Europe chems cautious on automotive as recovery may be short-lived

Author: Katherine Sale


LONDON (ICIS)--European chemical markets remain cautious over the recent recovery from the key automotive sector, a result mainly of industry restocking, while the pandemic’s second wave hits the region hard.

The automotive sector has been the main area of concern from the end-user markets throughout the pandemic, and was the last to show any signs of life at the end of the first wave.

There has been higher demand from automotive across petrochemicals since September, particularly from polymers that are used for parts production like polycarbonate (PC), polymethyl methacrylate, (PMMA), polypropylene (PP), nylon, and other engineering plastics.

Stronger automotive demand is providing upward pressure in a number of monthly and quarterly contracts talks that are currently taking place.

EU-wide passenger car registrations suffered in the second quarter historic falls: April's 75% decrease, year on year, is likely to stick in players' minds as the bleakest figure they can remember.

While consumers gradually returned to car dealerships over the summer months, the falls are likely to cause a 25% annual decrease in cars registrations, according to trade group the European Automobile Manufacturers Association (ACEA); see graph for more data.

Commercial vehicle registrations in the EU rebounded strongly in September, rising 13.3%, ACEA said last week, commercial vehicles are those purchased by companies - vans, trucks, and buses.

Registrations for commercial vehicles shrank 25% in the first nine months of 2020, compared with the same period a year earlier.

However, despite the stronger consumption figures and the sharp rise in vehicle registrations, market participants remain very cautious across the board.

There are multiple government stimulus packages that are incentivising vehicles purchasing, but this may not be supported by actual demand from consumers.

This is a key concern for many companies, as it would be detrimental to consumption in the first quarter, which is traditionally one of the strongest times for this sector.

“There is always a question about what happens when the subsidies end? The original equipment manufacturers [OEMs] have a lot of finished car stock which will have to be destocked, so let’s see how automotive rebounds from now until Q1,” said earlier this month the CEO at Belgium’s chemicals major Solvay, Ilham Khadri.

It is the combination of the government stimulus and supply chain restocking that is driving the current levels, making it very hard for companies to gauge the actual strength of the sector, and how long it will last.

“We don’t know if it is recovery or a blip,” said one titanium dioxide (TiO2) buyer.

The automotive sector was practically idle for most of the pandemic’s first wave, coinciding with generalised lockdowns across Europe, and demand was largely lost, with large OEM’s not operating.

Part of the recent push is linked to OEM’s working on new models, which require a wide range of plastics and coatings product for parts.

Going forward, this is a key opportunity for the petrochemical sector, with light-weighting and innovation doubling the demand for some polymers on a per vehicle basis.

OEM running rates remain mixed; some players said normal levels of demand are only being registered in the electric vehicles (EVs) chain, with levels higher year on year.

However, production destined to other automotive sub-sectors remains lower than levels seen in 2019, at which point the automotive sector was already struggling.

“It’s a very inconsistent view. We are seeing restocking from tier 1 and 2 parts manufactures, but overall running rates are below 2019,” said one major chemical producer.

The pandemic has caused a sharp decline in public transport use, either because of restrictions or a lack in public confidence.

“Individual transportation is deemed the safest way to protect yourself from coronavirus,” said one seller.

However, there has also been a steep decline in social mobility and general vehicle use, with many people working from home and limiting other outings.

A number of markets have seen an increase in demand because of this shift in lifestyle for consumers, particularly the paints, coatings and polyurethanes (PU) sectors.

With wider spread uncertainty and the longer-term economic impact of the virus becoming more apparent, this will limit disposable income for many households.

Consumers may be driven to make minor purchases, such as carrying out ‘do it yourself’ (DIY) projects, but there will become more constraints on big-money purchases such as cars.

This is the main concern for many in the petrochemicals sector, and the reason why the early signs of recovery are not being prematurely celebrated.

The true test will come in the second-quarter of next year, and until then the industry is set to continue operating on a short-term survival mode.

Front page picture: Electric vehicles at a Volkswagen plant in Zwickau,  Germany
Source: Jens Meyer/AP/Shutterstock 

Focus article by Katherine Sale

Additional reporting by Will Beacham, Anne-Sophie Briant-Vaghela, Heidi Finch, and Miguel Rodriguez-Fernandez