Around the tracks: Chips, costs, and COVID-19 hinder auto market recovery

Clement Choo examines the latest manufacturing indices to assess the health of the global auto industry as well as the key factors that are hampering the sector's recovery.

From the start of the second half of the year, global automakers had to cope with the impact of a semiconductor shortage, fresh waves of coronavirus infections, as well as higher costs as steel prices surged, especially for hot-rolled coils.

Several automakers continued to temporarily suspend production to cope with a parts shortage.

Market participants were still concerned that rising gasoline prices resulting from high crude prices could affect driving activity. Amid the rising prices, the second-hand vehicle market could see some upside.

Forward gear: Carmakers suspend production on parts shortage

Reverse gear: Chip shortage recovery expected in 2022

US

US manufacturing spiked to a fresh record high in July. The Purchasing Managers' Index stood at 63.4, up from 62.1 in June, data from IHS Markit showed, on stronger expansions in output and new orders. Total new vehicle sales hit a seasonally adjusted annual rate of 15.4 million units in June, falling below forecasts and down 9.4% from May, industry analyst Cox Automotive said.

• Vehicle sales slowed in June but neared 2019 levels.
• The Platts TSI US HRC index hit a record high of $1,839.25/st on July 19.
• HRC supply to tighten in September and October amid planned mill maintenance.

EU

The Eurozone manufacturing sector stayed in expansion territory. The IHS Markit Eurozone Manufacturing PMI dipped to 62.8 in July against June's reading of 63.4. Supporting the firm reading, fresh passenger car registrations rose 10.4% year on year to 1.05 million units. Demand for new cars in the first half of the year hit almost 5.4 million units.

• Sales of battery electric vehicles in Q2 2021 surged more than 3.3 times year on year to 210,298 units.
• HRC market expects robust automotive demand in Q4.
• EU's quota for Indian HRC exhausted for July-September.

CHINA

Manufacturing also slowed down in China. The PMI published by the National Bureau of Statistics stood at 50.4 in July, down from 50.9 in June, its weakest since it hit 35.7 in February 2020. Chinese media company Caixin's PMI fell to 50.3 in July against 51.3 in June. Both PMI readings took place amid an outbreak of the COVID-19 delta variant in Nanjing, higher material costs and extreme weather. Vehicle production over H1 2021 was 12.57 million units.

• Passenger vehicle retail sales reached 1.57 million units in June, down from 1.65 million units in May and lower than 1.76 million units the year before, data from the China Association of Automobile Manufacturers showed.
• CAAM revised its forecast for vehicle sales in 2021 from 26.3 million units to 27 million units.
• China removed export tax rebates on cold-rolled and coated steel Aug. 1.

INDIA

India's manufacturing rebounded as shown by the IHS Markit India Manufacturing PMI swinging to 55.3 in July from an 11-month low of 48.1 in June. Output, new orders, exports, quantity of purchases and input stocks all returned to expansion territory. Vehicle production in Q2 fell about 35.9% at 4.38 million units from Q1, data from the Society of Indian Automobile Manufacturers. Production in H1 totaled 11.2 million units, up from 6.9 million units year on year but below H1 2019's 13.7 million units.

• India's vehicle industry faces headwinds from higher commodity prices, chip shortage and concerns of a fresh wave of COVID-19.
• India yet to see automotive retail numbers comparable to 2019.
• Higher material costs cause domestic vehicle manufacturers to raise list prices for their vehicles.

Outlook

The chip shortage, which started early this year, is still being felt by global vehicle makers. While many countries have started vaccinating their populations against the coronavirus, a global recovery is still some way off, especially as China posted fresh spikes in infections.

S&P Global Ratings projected the shortage could take two to three quarters to resolve for most global automakers and up to a year for select models.

Disruptions to the supply chain could hinder manufacturing activity, likely causing vehicle makers to speed up their buying activities towards the end of 2021 and early 2022 to build up their inventories of parts as a safety measure.