INDUSTRY INSIGHT

Covid-19 takes a toll on automotive and tire industries, but GCC is a bright spot

By Angie Joe, Argus Vice President, Crude C4s and Derivatives, and Blake Vance, Argus Market Analyst

The automotive and tire industries have not been immune to the effects of the Covid-19 pandemic. Global sales forecasts for light weight vehicles are expected to fall by 20% this year from 2019’s levels. Industry analysts are thinking it may take up to five years for a full recovery back to 2019’s sales levels. The sector recorded about 90 million light vehicles sold in 2019, against 94 million units in 2018 and 95 million in 2017.

Decreased vehicle sales will weigh on demand for many petrochemicals, including propylene, polypropylene (PP), benzene, styrene, butadiene, acrylonitrile butadiene styrene (ABS) and chlor-alkali.

The lack of global demand hit the earnings of major Middle East petrochemical companies, who are major exporters. SABIC recorded a second quarter year-on-year net loss of SR 2.22 billion (USD 0.59 billion), compared to net profit of SR 2.03 billion (USD 0.54 billion) for the same period last year. In the first quarter of 2020, SABIC had a net loss of SR 1.05 billion (USD 0.28 billion). Saudi’s PetroRabigh, another diversified petrochemical producer, reported losses of SR1.44bn (USD 384mn) in the second quarter, a further decline from the SR308mn (USD 82.1mn) loss reported during the same period in 2019.

“Decreased vehicle sales will weigh on demand for many petrochemicals, including propylene, polypropylene (PP), benzene, styrene, butadiene, acrylonitrile butadiene styrene (ABS) and chlor-alkali.”

“Within the Gulf Co-operation Council (GCC) region, Saudi Arabia’s non-oil GDP is expected to fall 8.3% this year.”

Auto plants in Europe and the US shut for about two months starting in the second half of March. Once facilities finally restarted, though, there were more hurdles. Global economies struggled with a surge in unemployment or expected furloughs, and with less money in their pockets, consumers have slowed purchases for higher priced items, including cars.

UK consultancy Oxford Economics is projecting a 4.5% decline in global gross domestic product (GDP) for 2020. Within the Gulf Co-operation Council (GCC) region, Saudi Arabia’s non-oil GDP is expected to fall 8.3% this year. In July 2020, the government tripled the value-added tax (VAT) to 15%, causing inflation to jump and curbing domestic demand. Kuwait’s deficit will probably reach almost 25% of GDP, a massive deterioration from the 7% deficit posted in 2019. Government revenues are forecast to fall by about 30% alongside oil price pressures. In 2020, Qatar’s GDP is expected to contract 4.4%, while the UAE’s will contract 6.1%.

This brave new Covid world has brought on a tremendous shift in business culture. Many corporations in western countries have implemented work from home policies, reducing the need for motor fuel as well as new vehicles or replacement tires. As economies continue to reopen, employers will have to ask themselves whether or not they are ready to reduce in-office staff and increase work from home policies.

In manufacturing plants, new Covid related precautions have taken extra time to implement. These safety measures include employee health checks, deep sanitization and social distancing measures along the assembly line.

Another major factor is supply chain disruption. Factories in China were quicker to restart as the country’s virus cases subsided. But if a plant relied on parts from other regions that were still shut down, then Chinese manufacturing was forced to slow down.

There is clear evidence of a supply chain disconnect in the US. Nearly 40% of US auto parts are imported from Mexico, according to the US Department of Commerce. Initially, Mexico’s car industry was not classified as an essential business, so they did not resume operations until about a month after US auto plants restarted. In addition, Mexico continues to be weighed down by Covid prevention efforts.

Volkswagen in its first quarter earnings call projected a global market decrease between 15-20% in 2020. The German automaker cautioned that economic and political forces, including subsidies, will play a crucial role in an overall recovery. General Motors (GM) said its North American utilization rate was at 36% of capacity in the second quarter.

“Factories in China were quicker to restart as the country’s virus cases subsided. But if a plant relied on parts from other regions that were still shut down, then Chinese manufacturing was forced to slow down.”

“Saudi Arabia’s rubber market, which includes tires, hoses, sheets and belts, is projected to grow by 8% to USD 472 million from 2018-30, according to the Saudi Arabian General Investment Authority (Sagia).”

More than 25% fewer vehicles have rolled off the line since 2017, estimated Elmar Degenhart, Continental AG’s chairman of the executive board, in a July speech. While there has been a slow improvement, “We will not achieve the level of 2017 until after 2025 at the earliest,” he said.

