Small part, big deal

The economic impact from Japan’s crisis is beginning to be felt across the globe. Supply chain disruptions in the automotive and electronics sectors will take a bite out of chemical company profits in North America and Europe.

One component in the supply chain can have a significant impact. For example, a shortage of engine-related micro control units (MCU) resulting from damage to Japan’s Renesas Electronics plant in Naka will curtail global auto production, according to Deutsche Bank.

The Renesas plant, the most advanced of its kind, supplies between 18-20% of the world’s automotive MCU market, its analysts estimate. About 70% of production is sold to Japanese automakers, with the remaining 30% to US and European car companies. And the supply of these MCUs is not easily replacable, as boosting production at other sites could take as long as 6-9 months.

Deutsche Bank estimates that 12% of US “Big Three” (General Motors, Ford, Chrysler) auto production is impacted by the MCU disruption. In a worst-case scenario, global forecasted auto production of around 76m units would be reduced by 7.5m-11m units, or 10-14%.

“As a result, we see downside risk to US chemicals earnings starting in Q1 for companies with exposure to the global auto makers,” says Deutsche Bank chemicals analyst David Begleiter. US chemical firms under coverage with the greatest exposure to the auto end-market include Solutia (18% of sales to auto OEMs), Rockwood (14%), Celanese (11%), PPG Industries (10%), Cabot (15%), Dow Chemical (8%), and DuPont (7%).

The civil war in Libya is also impacting the chemical supply chain – and not just indirectly through the higher price of crude oil.

Lawrence Sloan, president of the Society of Chemical Manufacturers and Affiliates (SOCMA), noted that some of SOCMA’s member companies have European customers that have lost business in Libya and other African nations due to popular uprisings. The loss of business will work its way through the supply chain, he said at the GlobalChem regulatory conference in Baltimore, Maryland, US last week.

While supply disruptions stemming from Japan and Libya will certainly hit profitability across many business sectors and regions, the impact is likely to be transitory. If the global economy can withstand and overcome these external shocks, we’ll be off to the races.

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