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.

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.

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.

The automotive industry is a major global consumer of petrochemicals which contributes more than a third of the raw material costs of an average vehicle. ICIS tracks the movement of petrochemical raw material costs in auto production both globally and regionally with the weighted ICIS Basket of Automotive Petrochemicals (IBAP).

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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