US auto sales favors rubber, bad news from China-Japan

Commodity Online - The March new vehicle sales in USA has shown stability through first three weeks of the month, continuing a trend of montly double-digit year-over-year increases, according to JD Power and Associates, which gathers real-time transaction data from more than 8,900 retail franchisees throughout the United States. Automobile industry is a major consumer of rubber in the making of its tyres and hence it gives firm support to natural rubber prices globally. 

However, automobile sector in both China and Japan are going through a crisis created by the devastating earthquake which has forced closure of automobile plants in Japan and China. The global supply chain disruption following the earthquake and tsunami in Japan has sent shockwaves through auto makers in China, especially companies that are funded by Japanese car makers, Xinhua reported. China has become the world's largest automobile market although it sources parts and technologies for production from other countries.

Toyota, the world's largest carmaker has stated that it would extend the shut down to eleven of its factories till the end of this week. Honda would also remain shut while Nissan has reported partial resumption of operations.

Meanwhile, auto joint ventures between Japan and China with production bases in China are hard hit due to supply disruptions of parts and components following the quake. Some local Chinese car makers could also face tough times as they source raw materials from Japan that production would be halted by the end of March.

In USA, March new-vehicle retail sales are projected to come in at 991,900 units, which represents a seasonally adjusted annualized rate (SAAR) of 10.9 million units. This level would bring the selling rate for the first quarter of 2011 to 10.7 million units, slightly ahead of the annual forecast of 10.6 million units. Retail transactions are the most accurate measurement of true underlying consumer demand for new vehicles.

"Retail sales in March are exhibiting strength and remain in line with expectations, despite increasing gas prices and falling inventory levels," said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates. "In fact, retail sales in March may be benefitting from the uncertainty around inventory levels, as consumers flock to dealerships to secure their choice of vehicle as availability decreases."

Shifts in the retail segment mix are becoming evident, as sub-compact cars are expected to be up more than 0.5 percentage points in March to 3.8 percent, from 3.2 percent in February. The share of compact cars is also expected to increase—up to 20.4 percent in March from 17 percent in February.

Meanwhile, TOCOM rubber prices have fallen on Friday after gaining steadily in the week. China's monetary tightening has also added to the woes of rubber demand. The August-delivery contract at TOCOM has fallen 3.9% although it gained 5 percent this week rallying to 446.9 yen on March 23.

If China buying doesn't step up due to crisis in automobile sector, rubber could witness some weakness in the beginning of April, analysts said. Meanwhile Bloomberg quoting an analysts of Nanhua Futures Co pointed out that rubber supplies are set to begin in China's Hainan province, the country's biggest producer as tapping starts in late March. Meanwhile, Indian automobile cumulative sales data for April-February 2011 shows domestic sales growth of 26.92 percent over same period last year. In February 2011 as compared to February 2010, domestic sales grew at 21.32 percent, according to Society of Indian Automobile Manufacturers.

Passenger Vehicles segment grew at 29.85 percent during April-February 2011 over same period last year. Passenger Cars grew by 30.34 percent, Utility Vehicles grew by 19.69 percent and Multi-Purpose Vehicles grew by 43.28 percent in this period. February 2011 figures for domestic sales of Passenger Cars show a growth of only 22.63 percent over the same month last year. However, in absolute numbers, this segment recorded highest ever sales. Total passenger vehicle sales figures for February 2011 compared to February 2010 shows growth stands at 20.88 percent.

Since vehicle sales in 2011 in USA have thus far been stronger than expected, the outlook for 2011 remains optimistic. Due to this strength in retail sales, J.D. Power has increased its 2011 forecast to 10.6 million units (from 10.5 million units) for retail sales, a 16 percent increase from 2010. The forecast for total vehicle sales remains at 13 million units, which is up 13 percent from 2010, JD Power and Associates said in an analysis.

"The economy is no longer the primary variable that could impact the total year sales volume, as the industry is now grappling with gas prices at their highest level in more than two years, as well as the potential for widespread shortages in vehicle availability," said John Humphrey, senior vice president of automotive operations at J.D. Power and Associates. "While risks remain evident, the industry's condition is much stronger and able to weather external shocks better than it could before the recession."