Global autmotive sector skids, impacting chemicals, but long-term growth prospects intact

27 May 2011 13:05  [Source: ICB]

The Japan earthquake and tsunami are having lasting effects, disrupting the chemical chain in the near term. But the long-term growth story remains intact

The auto manufacturing industry is a major petchem end-user
Rex Features

After enjoying a steady recovery since the 2008 financial crisis, the global auto industry is once again experiencing turbulence.

First, the March earthquake and tsunami in Japan forced the country's major automakers to cut production, with repercussions felt worldwide as global supply chains were hit. And now auto sales in some key markets are showing signs of easing, raising concerns about prospects for the rest of the year.

The world's largest car producer, Japan's Toyota Motor, is still running at reduced rates after cutting production in Japan by 54% in March. Operations in other countries have also been curtailed, with output in China cut by 50-70% until early June. Toyota is estimating a production shortfall of 540,000 units ­between April and June in North America, Europe, Japan and China.

The number is likely to increase as the company expects to achieve normal production only by November or December.

Other Japanese automakers are also in a similar situation, with Honda, Nissan and ­Suzuki having to trim production at sites ­globally. Even as these companies work ­overtime to repair damaged facilities, full ­operations can resume only when the auto part suppliers are back on line.

Honda stressed in late April that "as the supply of parts remains fluid, decisions concerning production from July on will be made step-by-step," and that some of its Japan-based suppliers are yet to resume production.

Analysts at Chicago-based Zacks Equity Research said in a recent report the operations of 40 auto parts manufacturers in Japan have been jeopardised by plant outages and power shortages after the earthquake.

"Most of the auto parts sourced from Japan are unbelievably complex and specifically tailored. As a result, finding substitutes for such customized components becomes very difficult," said the analysts. "Moreover, it is extremely painful to shift production of these parts to unaffected areas, where Japan has ­excess auto parts supplying capacities."

And it is not just Japanese producers that have been hit, as other producers have seen shortages of electronic parts and other items used in auto manufacturing.

US auto manufacturers are expected to trim production by 450,000 vehicles in the second quarter as a result of a shortage of parts, ­according to US consultancy IHS. Europe's second-largest automaker, PSA Peugeot-­Citroen, said in April it was unable to produce some diesel engines because of a shortage of engine management systems ­produced by ­Hitachi Automotive Systems in Japan.

Production has since returned to normal, but the problem underscores the complicated nature of global supply chains across ­industries - and the ripple effect created by any ­disruption. As a result many analysts believe the full impact of the parts shortage will be felt in the coming months, once inventories are exhausted.

CHEMICALS FEEL THE PINCH
This inevitably raises concerns for the ­chemical industry, as the auto sector is a large end-user of products such as polypropylene (PP), nylon, acrylonitrile-butadiene-styrene (ABS), polyurethane (PU) flexible foam and synthetic rubber.

The impact on the chemical industry has not been widespread, but some producers are feeling the pinch.

"Japanese chemical companies expect a 40% decrease in [fiscal] first half 2011 sales to the auto industry, but they are hoping for a 10-15% increase in the second half," points out a Tokyo-based analyst. Japan's fiscal year begins on April 1.

In India, PP producers are seeing a slowdown in sales, partly because of a decision by Toyota and Honda to run their local plants at only 50%.

"Sales of impact copolymer PP grew by 20% last year, but growth in the last three months has been only 9%," says a source at an Indian producer.

A second source points out that PP compounders for the Indian auto industry have seen a 10-40% drop in production in the last two months. European demand for nylon 6,6 is estimated to have dropped by 30% because of the disruption to auto production.

AUTO SALES SLOWDOWN
A drop in global auto production, coupled with other factors such as high gasoline ­prices, have started affecting sales.

In China, the world's largest auto market, passenger vehicle sales expanded by only 1.3% in April - the lowest level in more than two years, after the government canceled incentives introduced in 2009 for the purchase of cars with small engines, and tax breaks to people buying cars in rural areas.

This, coupled with limits on the use of ­vehicles in large cities and rising fuel costs, spurred people to postpone purchasing a new car.

In the US, auto sales for April rose 17.9% compared with the same month in 2010, but this figure is expected to be lower for May and June, as auto inventories get depleted and a shortage of Japanese cars starts to hit the market.

However, despite the uncertainties and macroeconomic risks such as tightening of credit in China, chemical companies and ­analysts remain positive.

OPTIMISM PREVAILS
"While it is too soon to count the full cost of the disaster, nine weeks later it seems clear that the supply chain disruptions were less severe than the worst fears suggested," said Bruce Clark and John Rogers, analysts at US-based Moody's Investors Service, in a May 19 report. "We think that for most companies affected by supply disruptions related to the disaster, the financial impact will be felt mainly in the second and third quarters of this year."

The analysts expect automakers and ­automotive parts suppliers to see modest declines in production, but little impact on 2011 operating performance.

US and South Korean automakers may gain market share at the expense of Japanese auto manufacturers, they said.

Germany-based LANXESS predicts a 5% expansion in automotive demand for 2011, and a 5-6% increase in tire demand.

Asia is expected to dominate growth, with an 8% increase in tire demand in 2011. LANXESS estimates above-average growth of 11% in China, while the European tire market is expected to grow at a more modest 3%.

Germany's BASF is more positive, and expects global auto production to expand by 6.1% year on year. It also does not expect the Japan disaster to have an impact on its ­business with the auto sector.

Auto sales in the US, for instance, are expected to reach 13m units in 2011 - a 12% gain from 2010, with the shortfall in the second quarter made up by the end of the year. China too is expected to recover in the second half of the year to post 10% growth on the 13.8m units of passenger vehicles sold in 2010. This will not be as impressive as the 33% growth recorded in 2010, but is still a healthy number.

And the long term prospects for China remain positive, as it draws fresh investments from global auto majors. Germany-based auto firm BMW Group recently announced it will nearly double its investment in China - its third-largest market after Germany and the US. This in turn is supporting expansion in capacities by chemical firms. BASF expects to start a new plant for polyurethane-based automotive spring aids in the second half of 2011, and plans to double its capacity for engineering plastics in the country by 2015.

The Japan earthquake and tsunami has forced the global automotive industry to hit the pause button, but there is confidence that the interruption will be short-lived.

By: Malini Hariharan
+65 6780 4359

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