INSIGHT: Global growth forecasts downgraded but auto opportunities remain
Mark Victory
15-Jun-2016
By Mark Victory
LONDON (ICIS)–We’ve been warning in the global
automotive report for some time now of the dangers of low
labour participation rates in the US and elsewhere, as well
as the current precariousness of global macroeconomic
conditions.
This view was given further weight at the
beginning of June by the OECD lowering its global GDP growth
forecast. This should be of concern to global automotive
markets since car sales are inexorably linked to GDP and
disposable income – if real-term income is falling you’re
less likely to make discretionary large purchases such as a
new car and more likely to prolong the life of your existing
vehicle.
On 7 June, the World Bank also revised
down its 2016 global growth forecast to 2.4% from 2.9%
projected in January, which it attributed to sluggish growth
in advanced economies, low commodity prices, weak global
trade and diminishing capital flows.
According to the World Bank, 40% of the downward
revision was the direct result of the failure of
commodity-exporting emerging market and developing economies
to adapt to the low price of crude oil and other key
commodities.
Furthermore, global automotive sales
remain driven by China stimulus, as John Richardson discusses
in detail in this month’s global automotive report.
Nevertheless, there remain opportunities
for petrochemical players, not least from the expanding usage
of plastics as a substitute for metals.
Plastics are continuing to substitute
metals in automobiles, to the point where the chassis may be
among the few components of a vehicle made of the material,
an executive with US-based styrenics and synthetic-rubber
producer Trinseo said on Tuesday 7 June.
Automobile producers are eager to replace
heavier metal components with those made of plastics to
lighten the weight of their vehicles, in an attempt to meet
stricter emission standards.
In 1960, an automobile had an average of
40lb (18kg) of plastics, mainly in knobs and handles, said
Kevin Swift, chief economist of the American Chemistry
Council (ACC). Now, the average vehicle has 350lb of
plastics.
Material substitution is helping
automakers remove several pounds of weight from their
vehicles, said Martin Pugh, chief operating officer for
Trinseo. He made his comments on the sidelines of the ACC’s
annual meeting.
The June outlook for US auto-linked petrochemical prices is
as uncertain as macroeconomic conditions, with markets
pulling in different directions depending on localised
conditions.
The bullish expectation on prices is reflected in the
newly launched Europe May Chemical Market Confidence Index
(CMCI), which is positive on all forward looking indicators
except profitability – despite some gathering macroeconomic
storm clouds.
Nevertheless, sentiment in the European polypropylene
(PP) has turned bearish on prices, which is also reflected
in the polyolefins CMCI, which is overwhelmingly bearish on
future profitability.
Negativity on profitability is likely related to
firmer crude oil prices and macroeconomic
uncertainty.
The Europe ICIS Basket of Automotive Petrochemicals
(IBAP) has been increasing for the past three months, but
this has largely been the result of increasing crude oil
prices. With crude oil continuing to broadly trend upwards,
and unstable macroeconomic conditions, players may be
concerned with their ability to pass expected upstream cost
increases down the chain.
The Europe IBAP hit an eight-month high in May and
closed the gap with the US IBAP in dollar terms.
Although macroeconomic conditions and automotive
sales remain broadly positive, and the European Central
Bank (ECB) has revised its 2016 growth forecast higher as a
result, there is still great uncertainty over the potential
impact and direction of the British EU referendum,
and the background contagion risk of any potential
downturn in global growth conditions.
Overall, though, European markets appear to be
enjoying more favourable trading conditions and more
certainty on both sides of the chain than there US and
Asian counterparts.
All of these trends are discussed in detail in the
June ICIS global automotive report.
Nevertheless, it is the markets with the larger usage in
automotives which typically have the most bearish sentiment
– excepting isocyanates – with polypropylene (PP), nylon
and polyvinyl chloride (PVC), and polyethylene (PE) prices
all under pressure. This suggests that the IBAP may fall in
June.
Macroeconomic indicators remain confused in the US – with
uncertainty growing as the US election approaches.
This is a typical facet of financial markets in all major
economies in an election year – although potentially
heightened in the US by the markedly different approaches
of the US presidential candidates, and this may mute
confidence in the US economy until at least after the
election.
Lack of confidence appears to be directly impacting US
light vehicle sales, which turned negative for the second
time in 2016 and with passenger car sales remaining
negative throughout the year to date.
Europe is the most bullish on June prices of the three
major auto producing regions, reflecting comparatively
better macroeconomic conditions in the region.
ICIS produces a monthly Global Automotive report
covering the major automotive chemicals
markets, the auto-industry, the IBAPs and
macroeconomic trends. For more information on the report and
details on how to subscribe, please click here
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