Metals | 22nd May 2019

METALS WATCH
Recent drags on car sales are set to unwind
• Car sales in the world’s three largest markets have slumped since mid-2018

• But there is scope for much of that to unwind over the next few years …

• … which could give a helping hand to many metals prices

roughly the economy’s trend in the past few decades
Car sales in the world’s largest markets have slumped
– has been consistent with flat sales. (See Chart 2.)
since mid-2018. In this Metals Watch we explain our
forecast for sales to begin recovering later this year. Chart 2: US Car Sales & Real Consumption
Down in the dumps 8
Car sales
40
outperform 30
The auto sector represents a large share of demand 6
20
for many metals. For lead and the platinum group 4 10
metals, car batteries and autocatalysts respectively 0
2
make up the majority of their end use. As such, the -10
0 -20
sharp downturn in car sales in several major markets
-30
since mid-2018 has cast a long shadow over prices. -2 US Real Consumption (LHS)
-40
US Car Sales (RHS)
-4 -50
Car sales in China, the US, and the euro-zone, 80 83 86 89 92 95 98 01 04 07 10 13 16 19
which together account for roughly two thirds of Sources: Refintiv, Capital Economics
the global total, fell by 8.6% y/y in Q4 of last year.
This was the sharpest drop since the global financial Admittedly, in the years after the GFC car sales ran
crisis (GFC), and the pace contraction eased only well ahead of what the recovery in consumption
slightly in Q1. (See Chart 1.) Weakness in China has would suggest. But that was mostly due to two factors
accounted for some 80% of the recent fall, but sales which have since faded. The first was a surge in the
in all the ‘big three’ markets have been soft of late. number of cars that dealerships purchase in order to
lease, which has since levelled off. What’s more, the
Chart 1: ‘Big Three’ Car Sales* (3m Avg., % y/y) steady stream of cars coming off-lease has probably
40 40 if anything, weighed on new car sales in the past few
30 30 years by depressing used vehicle prices. The second
20 20 was a boom in car financing which has since been
10 10 cooled by tighter credit standards and, more
0 0 recently, by higher interest rates. Given our forecast
-10 -10 for consumption growth to slow, and unemployment
*Combinedcar sales of China,
-20 the US & the euro-zone -20
to rise both this year and next, we think US sales will
-30 -30
probably continue to slide. That said, if the upturn
07 08 09 10 11 12 13 14 15 16 17 18 19 in the US economy that we expect in 2021
Sources: Refinitiv, Capital Economics
materialised, car sales should later stabilise.
US sales are unlikely to pick up Distortions to unwind in the euro-zone
While the weakness in Chinese and euro-zone sales In contrast, we think sales in the euro-zone will
began more recently, US car sales have been continue to recover. Despite an economic recovery
struggling since early 2016. That might seem and a steady fall in the unemployment rate, car sales
counterintuitive, given that consumer spending has were knocked off course late last year by disruptions
been growing at a fairly healthy pace. But on past linked to the introduction of a tightened set of EU
form, consumption growth in the US of 2.5% or so –
Oliver Allen, Assistant Economist, +44 (0)20 7811 3918, oliver.allen@capitaleconomics.com
Metals Watch Page 1
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emissions tests that all new passenger cars had to
pass. With many manufacturers seemingly unable to
cope with just how stringent the new tests were,
many models of vehicle were simply not approved
for sale before the September deadline. Dealerships
initially went on a spree of pre-deadline discounting
to clear out old stock, but sales subsequently
slumped, and are yet to fully recover. (See Chart 3.)
Chart 3: Euro-zone Unemployment & Car Sales
6 Euro-zone Unemployment Rate (%, Inverted, LHS)
7
Eurozone Monthly Car Sales (Mn., RHS)
8 tax cuts or subsidies for cars that they currently seem
9 0.90
10
11
12
13
00 02 04 06 08 10 12 14 16 18 20
Sources: Refintiv, Capital Economics
However, the last of the disruption from the tests
seems to be fading, and the backlog of vehicles that
still require testing is reportedly nearly cleared.
While we are downbeat on prospects for the euro-
zone’s economy overall, we think the labour market
will hold fairly stable in the near term. As such, the
steady period of catch up growth in euro-zone car
sales looks set to continue in the coming quarters.
But China is the bigger story
Given that China is now the world’s largest car
market, swings in its car sales now more or less set
the pace for the global trend.
The hit to Chinese car sales from a slowing economy
was compounded last year by the reversal of a cut to
the purchase tax on vehicles. Speculation that the
government would step in to support the auto sector
with subsidies, or a repeat of the tax cut, reportedly
also led many consumers to delay buying. Indeed,
one would typically expect April’s 3%-pt VAT cut on
goods to be followed by a boost to car sales. But in
the event, sales fell once again last month. This may
be because consumers are still holding off on buying
because they think another tax cut means car prices
will soon fall even further.
Some piecemeal support, such as a suggested
scrappage scheme targeted at helping rural
residents buy cars, is likely. But we do not think that
across-the-board stimulus for the auto sector is on
Metals Watch
the cards. Officials are committed to the fiscal targets
set at the National People’s Congress annual meeting
in March, and lately policymakers have preferred to
support the economy via general cuts to VAT or
income tax, rather than support specific industries.
However, there are still reasons to expect car sales
to turn a corner later this year. The boost from
earlier cuts to VAT and income taxes has probably
not yet been fully felt, and our China team expect
1.10 that the PBOC will further loosen monetary policy
1.05 this year. And even if consumers do not receive the
1.00
0.95
to expect, they should at least stop holding off on
0.85 buying once it becomes clear that support for the
0.80 sector is not coming. The above factors mean that
0.75
we suspect sales are probably close to a nadir.
0.70
Given a very weak base, it would not take all that
0.65
strong a recovery for annual sales growth in China
to reach double-digit rates by the turn of the year.
The bigger picture
Pulling this all together, we suspect that car sales in
the ‘big three’ markets are near their trough, though
a poor showing so far this year means sales will
probably still shrink slightly in 2019. But as
weakness in the euro-zone and China unwinds, we
expect to see fairly strong catch-up growth in car
sales in Q4 2019 and early 2020, before they then
settle at a more sustainable rate. (See Chart 4.) Our
forecast is for combined car sales in the three major
markets to grow by 5% in 2020, and 2.5% in 2021.
Chart 4: Contribution to ‘Big Three’ Car Sales* (%-pt)
15 15
*Combined sales of China, the
CE Forecast
euro-zone and the US
10 10
5 5
0 0
-5 -5
Euro-zone China
US Total (% y/y)
-10 -10
11 12 13 14 15 16 17 18 19 20 21
Sources: Refinitiv, Capital Economics
Demand from the auto sector is just one part of the
overall picture. But the recovery in car sales that we
expect would be a positive for metals prices, and for
lead and the platinum group metals in particular.
We will publish more detailed analysis of what these
forecasts mean for prices in forthcoming research.
Page 2
 Metals | 22nd May 2019

