAAM).

In Columbia, car sales in the first eight months of the year grew by 28% compared with the same period in 2009, according to consultancy Econometria.

“Plastics [markets] are in a good position," a POM producer said. "It doesn’t concern just Europe, you now have to consider other regions too... material is flowing worldwide. This means all markets grow, though maybe not at the same rate.”

It was this growth in demand that meant most automotive-linked chemical markets in Europe saw no traditional summer slowdown in demand in 2010.

Automotive-linked chemical demand can be seen as a leading indicator for automotive demand, since material is purchased prior to production.

The Asian market may see a slowdown in the next few weeks due to Chinese holiday shutdowns. China will observe its annual Mid-Autumn Festival on 22-24 September and celebrate its week-long National Day holiday on 1-7 October. But the majority of auto-linked chemical buyers and sellers are expecting Asian demand across the fourth quarter to remain robust for the time of year.

“Things aren’t going to change. Strong tyre demand because of the pull from Asia will continue through the fourth quarter,” an SBR buyer said.

Nevertheless, the danger is that automotive manufacturers will study the emerging macroeconomic data and revise down forecasts as a result. This possibility is being echoed by a minority of chemical players in auto-linked markets, which are generally seeing strong demand.

“[Acrylonitrile butadiene styrene (ABS)] demand is down as automotive output fell," a European ABS trader said.

In uncertain times, the best that conflicting economic data can do is to tell us that times are uncertain. Economic indicators give a snapshot of the market at the time they are compiled, but they do not offer a crystal ball view into the future.

($1 = €0.77)

Additional reporting by Heidi Finch, Al Greenwood, Malini Hariharan, Ryan Hickman and Amandeep Parmar.

For more on nylon, POM, PBT, polycarbonates, caprolactam, MIBK and SBR visit ICIS chemical intelligence
Bookmark Paul Hodges’ Chemicals & the Economy blog
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
To discuss issues facing the chemical industry go to ICIS connect

By: Mark Victory
+44 208 652 3214

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