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Commodities 2022: Vehicle makers face challenging year amid persistent chip shortage

Highlights

Chip supply expected to stabilize only in 2023

Chip makers' revenue far greater from smartphones than vehicles

Automotive steel demand rides on vehicle output rebounding

Global vehicle manufacturers found themselves struggling to meet demand in the second half of 2021 as production was hampered by a semiconductor chip shortage -- and supply is not likely to return to normal in 2022.

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S&P Global Platts Analytics has projected that the shortage hindering global vehicle production is poised to persist into 2022 before supply catches up with demand in early 2023. Light-vehicle production in 2022 is expected to shed 5.7 million units as the shortages impact production facilities worldwide.

The Boston Consulting Group expects the shortfall in vehicle production to last into 2024 before stabilizing in 2025. The lower lower vehicle output will affect demand for a range of commodities, steel and other materials.

Automotive steel demand uncertainty

The drop in vehicle production has impacted the automotive sector's demand for steel, resulting in a buildup of steel inventories, especially for hot-rolled coil. Several vehicle makers have cancelled volumes agreed upon under long-term contracts and remain uncertain over how much steel to secure in future long-term contracts amid reduced production forecasts.

In response, steelmakers have taken to diverting the surplus for export in the hope that other steel-intensive sectors, such as heavy machinery and construction, can absorb the excess.

The World Steel Association had projected that disruptions in the supply chain were significantly undermining the global automotive industry's recovery, noting that as pent-up demand dissipated, the growth in auto production in 2022 will decelerate, though high order backlogs could provide some support.

Asian ADC12 aluminum alloy, a major material used for automotive parts production, also faced weaker demand and falling raw materials prices in the last quarter of 2021 that will likely continue into 2022.

The lower vehicle output has affected platinum group metals demand in all key auto-producing centers -- which account for around 40%-80% of PGM end-use -- according to UK brokerage Liberum analysts. Heraeus Precious Metals estimated the fall in global light-vehicle production for 2021 amounted to a drop of around 1.4 million oz of PGMs in 2021, with platinum demand decreasing 230,000 oz, palladium down 1.1 million oz and rhodium dropping 161,000 oz.

Fresh chip supply years away

Although chip makers have pledged billions to expand production capacity in the coming years, it will take some time for the fresh capacity to come online. A semiconductor fabrication plant, or fab/foundry, costs $10 billion-$20 billion and takes 3-5 years to build.

Governments have joined the push to build chip capacity, notably India, which aims to become a global hub for electronics manufacturing with semiconductors as the foundation. India's cabinet on Dec. 15 approved Rupees 760 billion ($10.17 billion) to develop a domestic semiconductor and display manufacturing industry.

While the rampup takes shape, the automotive industry will have to compete for chips with other industries, especially those affected by the "stay home" effects of the coronavirus, such as surging demand for mobile phones, notebooks, gaming and wearables like virtual reality headsets. PlayStations and Xboxes were in very short supply during 2021.

The competition is acute as the automotive industry is not a major contributor to a foundry's revenue. The automotive sector accounted for 3.31% of Taiwan Semiconductor Manufacturing Co.'s annual revenue in 2020, well behind the smartphone sector at 48.18% and high performance computing at 32.84%. TSMC is said to be the world's largest contract manufacturer for semiconductor chips.

Fabs like TSMC have cautioned that the tight chip fabrication situation is unlikely to normalize even over 2022. The shortage inevitably means prices for chips are higher.

The World Semiconductor Trade Statistics has projected global chip sales to rise 8.8% year on year to $601.5 billion in 2022. after rising 25.6% to $553 billion in 2021 from $440.4 billion in 2020.

"The semiconductor market overall was not negatively impacted by the COVID-19 pandemic in 2021. Robust consumer demand pushed all major product categories to double-digit growth rates except optoelectronics. The largest growth contributors are memory [chips] with 34.6%, followed by analog [chips] with 30.9% and logic [chips] with 27.3%," WSTS said Nov. 30.

Explore this topic: Commodities 2022

Tie-ups to secure future supply

As automakers grapple with the shortage, there is a growing push to tie up with global foundries to ensure chip supplies.

Ford Motor Co. and GlobalFoundries Inc. on Nov. 18 signed a non-binding agreement "to create further semiconductor supply for Ford's current vehicle lineup and joint research and development to address the growing demand for feature-rich chips to support the automotive industry," the vehicle maker said.

General Motors could sign similar agreements with TSMC, Qualcomm and NXP Semiconductors NV, and has an existing relationship with Qualcomm.

Automakers could also be more inclined to set up their own chip plants, as Toyota Motor did in 1989 when it started making chips at its Hirose plant. Toyota transferred core electronic component operations from the plant to Denso in April 2020, a domestic automotive components manufacturer that is 24.77% owned by Toyota. The Japanese company faced a shortage of parts in H2 2021 when COVID-19 spread in Southeast Asia, a main source of automotive components.

The developments seem to indicate that automakers are keen to have chip facilities on home ground or close to home, particularly as the pandemic disrupts supply chains, as the emergence of variants could mean disturbances will not ease anytime soon.