INSIGHT: Diesel ban, new emissions testing cloud auto-related demand for petchems in Europe

LONDON (ICIS)–As the automotive industry looks set to turn a corner in 2019, it is unclear how the diffuse issues impacting the sector will affect demand for petrochemicals like epoxy resins, fatty acids or polypropylene (PP).

The immediate challenge facing the market is how to adapt to the stricter carbon dioxide (CO2) emissions testing regulations, implemented by the EU in September 2018.

A longer-term challenge will be adapting to the diesel bans announced by several European countries which could, in just a few decades, completely change the face of a 100-year-old sector created around crude oil and its derivatives.

Healthy productivity prior to the new emissions testing legislation caused demand to splutter out from the third quarter of 2018, and is yet to get back into gear.

As all newly manufactured vehicles in the EU must be compliant with the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) – and not just new models as in the previous regulations – this has slowed the amount of new cars being manufactured.

The slowdown in vehicles’ production has rippled back upstream, and those involved in providing coatings for new vehicles have struggled with a decrease in demand.

Opinions are divided about when automotive demand is likely to recover, and the European market remains reactive to what is happening in Asia and in particular in China.

Participants in China have been away for the Lunar New Year holidays, and are unlikely to return to the market in earnest until the middle of the month.

Although there could be an increased appetite for material in other downstream applications, there is little clarity about whether this will be reflected in the automotive sector.

While one epoxy resins source stated that a recovery would be more likely in the second half of the year, others believed that supressed sentiment would continue throughout 2019.

“We are not so optimistic here. We are not so confident that it will recover in H2 [second half],” said one source.

“There is negative feedback from the automotive industry, and that will not change after Lunar New Year … The whole year should be more than 10% down in China, [and] that is not only down to Lunar New Year,” the source added. .

“Last year was a good year, but not a booming year as Q4 [fourth quarter] was already weak.”

FATTY ACIDS, PP ALSO AFFECTED
Other petrochemical markets also being affected by the pressure from the slowdown in automotive demand would be fatty acids or polypropylene (PP), for example.

European fatty acids second-quarter contract negotiations are being influenced by the weakness posted by automobile lately. 

In the European PP market, a product which is widely used in automotive parts, some players have described demand from the sector as “very bad”, adding that major markets like Italy are showing signs of fatigue.

A source said that automotive demand in Italy, for instance, was suffering not only due to home-grown problems like the crisis surrounding the country’s automobile major Fiat, but also due to the general political situation.

More generally, a European PP producer also conceded: “There’s a big question mark over demand. Automotive is very bad.”

ECONOMIC WOES
The Germany-based Ifo Institute, part of the Leibniz Institute for Economic Research at the University of Munich, recently released data suggesting that sentiment surrounding exports from Germany had weakened.

“December’s ray of hope in the automotive industry has vanished at the beginning of the year. The outlook has worsened noticeably. The same applies to the chemical industry,” said Ifo.

Ifo’s economist Christian Grimme added that in many advanced economies there is a slowdown in growth following a period of above-potential expansion, and said that labour shortages, as well as of capital investments, was putting a strain to growth.

“However, due to the slowdown in growth expectations, incentives to invest have been dampened. In the eurozone, there are a number of internal factors. The yellow vests movement in France has led to an increase in uncertainty about the continuation of reform policies by President [Emmanuel] Macron,” said Grimme.

The economist added that discussions in Italy about the budget may resurface at any time, potentially raising uncertainty about the country solvency.

In the UK, a hard Brexit would be becoming increasingly likely, he added, and would have a disruptive impact on trade relations between the EU and the UK.

“German carmakers are now faced with the incertitude whether diesel cars are still bought by other countries due to potential bans and technological advancement with respect to electrical cars,” added Grimme.

With various macro-economic issues impacting the market, including Brexit and the US-China trade war, consumer sentiment has suffered dramatically.

DON’T REPLACE IT – FIX IT
This means that potential buyers are more risk averse and hesitant to making high-priced commitments such as purchasing new cars, and are instead more likely to invest in their current vehicles.

“What happens now remains to be seen. There is an element of concern around consumer sentiment, not helped by things like Brexit, as these things create a high level of uncertainty,” a source in the epoxy resins market said.

“In the past, when people don’t buy new cars, they fix their old ones, so although those in new building will see downturn, those in re-finish will see an uptick.”

Another issue on the horizon for the automotive industry is the changing technologies, which could increase the demand for epoxy resins in the sector, like the use of composites in electric vehicles (EVs).

The use of composites to be used for car bodies is something that could become more popular in automotive manufacturing, as composites are lighter than metal, and are therefore more fuel efficient.

An uptick in consumer demands could support consumption of epoxy resins, but this would be funnelled into a different end-use, as composite materials do not rust in the same way as metals, and therefore don’t need protective coatings.

“It’s not a death sentence for some value chains, but the transition could be tricky, and the beginning [of this transition] could be a huge challenge for the industry, and the plastic suppliers,” said one supplier.

“The challenge is with the industry and how they adapt to these new trends. The discussions around diesel or the foreseen ban on diesel have created a lot of confusion…and it is never good when the market is confused.”

EVs SOCIAL ACCEPTANCE: YET TO COME
There is some scepticism about how popular electric cars will become, as although these vehicles are more efficient, they are also significantly more expensive than their petrol-based counterparts.

“Numbers [for EVs] are too low in terms of the total market. I think these cars are available in the next month ready for purchase, but people are concerned as they cost money,” said a source from the automotive industry.

“Not everyone wants to buy one as they don’t know how to charge them, and they may not be fit for their lifestyle, so I’m not sure the ‘electric vehicle topic’ will take off. Consumers are not stupid, so if you are not 100% convinced, you won’t spend the money.”

Along with the shifting attitudes towards car ownership and the rise of artificial intelligence (AI)-controlled self-driving cars, the spark of interest created by electric automobiles could fade away quite suddenly.

Although the automotive industry remains a key segment of epoxy resins demand, it is not the only downstream market, nor even the key sector with big buyers in the wind energy and construction industries consuming a lot of material.

If strong demand from other end-use sectors tightens epoxy resins supply, then those using epoxies for coatings or composites may be left facing steeper prices.

They may have to end up accepting conditions set by the rest of the market.

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Epoxy resins are used as adhesives on metals and construction materials, as well as in coatings and automobiles.

Apart from being used in automotive parts, PP is also used for packaging, ropes, carpets, plastic parts, or loudspeakers, among others.

Pictured: Traffic sign for urban diesel ban area in Stuttgart, Germany; January 2019
Source: Michael Weber/imageBROKER/REX/Shutterstock 

Additional reporting by Linda Naylor

By Morgan Condon