Around the tracks: Automakers stumble over geopolitics, supply chain entanglement

Lockdowns to limit the spread of COVID-19 in China, particularly in Shanghai, have disrupted the supply chains of automakers, which were already facing a shortage of semiconductor chips.

Market projections have become more uncertain following Russia’s invasion of Ukraine, the latter being a major supplier of vehicle wiring harnesses to several European automakers. The invasion has also affected chipmakers in the United States, as Ukraine manufactures gases such as neon which are used in lasers to produce the chips. Sanctions on Russia have hit hard as from January to May, vehicle sales in the region fell 52% year-on-year to 318,114 units, according to data from the European Business Association.

Rising raw material costs are hitting electric vehicles, driving up retail prices for electric vehicles.

Platts marine lithium carbonate and lithium hydroxide valuations jumped 115.9% and 139.4%, respectively, since the start of 2022 to $73,000/mt CIF North Asia and $75,900 /mt CIF North Asia on June 22, according to data from S&P Global Commodity Insights.

Market uncertainty will likely lead to greater dependence on contract volumes, which could prolong future contract discussions and strengthen the protection of supply chains.


Forward speed: End of containment in Shanghai to repair supply chains
Reverse: Retail vehicle prices could exceed disposable income

Outlook

Automakers are struggling to restore normal operation. Along with the likelihood of the war in Ukraine not ending anytime soon, the emergence of a downside factor that could hit global economies could lead to a recession never seen before.

“For many countries, recession will be difficult to avoid,” World Bank President David Malpass said on June 7. “Even if a global recession is averted, the pain of stagflation could linger for several years unless significant supply increases are triggered.”

Even though demand for new vehicles is strong, prices for these vehicles are rising and may well put them outside the comfortable price range for consumers whose earning capacity has been reduced by at least two years of COVID-19 and their effects, inflation notwithstanding. Is it any wonder that stagflation is on the lips of economists and soothsayers?

Moreover, growing food protectionism could very well lead to an obvious choice between filling stomachs or gas tanks or recharging an EV battery.

WE


U.S. vehicle inventories remained tight as production struggled to recover from semiconductor shortages and other logistical challenges that began in the first half of 2021.

Although vehicles on dealer lots are reaching record transaction prices, the impact of rising interest rates could curb this trend.

Hot-rolled coil prices have been volatile since hitting the $1,500/st mark, as assessed by S&P Global for its daily Platts TSI US Hot-Rolled Coil Index in early 2022.

  • Shortage of semiconductors is hampering production
  • Suppressing demand for vehicles could increase production in 2023
  • The Platts TSI US HRC Index stood at $1,240/t on May 31, down 2.4% from $1,270/t on January 31.

EU


Chart: EU car registrations face supply problems

New car registrations in the European Union fell 13.7% to 3.72 million units between January and May, according to data from the European Automobile Manufacturers Association, as shortages of semiconductors have negatively affected car sales in the region.

For the month of May alone, passenger car registrations fell by 11.2% year on year to 791,546 units. Consumers in the region have come under increasing pressure from rising inflation.

Russia’s invasion of Ukraine has deepened the bear market, as well as impacting energy. Due to the uncertainties, EU automakers that were able to recover quickly from the initial impacts could face short-term declines. European electric vehicle manufacturers have had to deal with rising material costs for batteries.

  • Glut and weak demand hit HRC markets in EU
  • Battery and vehicle makers step up plans to secure future supplies
  • Russia’s new car sales may fall to lowest since 2006: Autostat

CHINA


Chart: Chinese vehicle production slumps due to lockdowns

Vehicle production in China fell 12.6% year-on-year to 1.86 million units in May as lockdowns in Shanghai disrupted vital supply chains, according to data from the China Association of Car manufacturers.

But the country’s new-energy vehicle production in May reached 466,000 units, up 113.9% on the year and 49.5% on the month.

China’s auto industry is expected to hit its full-year target as domestic producers step up efforts to bring production back to normal, CAAM said.

  • China cuts taxes on vehicle purchases
  • Rising raw material costs could hamper NEV growth
  • NEVs are more likely to benefit from government stimulus

INDIA


Chart: India's auto sector sees steel costs rise

Indian vehicle production stood at 1.97 million units in May, down from 1.89 million units in April and 806,755 units in May 2021, according to data from the Society of Indian Automobile Manufacturers. However, since 2020 and 2021 were years when lockdowns took place to limit the spread of COVID-19, the 2019 data was considered a better comparison. In this case, 2.42 million units were produced in May 2019, so May 2022 was 18.6% lower than the pre-COVID-19 level.

In May, the Indian market had not recovered from the impact of COVID-19. The Federation of Automobile Dealers Associations is taking a cautious stance on any recovery in vehicle sales in the near term.

  • Higher wholesale vehicle prices will reduce buyers’ disposable income, affecting vehicle sales
  • India cuts excise duty on fuel prices to control inflation
  • Local automakers, such as Maruti Suzuki, are struggling to maintain high production schedules

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