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COVID-19 wreaks havoc on Asia's automotive industry

Highlights

Shutdowns hit metals and petchems demand

Unpredictable virus leaves auto makers guessing

Auto industry's cash flow tested

Singapore — The COVID-19 pandemic has been a bane to vehicle producers in Asia, but the industry's reaction is just the tip of a supply chain disruption as heightened demand destruction to component parts, such as steel coils and foams are in the offing.

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The trend of halting production among Asia-based car makers is starting to spread, threatening to dent metal and petrochemical requirements from the automobile sector.

Two auto powerhouses of the Far East — Japan and South Korea — have implemented an interim shutdown of production at national car makers Toyota Motors and Hyundai Motor since the outbreak of the coronavirus in February.

India is the latest victim to the spread of the coronavirus with a nationwide lockdown which will last until April 14. Even before the lockdown, Indian carmakers were already struggling with poor buying interest amid concerns of a slowing economy.

The shutdown of an auto manufacturing plant translates to an abrupt reduction in demand for steel plates, foams and polypropylene, all of which are troubling given India's inability to import material from other countries.

India's appetite for toluene diisocyanate, used in the manufacture of foam for vehicle seats and steering wheel covers, has been shrinking over the past few years due to a series of anti-dumping investigations. Chinese-origin toluene diisocyanate imports into the country fell to 7,363 mt in second-half 2019, from 8,253 mt in H1 2019. Imports from South Korea shrunk from 8,560 mt in H1 2019 to 4,837 mt in H2 2019.

Platts does not assess toluene diisocyanate, but its FOB Korea toluene marker plunged to its weakest in nearly 17 years at $323.50/mt on Monday before climbing marginally higher to $327.50/mt on Wednesday and stayed unchanged on Thursday. The FOB Korea marker was last lower at $315/mt on May 12, 2003.

The Indian government's strict 21-day lockdown on human traffic, which is sure to curb vehicle demand, has pushed South Korean steelmaker Posco to shut two coil service centers in Delhi and Pune, just one week after it shut its coil service centers in Malaysia and Thailand.

Platts assessed SS400 HRC 3 mm thick at $420/mt FOB China on Thursday, down $8/mt day on day, while on a CFR Southeast Asia basis, the same grade of coil was assessed at $422/mt, down $6/mt from the previous day.

In addition, Indian polypropylene producers, who were optimistic about healthy demand from the construction and automobile sectors earlier this year, are under pressure especially with the 21-day lockdown, industry sources said.

Asian PP prices for Block Copolymers -- one of the main PP grades used for automotive applications -- tumbled $75/mt to $825/mt CFR Fareast Asia, dived $650/mt to $865/mt CFR Southeast Asia and fell $70/mt to $920/mt CFR South Asia, all from early March, Platts data showed.

The president of the Society of Indian Automobile Manufacturers, Rajan Wadhera, said "many automakers in India import about 10% of their raw materials from China", which has been reeling from the pandemic since January. SIAM estimated the "domestic vehicle plant shutdowns could lead to a loss of more than Rupees 23 billion ($302.9 million) in turnover for each day of closure," Rajan added.

Auto makers' liquidity to show direction

The shutdown of automobile plants has moved beyond just developed countries, such as Japan and South Korea, where purchasing power is higher compared with developing nations such as India.

SIAM data showed that India produced 2.03 million vehicles in February, down 18.1% from a year ago and representing the 15th straight month of decline. South Korea's vehicle production for the first two months of 2020 totaled 440,810 units, a 27.9% tumble on the year, data from the country's Ministry of Trade, Industry and Energy showed.

In South Korea, Trade, Industry and Energy Minister Sung Yun-mo said not only were domestic car makers facing challenges to export, but they were also unable to get hold of auto parts due to the closure of finished car plants and stores in the US and Europe.

However, with a significant number of multinational auto makers, such as Toyota, Hyundai and Suzuki, having tie-ups and consumer bases straddling both developed and developing countries, there would be a need to hold the fort on both ends of the demand spectrum, leaving analysts to forecast that the automobile sector will be the next industry to be subjected to the great liquidity test, as with the aviation sector.

Japanese carmaker, Mazda, is preparing to limit production at its Hiroshima and Hofu plant and will halt production at its plant in Thailand for about 10 days, beginning March 30. Toyota Motor plans to pause operations at seven production lines in five domestic plants in Japan and expects car sales in Thailand to decline. Thai production will be affected by the Japanese production cuts as Thailand imports completely-knocked down, or CKD, car assembly kits from Japan.

S&P Global Ratings' credit team, in a recent analytical report, projected that global light vehicle sales to fall below 80 million units in 2020, a near 15% decline from the 90.3 million units produced in 2019. "We expect global automakers and suppliers will face intense credit pressures, which will test their liquidity management and the headroom in their credit metrics."