INSIGHT: The growing wealth gap will shape the automotive petchem chain
Mark Victory
18-Jul-2016
By Mark Victory
LONDON (ICIS)–In June 2015, the IMF wrote “Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades,” in its staff discussion note on Causes and Consequences of Income Inequality: A Global Perspective.
Although globally income inequality has been declining, in developed countries it has been increasing rapidly since the 1990s as poverty has risen, according to a 2011 report from the OECD.
A subsequent 2013 report from the OECD demonstrated that the global financial crisis had further stressed this inequality as the poorer in society bore the brunt of the economic downturn.
Despite there being multiple factors contributing to growing inequality, the rise of financial centres and the associated concentration of wealth was the biggest of these, according to the IMF.
It is important to note the similar process of financial concentration that has happened in China as it expands its economy.
There may be no starker recent example of the consequences of a widening wealth gap than the UK’s vote to leave the EU, which – according to Bank of America Merill Lynch was the “biggest electoral riposte yet to [this] age of inequality”.
Analyses from the FT, Forbes, Bloomberg, CBC News, the Guardian, the Huffington Post and Politico.eu – to name but a few – have all drawn the link between income inequality growth and Britain’s vote to Leave. The conclusion drawn was that the leave vote was as much a rejection of EU and UK government sanctioned austerity politics, and a vote against London and the haves and have nots as it was about any other issue.
Analysis from UK national newspapers The Guardian and The Telegraph showed a correlation between median income, education levels and class of an area and the way it voted, with areas with lower-end income, education and class likely to have voted for ‘leave’ and higher likely to have voted ‘remain’ – with the percentage of the population holding degrees the strongest indicator.
Nevertheless, Newsweek provides some sobering analysis showing that area income changes since 2002 do not seem to correlate with voting intention, and there will have been myriad reasons why people voted to leave the EU. So such comments must be taken with a dollop and not just a pinch of salt.
It does appear, however, that income inequality played a role at least to some degree, and may indeed have been the touch-paper that ignited anti-EU feelings bubbling away at the surface.
Similar links are being drawn between earnings disparity and the rise of Donald Trump’s election prospects in the US.
According to Credit Suisse’s 6th annual Global Wealth Report, in 2015 ultra-high net-worth individuals – which account for 0.7% of the population – owned 45.2% of global wealth. The same report, unsurprisingly, highlighted that the US has the highest number of ultra-high net-worth individuals, followed by China, with the UK in third-place.
The Credit Suisse report also assumed that there would be a 53% rise in the number of million-dollar households in the UK by 2019 – although the Brexit vote now puts that into question.
According to the charity Oxfam, the richest 1% of the global population exceeded half of the world’s net worth in 2015.
Income disparity is now a global phenomenon among the developed world, but not one that has sprung up over night or come without warning, as this BBC article from January 2012 , and the memory of the Occupy movement’s activities from 2011-2012, show.
Income inequality has several important consequences for automotive manufacturers.
Firstly, inequality typically results in greater social discontent and increased political instability – as appears to have happened in both the UK and US. It increases the likelihood of ‘shock’ political or economic events as the discontent bubbles to the surface.
This destabilises financial markets, which are now so interlinked that shockwaves tend to reverberate globally.
When global financial markets are rattled this tends to lead to a ‘flight to safety’ among investors that look for safe-haven investments as risk appetites decrease, including metals. This has a direct impact on costs for automobile manufacturers. The UK vote to leave the EU again serves as a good example.
Steel prices have risen dramatically since the UK referendum result was revealed on 23 June. Steel prices at the end of May were in the region of $50/tonne, whereas by 5 July they had risen to over $325/tonne – a more than five-fold increase.
Steel accounts for an estimated approximate 60% of the weight of an average finished car – although this varies from model to model depending and can be substituted with alternatives such as aluminium or carbon fibre.
With an average car weighing in the region of 1.4 tonnes – this equates to an in car cost of around $273/average vehicle at a 60% weighting, a figure approaching the ICIS Basket of Automotive Petrochemicals (IBAP) raw material cost for the majority of petrochemicals used in cars of $277.62/tonne of total vehicle weight (TTVW).
If income inequality continues to increase in developed countries and shock events do become more common, this will increase the need for and reliance on hedging mechanisms.
Along with the risk of financial volatility, IMF analysis suggests that GDP growth slows as income disparity increases.
“Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth,” the June 2015 IMF Staff Discussion Note states.
On 1 June, the OECD lowered its global GDP forecasts for 2016 and 2017 because of what it described as the “low-growth trap” caused by low productivity and increasing inequality.
The two-speed economic system in China has been discussed in in past issues of the ICIS Global Automotive Report, but the increased concentration of wealth in China – and indeed across the world – has important ramifications for projected growth forecasts and the automotive industries hopes of continued long-term expansion in the region.
Even if wealth disparity were not to have an impact on economic growth, it is likely to have an impact on automotive sales. Unevenly distributed GDP is concentrated among a small percentage and with the majority seeing no material benefit from economic growth, no increase in disposable income, and therefore no stimulus or security for pre-end-of-life vehicle replacement.
At the tipping point, this will lead to a complete disconnect between GDP and new car registrations as economic growth becomes ever more controlled by the thin-wedge at the top of the wealth pyramid and ignores those below. This is far from an inevitability, but is a process that is already under way.
Growing disparity of wealth is also likely to result in the need for increased diversification of automotive fleets.
Concentration of wealth means there will be both more rich and more poor, with vastly differing needs. The increasing rich are likely to require top-of-the-line models with the latest accessories and technological advancements – ensuring an increasing audience for supercars and their ilk.
The poorer off, conversely, are likely to focus on reliability and cost. They’ll want cheap to run, long-lasting vehicles that don’t put too large a dent in their wallet.
Demographic movements will add fuel to this shift. The rise of the over-55 audience post-2030 and the rise of the new middle class, and its lower median income will again creating an audience eager for reliability and affordability.
The increase in both higher income and lower income groups will both push innovation as a necessity to meet their demands – for the newness needed to attract the supercar crowd, and for the reliability and affordability to attract the ageing and wealth declining population.
However, much like society, this innovation will push in opposite directions. Automakers, parts manufacturers and chemical companies will need to decide whether they chase the higher value but smaller wealthy population looking for a status symbol, or the lower value but larger group looking for value for money.
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).
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