INSIGHT: Premium automobiles will shape petchem materials demand

22 March 2013 16:21  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Two cars begin their journey a mile apart from each other. The car in front is travelling at 60 miles per hour (mph), the car behind at 30mph. Within two minutes, they are two miles apart.

But the second car encounters traffic and slows to 10 mph, while the first reaches a motorway and speeds up to 80mph, and the rate at which they’re accelerating away from each other increases because of local driving conditions.

Imagine the front car represents the premium automotive industry and the back car the non-premium automotive market. This is broadly the trend expected in the next few years by market sources, with an already significant gap in demand between the two products ever increasing.

Sources in heavily automotive-linked markets such as the polyamide chain, polyacetal (POM), polybutylene terephthalate (PBT), recycled polyethylene terephthalate (R-PET) and acrylonitrile (ACN) – which is the feedstock for acrylonitrile-butadiene-styrene (ABS) – estimate that automobile demand in the first quarter of 2013 is around 15% below the same period in 2012.

Although sources forecast a pick-up in the second quarter because of seasonal factors, they expect demand to remain below levels in the 2012 second quarter. Nevertheless, these estimates hide significant variations in demand depending on end-use market.

Demand for small- and mid-sized automobiles in Q1 2013 has been estimated by some sources at up to 40% below Q1 2012 levels. Premium automobile consumption in Q1 2013 is at 2-3% below Q1 2012 levels according to market estimates.

“Germany’s [automobile demand year-on-year is down] only 2-3% and southern Europe [demand is down] 40%,” a European caprolactam (capro) producer said.

New passenger car registrations in the EU fell by 10.5% year-on-year in February 2013, according to European Automotive Manufacturers’ Association (ACEA) statistics. Nevertheless, in the US and Asia they are growing.

“[Automotives is] a very fractured market. 2013 will be a difficult year. Most people [are] forecasting it will be the weakest [new car] registration year in 20 years, only looking at European [new car] registrations. Premium cars of course are doing better than the low quality and the low cost cars... If you put on EU exports the situation is more positive, we're benefiting from exports Asia and US. I think it will be the case that the gap between the two will grow,” a nylon producer serving the automotive market said.

In the US this is the result of macroeconomic recovery, in Asia it’s because of upwards social mobility fuelling demand. Large percentages of premium automobiles – more than 50% of production according to some market estimates – are being exported to areas such as Asia.

A high percentage of NWE (northwest Europe) automobile production and a low percentage of southern European automobile production is for premium brands. As a result, NWE automobile demand is higher than southern Europe. 

In addition to being more geared to non-premium automobiles, the impact of the eurozone debt crisis has been higher in southern Europe.

With growth of the middle class in the developing world, the gap between premium and non-premium automobile demand is likely to increase, which will drive innovation in performance specific parts for premium automobiles.

Some market sources estimate that world-wide car ownership will increase by almost 50% by 2020. Most of this growth will be in the premium automotive industry as the new middle class will seek to adopt luxury brands as a status symbol.

“It's an opportunity for sure, if you look at population. Growth and middle class development [means] there will be 47% more cars [globally] by 2020 - that's such a big driver. If on top you have weight reduction and C02 pressure, there will be room for polyamide innovation,” a nylon producer said. He estimates worldwide car numbers going from 80m today to about 125m in 2020

Coupled with this, at least in the short-to-mid-term, the eurozone crisis shows no signs of abating.

As a result, the gap between northern European automobile production and southern European automobile production is likely to increase, and at a faster rate if the eurozone crisis deepens.

Perhaps more worryingly for Europe as a whole will be if trends in markets such as caprolactam and adipic acid (ADA) for large capacity expansion in Asia to satisfy domestic needs are replicated across the chemical chain.

Just this week a caprolactam producer said that demand in Europe is only enough to cover 30% of merchant market production in the region, and, as a result, additional capacity in Asia will require a large amount of consolidation in Europe.

Asia has traditionally been a major importer of European capacity. Nevertheless, large amounts of additional capacity due to come on-stream in the next few years in Asia will result in material previously ear-marked for export remaining in Europe – causing potential oversupply, sources said.

One of the reasons that German underlying macroeconomic conditions have outperformed most of the rest of Europe is the country’s strong manufacturing base. But, as already mentioned, in automobiles this is predominantly the result of exports.

If the manufacturing base shifts to Asia this will hugely suppress European demand, particularly if the shift happens while macroeconomic conditions remain volatile. For example, new passenger car registrations in Germany – which strip out exports – in January and February 2013 were 9.6% fewer than the same period in 2012, according to the ACEA.

Of course, predicting the evolution of mid-term macroeconomic conditions amid current volatility is dangerously close to a pseudo-science. Nobody is able to predict how long and how deep the eurozone crisis will eventually be. For evidence of this, think back to 2007 and how difficult it would have been to find someone willing to predict that Europe would not have been in sustained growth in 2013.

A rigid adherence to macroeconomic forecasts in long-term strategy carries the danger of turning into Icarus's wings. Nevertheless, there are clear trends developing in the automotive market that have an implication for strategy.

The long-term outlook for automotives is positive because of growth in premium automobiles.

“The majority of our business is in premium brands, so we are seeing good growth in this area,” a polymethyl methacrylate (PMMA) producer said.

For the plastics industry, lightweighting is also likely to fuel growth as automobiles increasingly adopt less carbon intensive materials as replacement for metal car parts.

These two trends are likely to intersect and result in innovation to focus on performance specific products for premium automobiles.

More specialised products not only command higher margins, but insulate against competition from substitution.

This is particularly likely to be a driving force for products such as nylon. For non-specialised applications, nylon faces substitution competition from polypropylene (PP). PP has been substantially cheaper than nylon throughout 2013 and nylon players do not expect to be able to compete on price, but they can compete on specialised performance.

“It's for nylon to find the niches where it can add value. It will be performance specific parts, not just engine parts, but composite sheets and functional integrated parts that reduce weight. From our understanding that's the way to go. Only competing on price we'll lose compared to PP so we have to compete on innovations,” a nylon producer said.

In the short-term, trading conditions in the automotive market are likely to remain tough.

In the longer term, the automotive market is likely to see substantial growth, but mainly from the premium automotive sector. As a result performance of companies serving the automotive market will depend on their basket of customers,

“[it’s] very important they [suppliers to the automotive market] select the wining customers. The gap between premium and non-premium will grow,” a capro producer said.

In short, companies must ensure that they get into the right car.

Additional reporting by Helena Strathearn

Read Paul Hodges’ Chemicals and the Economy blog
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($1 = €0.77)

By: Mark Victory
+44 208 652 3214

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