Forecast Summary

Latest
End-Period (22nd May) Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20

Commodity Indices & Oil Price

S&P GSCI1 443 445 425 405 420 430 440
S&P GSCI Industrial Metals Index 319 330 325 315 325 335 345
S&P GSCI Precious Metals Index 1,652 1,680 1,750 1,820 1,795 1,785 1,765
Bloomberg2 341 345 345 340 350 355 360
Brent Crude Oil (US$ per barrel) 72 70 65 60 62 64 65

Industrial Metals (US$ per tonne)

Alumina 456 400 370 340 340 340 350
Aluminium 1,762 1,775 1,775 1,750 1,800 1,850 1,900
Cobalt 34,500 33,500 33,500 35,000 37,500 40,000 42,500
Copper 5,965 6,300 6,300 6,250 6,500 6,750 7,000
Iron Ore 99 88 77 70 68 67 66
Lead 1,794 1,900 1,900 1,850 1,875 1,900 1,925
Nickel 12,068 12,000 11,500 11,000 11,250 11,500 11,750
US Steel (HR Coil, Sh. ton) 608 620 620 600 600 600 600
Chinese Steel (Rebar, RMB per tonne) 4,318 3,850 3,500 3,250 3,000 2,750 2,700
Tin 19,724 20,000 19,500 19,000 19,250 19,500 19,750
Zinc 2,725 2,700 2,500 2,300 2,300 2,300 2,300

Precious Metals (US$ per troy ounce)

Gold 1,273 1,330 1,350 1,400 1,385 1,375 1,360
Silver 14.39 15.00 16.00 17.00 16.75 16.50 16.25
Platinum 803 830 840 850 885 925 975
Palladium 1,309 1,250 1,175 1,100 1,125 1,150 1,175
Rhodium 2,865 2,700 2,500 2,300 2,325 2,350 2,375

Sources: Thomson Reuters, Bloomberg, Capital Economics

1
Standard & Poor’s Goldman Sachs Commodity Index 2 Bloomberg Commodity Index

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