Waning Demand Exerts More Negative Impact on Automobile Industry Than Rising Costs
Sources report price negotiations between Chinese automobile makers and steel mills were in stagnant, due to rising finished steel prices, meanwhile automobile makers in the US, Europe and Japan said they would not accept price rises. When asked by CBI for details, Ford, GM, and Toyota disclosed little information on the negotiation progress and the measures they would take to deal with the situations. Steel mills also declined to reveal details. However, a small number of automobile makers told CBI that it was impossible to solve the problem of rising costs through the negotiations with steel mills. Those automobile makers believed steel mills were inflexible, and they had even collaborated in rejecting price rises several years ago, but ended it without results.
Faced with the higher finished steel prices, automobile makers could only absorb rising costs through production efficiency, accelerating technical innovation, and streamlining logistics and management costs. In addition, declining purchasing power was another negative factor in the automobile industry. CBI made an analysis from two aspects: cost and demand.
First, the impact of rising finished steel prices on the automobile industry was lower than previous market predictions.
Finished steel is a major raw material in the automobile production, accounting for 75% of total automobile weight. For example, it will consume 1.6 mt of finished steel in producing one automobile. Market price of one economic automobile is about RMB 200, 000, and costs of finished steel account for 8% of total costs, according to estimation.
Production of automobile plates involves many kinds of finished steel, from long products to plates, from plain carbon steel to special steel. Price of rebar (HRB335,18mm) and hot-rolled coils (5.5*1500*C) rose by 24% and 25% respectively from January to June. If the average price increase of finished steel is 24.5% since early 2008, and the cost of steel for automobiles was RMB 8,000/mt in early 2008, absolute costs in the automobile industry will increase by RMB 3,136 or 2%. Although automobiles enjoy different levels of gross profits, rising finished steel prices had a limited impact on automobile sector costs, based on the above calculation.
In addition, profits in the Chinese automobile industry were RMB 63.3 billion from January to May, up 36.2% on a yearly basis. Although the growth rate dropped greatly from the 61.6% YoY growth during 2007, it was much higher the 29.8% growth during January and February. Prices of finished steel began to rise from March, which meant profits in the automobile industry were healthy when finished steel prices were soaring. Hence, although growing prices of finished steel and other parts (like engine and automotive electronics) squeezed profits in the automobile industry, impact of rising finished steel prices was lower than previous market predictions, as finished steel prices accounted a small part of total costs in producing automobiles.
Second, waning demand exerted greater negative impact in the automobile industry.
The National Development and Reform Commission (NDRC) announced on June 20th an increase in gasoline and diesel prices by RMB 0.73/litre and RMB 0.84/litre, respectively. CBI made a rough calculation on fuel costs of cars and heavy-duty trucks, according to the new fuel price adjustments.
Generally speaking, different types of vehicles are driven differently. A car with an1.8L engine in China is driven 15,000 km per year, and a heavy-duty truck is driven 200,000 km. Fuel prices will increase RMB 547.5 for the Santana 1.8L passenger car (fuel consumption: 5L/100KM), and RMB 67,200/mt for Styerking truck (336 PS) (fuel consumption: 40L/100KM) for one year.
Based on the example above, fuel costs will rise by RMB 547.5 per year due to rising gasoline prices, with average monthly increases of RMB 45.6. According to CBI’s survey, there was a negative relationship between monthly sales of passenger cars and oil price rises after 2006. By late 2007, the proportion of sales of cars with 1.0-1.6L engines accounted for 52.3% of total sales, while the rising oil prices exerted evident negative impact on sales. On the other hand, fuel costs for a typical heavy truck will rise RMB 67,200 per year due to rising diesel prices, with average monthly increases of RMB 5,600, and these cost increases will dampen sales of heavy-duty trucks in the future.
In summary, the rising costs and waning demand have depressed the automobile industry, but demand has exerted a more negative impact on the sector than the higher costs.
Rising Prices of Finished Steel Depress the Machinery Industry
Rapid price increases for finished steel have exerted pressure on downstream industries throughout 2008, causing downstream producers to purchase materials very cautiously. CBI made a survey of the machinery industry and reports the following insights.
First, growing prices of H beam, hot-rolled coils and medium-heavy plates have great negative impact on the machinery industry.
In the machinery industry, the top three consumed materials are section, hot-rolled coils, and medium-heavy plates, accounting for 30%, 25%, and 25%, respectively. Hence, rising prices of those products will directly increase costs in the machinery industry.
The chart 2 shows prices for those products experienced sharp increases of RMB 1,000/mt in 1H08.
Rising prices for finished steel had limited impact on large state-owned enterprises in the machinery industry due to long-term partners, stable sales channels, as well as solid financial strength. Small and medium enterprises were more affected by price increases. Medium enterprise profits during 2008 fell compared to 2007 levels, and many reported competition was severe, with downstream producers showing limited buying interest due to price rises. Those enterprises were running at low operating rates, as they were unable to fully pass on increased costs to customers. Small enterprises suffered most from the price hikes. A large number of small companies went into bankruptcy due to higher costs, caused by the rising prices of finished steel.
Faced with the rising prices of finished steel, enterprises in the machinery industry have taken the following steps:
First, enterprises reduced purchasing volumes and kept inventories at low levels.
Second, enterprises lifted selling prices slightly, trying to pass part of rising costs to customers.
According to CBI’s survey, the majority of downstream producers said they could accept the finished steel prices in the RMB 4,000-5,000/mt range, but current prices were RMB 6,000/mt or higher. The rising prices of raw materials and difficulties in passing the price rises on customers were blamed for the weak performance in the machinery industry.