GCC regional impact

Regional GCC 2019 sales of new light vehicles totaled more than 1 million, according to research firm AutoForecast Solutions. This represents a drop compared to 2015 when sales hit 1.5 million units. Between 2018 and 2019, there has been a rebound, with an increase of more than 15% last year. Saudi Arabia claimed the top spot in 2019, totaling almost 530,000 vehicles. The UAE followed with 263,000 units, and Kuwait sold 113,000 vehicles. Global sales reached 90 million units in 2019.

Saudi Arabia’s rubber market, which includes tires, hoses, sheets and belts, is projected to grow by 8% to USD 472 million from 2018-30, according to the Saudi Arabian General Investment Authority (Sagia). In late 2019, Apollo Tyres entered the Saudi tire market via its distributor Al-Jomaih Tyres. “Saudi Arabia has a market potential of approximately 22 million tires,” said Shubhro Ghosh, Apollo ASEAN, Middle East & Africa Group Head.

The country also has two new tire facilities planned. Finland’s Black Donut was set to start up new tire production this year, but the project has been delayed. National Tire Co. (NTC) was scheduled to begin construction in 2020 for a new plant in Jubail, east of Saudi Arabia. In the UAE, Roadbot Tire Project KIZAD’s USD 614 million new facility will commence operations by 2022.

Auto, tire consolidation started prior to Covid

Prior to the pandemic, automotive manufacturers have been consolidating global operations for years in response to a transforming industry. The focus has been on idling older, less efficient facilities. Producers have opted instead to increase production at sites that are more competitive or build newer plants.

GM already sold its operations in Europe, Russia and Africa, shut a plant in Australia and closed five North American plants. Ford is set to reduce its European manufacturing footprint from 24 locations in 2019 to 18 facilities by the end of 2020.

Like the auto sector, tire suppliers were cutting back well before the pandemic. At least six Continental plants shut in 2018-19. Cooper Standard will close two plants in 2020, adding to the 10 already scheduled for closure around the globe. Pirelli plans to consolidate operations in Brazil through closures and move some European operations to Russia. Michelin will shutter its Roche-sur-Yon, France, and Dundee, Scotland, facilities in 2020. Michelin’s Hallstadt, Germany, asset will halt by early 2021. And as a testament to the state of the industry, Goodyear is idling an Alabama plant that has been operational in the US for more than 90 years.

In 2020, global light vehicle sales will see the largest decrease on the back of the pandemic, but some analysts are projecting a double-digit rebound in 2021. If governments extend unemployment benefits, wage subsidies or corporate loans, then this will help advance the economy forward. Incentives for alternative vehicles or a “cash for clunkers” program will also nurse the market along.

“In 2020, global light vehicle sales will see the largest decrease on the back of the pandemic, but some analysts are projecting a double-digit rebound in 2021.”

“Overall, the impact on the GCC automotive and tire industries will likely be limited. While mild sales losses are expected, the drop will be much less than other regions since the car market is smaller.”

The Chinese and Korean auto markets have proven the most resilient, despite an expectation that China is set for its third consecutive year of decline. The China Association of Automobile Manufacturers (CAAM) reported that first quarter year-on-year automotive sales tumbled 42.4%. Sales ticked up by 4.4% in April, and then further increased by 14.5% in May compared to the previous year. South Korean buyers have been lured in by a temporary cut in consumption tax on passenger cars that was extended through the end of 2020. The country has recorded an impressive year-on-year increase of 43% in June sales of light vehicles, according to LMC Auto.

Give this improved demand, Middle East petrochemical producers quickly shifted volumes of polypropylene (PP) copolymer to China and away from key export markets Turkey and India, where sales were tepid. China’s recovery is a boost to flagging demand in these other export markets. However, the improvement may not be enough to counter the cumulative global demand loss during Covid-19.

Overall, the impact on the GCC automotive and tire industries will likely be limited. While mild sales losses are expected, the drop will be much less than other regions since the car market is smaller. Despite the GCC’s relative resilience in the automotive and tire industries, Middle East producers are more exposed to the global aftershocks of Covid-19 and its uncertain trajectory. Exports of butadiene, polypropylene and other automotive-related petrochemicals, such as benzene and ABS, will need to improve at a fast pace for Gulf producers to recover their pre-Covid revenue positions. The continued health of automotive markets in China and southeast Asia will be closely watched for the rest of 2020 and beyond.