The automotive sector is turning out to be a key transmission system for the banking crisis to affect the "real" economy and for the U.S. economic slowdown to become a global economic slowdown.

Since the automotive is such a big end-use sector for industrial metals, it is also the direct transmitter of financial meltdown to metals price meltdown via slumping demand.

U.S. GETS WORSE
The United States automotive sector was in trouble well before the financial maelstrom hit with full intensity in September.

Indeed, it has been one of the two maximum points of global metals demand weakness, along with U.S. residential housing, for well over a year. However, things are getting worse. First, there was the oil price shock" in the second quarter, which culminated in crude hitting all-time highs above $147 per barrel in July. That devastated the fuel-guzzling SUV part of the market.

Now automotive sales are slumping across the board in response to the tightening in retail credit resulting from the crunch in wholesale credit markets. U.S. buyers use credit for more than 90 percent of all new vehicle purchases, which is why industry-wide auto sales plunged 26 percent in September. No major automaker was spared, not even the likes of Toyota which up until now has weathered relatively well the storm.

Based on those September figures, industry consultant Grant Thornton estimates that vehicle sales will fall by 2 million units year-on-year to 13.8 million units in 2008. The company warns that for automakers a decline of one million units of production is equal to the lost output of nearly four vehicle assembly plants, 2.5 engine plants and more than two transmission plants.

At the Tier 1 supplier level, more than 50 assembly/power train sites and more than 500 supplier manufacturing locations could be at risk of collapse "with the losses cascading down to Tier II and Tier III operations, as well as the truck and rail companies that ship components."

WEAKNESS SPREADS TO EUROPE
U.S. automotive weakness is spreading to Europe with a vengeance as consumer confidence plummets and credit conditions also tighten.

"We believed for a long time that what was going on in the U.S. would not happen in Europe and we had to learn that these two economic regions are closely linked," said BMW Chief Executive Norbert Reithofer at last week's Paris auto show.

GM Europe President Carl-Peter Forster explained to reporters how the transmission system works. Despite a "quite okay" economy where few companies have announced big job cuts, "the consumer has the feeling nevertheless as if the deep crisis is already here. He watches television daily, is bombarded with what is happening in the United States, cannot fathom in the slightest what that means for him personally and is gripped by a spreading fear that causes him not to buy a car for months."

The result is sliding sales across Europe. August saw new vehicle registrations slump by 10 percent in Germany, 19 percent in the UK, 26 percent in Italy and 41 percent in Spain. UK figures for September have just been released, showing the downtrend accelerating with a 21.2 percent fall.

Regional automakers are responding. Volkswagen's Spanish subsidiary Seat announced on Friday it will cut production and lay off workers between November and July 2009. Volkswagen is also shutting its Czech plants for a week at the end of this month.

GM Europe announced on Tuesday it will cut production by an unspecified amount at its regional plants.

These announcements may prove to be just the early tip of a much bigger cutback trend as capacity is shrunk to match contracting demand.

TAIL RISK
Automotive sector weakness is spreading to other parts of the world with sales falling in Japan and slowing sharply in India. Even in China new vehicle sales fell by 6.34 percent year-on-year in August, although whether this was a one-off phenomenon related to the Olympic Games remains to be seen.

Nor do automotive executives expect any short-term improvement. There was a marked reluctance at the Paris auto show to forecast sales for next year but Ford Motor Chief Executive Alan Mulally summed up the general sombre mood. "2009 is not going to be better than 2008 we won't see a recovery until 2010."

There is the potential for a nasty "tail risk" to push back even that deferred light at the end of the tunnel.

Industry analyst Experian Automotive has just released a report, showing an alarming rise in automotive loan delinquency in the United States.

Loans which are 30 days past due rose by 9 percent year-on-year in Q2 2008, while loans 60 days past due rose by 11 percent. Those figures predate the full banking crisis, meaning a likely further deterioration in the third quarter.

Unpaid loans equate to more vehicle repossessions. That means greater supply into the used car market and even more pressure on new vehicle sales. At the moment this is largely a U.S. phenomenon but since the credit crisis has gone global and automotive weakness has gone global, there is every potential for auto loan delinquency to go global as well.

andy.home@thomsonreuters.com