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By: Rhona O'Connell, Head of Market Analysis
Automakers: strong first half, but continued supply chain issues for H2; July already down
There are interesting dynamics within the auto sector at present. Manufacturers have been managing their way through difficult circumstances. Efforts are being concentrated on higher-margin models, costs are being contained and inventories are being run down.
The semiconductor chip shortage will continue to affect the auto sector for at least the next six months, judging from the warnings from the CEOs of those companies that have commented in the past few days, and tying in with more general observations of the sector.
High prices in the United States have been helping some companies mitigate rising raw material costs. The CEO of Ford said last week that the company’s pricing is strengthening daily, using the term “pretty breathtaking”; Ford has been cutting costs where possible (in keeping with its peers), and noting that overseas operations had bene a substantial drag on the business. The relatively buoyant US auto sector (see the chart below) has helped the bottom line and Ford did not have to cut its production rates in the way that had previously been expected, preferring to run down inventory in order to take advantage of resurgent demand. Ford’s CEO sees inventories running at low levels until some stage in 2022 in order to maintain its fresh pricing power and will keep inventories relatively lean henceforth, in a step change from previous policies.
Meanwhile Stellantis (the entity formed in January from the merger of Fiat Chrysler and PSA) has reported this morning, noting widespread gains on a regional basis. Proforma net revenues were up 46% with a record North America margin of 16.1%, stemming particularly from its Ram and Jeep Wrangler SUV sales while market share is increasing in other regions. A strong electrification programme (we will return to this in another piece) has also been helping performance.
BMW has also reported strong earnings this morning, despite the semi-conductor shortage, with record sales and healthy pricing boosting earnings and net profit also to a record and showing solid growth compared to the equivalent of 2019. The Chairman, however, was blunt about the outlook, saying that after significant growth in the first half, helped by strong customer demand “a number of prevailing risks, including raw materials prices and a shortage of semiconductors [mean that] the second six-month period is likely to be more volatile for the BMW Group". The semiconductor shortage prompted adjustment to the production schedule.
BMW sums up the outlook
But there is the sting in the tail, which more or less sums up the outlook for the industry as a whole: BMW’s outlook for the second half-year is based on the assumption that “neither the coronavirus pandemic nor the semiconductor supply situation will worsen significantly and that prices on international raw materials markets remain stable. We were largely able to compensate for the challenging semiconductor supply problems arising in the first six months through the sheer hard work of our purchasing, production and sales staff. However, the longer the supply bottlenecks last, the more tense the situation is likely to become. We expect production restrictions to continue in the second half of the year and hence a corresponding impact on sales volumes," said Dr. Peter, a member of the Board of Management, Finance.
Global auto sales by month, January 2109 – June 2021
Regional auto market share, June 2021
Source: Bloomberg Intelligence, StoneX
July starts to hit
First half global auto sales in 2021 are currently estimated by Bloomberg Intelligence at 3.91M units, a gain of 7% against the first half of 2019. Meanwhile, however, the chip shortage is likely to show a palpable effect on the sector in July. The Press is reporting that French car sales dropped 35% last month, largely as a result of the shortage; it is too soon to extrapolate across the rest of the industry, but it does look likely that after running down inventory, the automakers’ operating environment will toughen in the second half of the year and it could well be that the year as a whole comes in below that of 2019. A 10% contraction against H2 2019 looks feasible (and may yet be conservative) and would bring auto production for the full year down by 1.5%, which would take platinum auto demand to very marginally above 2019 and palladium demand in the sector very slightly lower.
This would leave platinum in balance this year prior to ETP activity and in a surplus next year: and palladium in a deficit of roughly three weeks’ global demand – and similarly in 2022.
We should warn that this may well be revised downwards as the year wears on.
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