China's ailing auto sector to suffer further from coronavirus

China's struggling auto sector is likely to take a further hit from the effects of the coronavirus outbreak given that Wuhan is the country's major auto production hub. But overcapacity in China's auto sector remains the biggest drag on any sustained recovery, particularly as consumption of cars has almost reached saturation point.

China's auto sector accounts for around 6% of the country's total steel consumption, S&P Global Platts estimates. The China Iron & Steel Association has forecast that China's total steel consumption will grow by 2% this year to just under 890 million mt.

The association has predicted that China's passenger car production and sales will decline by 2% this year, which would mark the third consecutive year of decline in the sector. China's vehicle output and sales reached 25.721 million and 25.769 million units respectively in 2019, down 7.5% and 8.2% from the year before, China Association of Automobile Manufacturers data showed.

In a recent note, S&P Global Ratings said the impact of the coronavirus on China's economy may be small provided it did not escalate, as Wuhan only accounted for about 1.6% of China's total GDP. However, Ratings noted that Wuhan was a key player in China's auto industry, hosting production facilities for seven major domestic and international manufacturers, along with hundreds of auto parts suppliers.

"Complicated supply chains and just-in-time production could mean that production outages in Wuhan factories have broader spillover effects," Ratings said.

"The moderate pickup in recent months [in retail sales] to about 8%, nominal and compared to a year ago, is due in part to a stabilization in auto sales, which had suffered a prolonged slump," the ratings agency added.

China's Dongfeng Motor Corporation has joint ventures with international car makers including Honda Motor, Nissan Motor, General Motors and Renault, with production facilities hosted mainly in Wuhan.

Renault has said it will resume production on February 10, while Japanese companies have told some staff to return home. GM has placed some restrictions on travel to China.

Japanese carmakers have been lifting production capacity at their facilities in China in recent years to take advantage of the massive China auto market.

Honda Motor started building a new 120,000 unit/year plant in 2017 in Wuhan that began operating last year. Nissan invested almost $900 million in an assembly plant in Wuhan, taking production capacity from 200,000 units/year to 300,000 units/year when fully operational in 2021.

Chinese mill sources believe that auto production overcapacity is the main problem for the ailing passenger car market, and it may take two to three years for a better supply-demand balance to emerge. Furthermore, after more than 10 years of strong sales growth, demand for cars has reached a ceiling at current income levels.

Most middle-class people who want a car already have one and many people in rural areas are unable to afford cars. Given China's slowing economy, incomes are unlikely to rise much higher. Lowering interest rates or pumping more money into passenger carmakers provides only a short term solution and the car market slumps again once these incentives are removed, market participants said.

Steel mill sources said auto sheet demand was unlikely to see any significant improvement in 2020, and would be probably stable at best from the year before.