Slow return of US auto demand likely to weigh on chemical markets in H2

Author: Adam Yanelli

2020/07/10

HOUSTON (ICIS)--Lagging sales of new automobiles in the US is likely to weigh on demand for petrochemicals through the remainder of the year, but an analysis of sales data by an industry association suggests that the market could recover more quickly if the overall economy improves.

Sales of new automobiles in the US were already trailing previous years’ levels when the outbreak of the coronavirus caused most North American automakers to idle their assembly plants in mid-March, which contributed to a 45% decrease in light vehicle sales in April.

New light-vehicle sales in June improved by 7% compared with the previous month but were down by 24% compared with the same month a year ago.

Through the first half of 2020, sales were down by 23.1% compared with the first half of 2019.

A review of sales data in the second quarter by The National Automobile Dealers Association (NADA) found a wide gap between the decreases in fleet sales and the downward trend in retail sales.

Fleet sales were down year on year by a 72% in May while retail sales only fell by 17%.

June fleet sales were down year on year by 73% while retail sales were off by only 6%.

Fleet sales are vehicles sold to corporations, rental car firms, utility companies, and government agencies, typically at a discount.

Patrick Manzi, NADA chief economist, said the retail sales recovery has been driven by generous manufacturer incentives.

“After reaching an all-time record in April 2020 of $4,981 per unit, incentive spending was dialed back in May and June,” Manzi said. “For the rest of the year, incentive levels are expected to be elevated compared to last year but likely won’t be as high as in April 2020.”

Fleet sales are forecast to remain down significantly because of major cancellations from rental car companies and fewer sales to state and local governments dealing with pandemic-related revenue losses.

Manzi cited data from Cox Automotive, who projected that fleet sales are expected to fall to 1.3 million units by the end of 2020, a decline of roughly 2 million units compared with 2019.

Some chemical market participants are seeing the impact of the reduced sales, with one saying the US auto industry was “in a coma.”

A nylon market participant said this week that aside from the loss of auto demand, other segments are seeing steady downstream consumption in line with pre-virus levels.

Between 30-35% of global nylon demand comes from the auto industry.

Moody's Investors Service said this week that earnings from four coatings producers should fall by 20% this year before rebounding in 2021, with some of that decrease directly attributable to the auto sector.

Moody’s said it expects auto sales to resume growth in 2021 off a diminished base, but global sales of light vehicles will not reach their 2017 peak of 95m units by 2022, when they expect 85-88m. Based on their automotive manufacturing sector outlook, they expect global auto unit sales to drop by 20% in 2020.

Some players are seeing positive signs in buying patterns and have a brighter outlook.

Polypropylene market participants said that automotive sales had been nearly dead during April and May but are now starting back again.

Customers who had not placed any orders for a while are suddenly asking for more than their usual monthly quantities as plants start up.

Another bright spot for the industry is the rehiring of employees.

NADA pointed to employment data showing car dealerships hiring back employees at a high rate as a positive for the auto industry.

Citing the Bureau of Labor statistics (BLS), franchised dealerships directly employed more than 1.1m people in the US prior to the arrival of the coronavirus.

That fell to 880,200 jobs in April a decline of almost 22%. In its first estimate of May employment, BLS said the May report indicated signs of recovery in dealership employment and showed that employment increased by roughly 80,200, an increase of 9.0% compared with April.

From a lubricants perspective, base oil market players expect the automotive lubricant industry to face demand challenges through 2020 and some do not anticipate a return to pre-coronavirus levels until the latter half of 2021.

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, and production disruptions could severely weigh on demand.

Focus story by Adam Yanelli

Amanda Hay, Zachary Moore and Al Greenwood contributed to this article.

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