Slumping auto sector faces long road to recovery

Automotive production will make only a gradual recovery from the Covid-19 crisis, cutting demand for auto components this year and weighing heavily on industrial metal and steel prices in the months ahead.

Automotive markets slumped in the first quarter of this year the world over, and the prognosis for the second quarter is similarly weak, signalling a sustained demand shock for the multiple metals and steels feeding the sector.

What began as a supply shock to the world's automotive factories is now firmly a demand crisis as human mobility skids to an abrupt halt. The UK suffered its worse month for new car sales in "living memory" as just 4,321 new sales were registered in April, down by 97pc year on year, according to the Society for Motor Manufacturers and Traders.

Further data across world economies have seen global truck output decline by around 30%. Total car registrations in Western Europe fell by 80pc year on year in April; China's passenger vehicle sales fell by 47pc year on year in March; and the same calculation yielded a 6pc year-on-year fall for the industry in India.

At the global level, annualised light vehicle sales fell below 58mn units, the first time this has happened since 2009. Given that sales were around 90mn in 2019 and 95mn units worldwide in 2018, Covid-19 and its associated factors have decreased expected sales for 2020 by around 38pc and has removed almost 40mn vehicles from world road networks this year.

Gradual return

The market expects some of this demand and supply to remerge as the supply side of the global industry reforms and reassembles its capabilities. Volkswagen had restarted production at Wolfsburg as of late April and BMW has since resumed the manufacture of its engines.

The scale of these production restarts illustrate that while the halt to production was sharp, the restart will be gradual — VW's Wolfsburg plant can produce 6,000 cars in a fortnight but will begin with production of just 2,800 over that same period. It is estimated that 70% of dealerships in Germany have reopened, although the stretch to full capacity is likely to take more time.

These production halts have had a severe impact on metals markets. With purchasing managers indexes (PMIs) for the Eurozone and Germany printed at 33.4 and 34.5, respectively, for April, the need for automotive raw materials is assessed at decade-lows. LME 3 Month copper prices remain depressed at $5,086/t, which was 17.7pc down year on year as of May 5. LME 3 Month aluminium prices at $1,477/t are down by 18.4pc year on year and Argus cif China prices for cobalt are down by 10.3pc year on year at $33,620/t.

Argus prices for hot-rolled coil (HRC) ex-works in northwest Europe have fallen by 11.5pc year on year to €424/t.

LME 3 Month nickel prices have remained broadly flat at $11,864/t, as of 5 May. But the resilience of the nickel price is more to do with supply-side mining issues in Indonesia than with the common demand influences driving steeper declines in prices for other metals.

Component demand

The calculable drop in demand reflected in Argus' metal price assessments corroborates an expectation for 20-40pc annualised falls in demand for automotive components this year.

Most of these prices represent cost-floors for some of the world's key mines that operate production around the third-quartile of global cash costs. Miners are expected to soon experience cost relief thanks to global falls in energy prices, which constitute up to 50pc of some mines' operating costs.

The market seems set to run automotive assembly lines at lower rates while demand pulls itself back to pre-crisis levels. But the supply side of the global economy is the where most change will have to occur as global governments spend 3-20pc of annualised GDP on bail-out and Covid-19 assistance programmes, and interest rates remain at rock bottom.

Social distancing measures are the largest problem for the automotive industry at the moment. Production lines struggle without their labour component, and unprepared common spaces are a key inhibitor to fuller restarts. Furthermore, without regional mobility, car ownership is not a pressing concern for households, some of which have experienced a drop in their incomes.

While there is talk of improving conditions for the general consumer, a U-shaped correction to manufacturing activity seems most widely anticipated by metals markets. Lower prices for automotive raw materials should be passed on to the consumer to help stimulate demand, although large queues for car dealerships and congested roads are unlikely to materialise in the near future.

By Max Court