Auto chain confidence falls in wake of Brexit vote, July CMCI shows

LONDON (ICIS)–Automotive-linked petrochemical markets have become increasingly negative on all indicators except for current order book volumes versus the same period a year ago, analysis of the July Chemical Markets Confidence Index (CMCI) showed on Wednesday.

The fall in the indicators from June comes in the wake of the UK’s vote to leave the EU, which could have a significant impact on European growth according to analysts, and has extensive potential ramifications for the automotive industry. The fall in confidence suggests that chemical markets are expecting a downturn in the automotive industry in the next 12 months.

Automotive-linked petrochemicals market views on current business conditions compared with the past 12 months have turned negative for the first time since the CMCI’s inception in May. Expectations on profitability in the next 12 months have once again turned negative following a brief reprieve in June.



Despite the fall in confidence in future order book volumes, the July CMCI future order book indicator remains in positive territory, and slightly above its May 2016 level.

Automotive chain players expect UK investment decisions to be delayed in the near-term. A typical business reaction to uncertainty, which has been created by the Brexit vote, is to hold back and wait for clearer indicators.

Financial markets have reacted in a similar fashion. One of the biggest short-term risks for Europe, and globally, is that this will lead investors to hold back until the UK’s new relationship with the EU is known, with that lack of investment directly translating into lower growth.

The extent of the impact of the UK vote on growth remains to be seen, but investors’ flight to safety clearly shows that the market is pricing in recessionary fears. For car markets, lower GDP growth typically translates into lower sales in a very direct way, and forecasts for the second half of 2016 are likely to need modification as a result.

Coupled with this, crude oil prices, which were relatively stable in June, have become more volatile, adding uncertainty both for petrochemicals raw material costs and fuel costs. Volatile automotive operating costs are having a negative impact on car buyers’ intentions in the same way as financial uncertainty deters investors.

Although it is too early to see the impact of the referendum result on consumer spending and industrial production, some figures for June show a slowing in big ticket item spending even ahead of the vote. New figures from the UK’s Society of Motor Manufacturers and Traders show that there was a 0.8% fall in vehicle registrations in June compared to June 2015, the first fall in any June since 2011.

If consumers are unnerved by the Brexit decision and are becoming more cautious, this will be bad news for the economy in the UK, Europe and further afield. Potentially even more significant for automotive and auto parts manufacturers is the significant increase in metals costs that the flight to safety has caused, with the price of steel sky-rocketing in the build-up to and wake of the exit vote.

At the end of May, steel billet prices were about $50/tonne, whereas by 5 July they had risen to over $325/tonne.

Steel accounts for about 60% of the weight of an average finished car, although this varies from model to model and can be substituted with alternatives such as aluminium or carbon fibre.

With an average car weighing about 1.4 tonnes, this equates to an in-car cost of around $273/average vehicle at a 60% weighting, a figure approaching the IBAP raw material cost for the majority of petrochemicals used in cars of $277.62/tonne of total vehicle weight (TTVW).

This is likely to mean that the benefits of lower cost materials seen over the past few years for parts suppliers and auto manufacturers may be reversed, potentially leading to higher costs and lower demand. How long this lasts will depend largely on political and economic developments outside of car manufacturers’ sphere of control.

The financial movements in the wake of Brexit have highlighted some deficiencies in the wider economy, and brought into sharp relief the effects of the widening wealth gap in developed countries, as discussed in the July ICIS Global Automotive Report.

Financial market instability aside, the other risk for automotive manufacturers in the UK is spectre of tariffs, which could drive investment out of the UK and shifting the automotive manufacturing power base in Europe, something Toyota has already warned on.

Coupled with this, the potential lack of EU “passporting” for financial institutions could make arranging credit more burdensome and affect financing options and costs, should the UK leave the EU without any agreements in place. Nevertheless, extra costs brought from potential tariffs need to be weighed against potential gains from the increased attractiveness of UK car exports resulting from the weaker longer-term prospects of the pound sterling.

For car makers exporting to the UK, the fall in value of sterling represents a very real and immediate cut in margins, creating incentives for car manufacturers to raise prices, particularly for premium automotive, where small percentage increases are unlikely to result in significant loss of business.

Such a situation could also prove more challenging for budget brands that sell predominantly based on affordability, particularly as lower growth creates the potential to magnify the impact on demand of any increase in price. For any chemical company operating in the UK, these are worrying times.

Quite apart from the longer-term questions over the form Brexit will take and how much access the UK will have to the EU’s single market, there are more immediate concerns about faltering demand down the supply chain in the UK and further afield. Six UK-based construction funds – including Aviva, M&G and Standard Life – have been forced to freeze withdrawals.

It remains early, but the major risks so far for automotive chain players are lower growth, volatile financial conditions, and – in Europe – increased cost burdens.

The newly established ICIS Europe CMCI aggregates sentiment from hundreds of petrochemical market players actively involved in price negotiations across more than 60 different markets.

The Europe CMCI runs from +100, to -100, with zero on each index representing neutral, or uncertain conditions, a negative score indicating bearish expectations and a positive score representing bullish expectations. The indices also gather sentiment on the comparison between the current situation and the situation across the past 12 months to give a complete picture of current market conditions and confidence. The information is gathered in the third week of each month.  A full methodology is available on request.

For more details on the overall Europe CMCI data, click here

Focus article by Mark Victory

Image source: Rex Features