Mainland Chinese Truck Market Remains Bearish with Supply Chain Shocks

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Mainland Chinese medium- and heavy-duty trucks (MHDTs) have
entered a bear marketplace considering that mid-2021. Though the market staged a
slight recovery adhering to the easing of electrical power shortages and
injection of plan stimulus from late final 12 months, sudden
headwinds introduced by the Russia-Ukraine crisis and domestic Omicron
outbreak plunged the marketplace back into weak spot in the next
quarter of 2022. Amid pandemic-induced lockdowns in Jilin and
Shanghai, creation of MHDT hit the lowest looking at for April more than
a 10 years. In our May forecast, we downgraded the mainland Chinese
MHDT generation for 2022 by 5% to 1.13 million units, a decrease of
23% compared with 2021.

External geopolitical tensions drive up producer prices

As uncooked components symbolize 20-30% of the expense of manufacturing for
weighty trucks, uncooked material costs partially establish the
profitability of truck producers. Owing to the worldwide financial
restoration from the COVID-19 scare, commodity selling prices have
undergone an upcycle due to the fact late 2020. The rally gained additional steam
in the 1st quarter of 2022 with the outbreak of the
Russia-Ukraine war. Precisely, the cold-rolled steel price that
accounts for more than 60% of the total uncooked substance expenses for a hefty
truck surged by 3% in March 2022 from the degree of January,
growing the growth to more than 40% as compared to the identical
period of 2020. Also, the diesel price tag lifted by 15% and handed the
RMB9,000 for every metric ton mark by means of January-March 2022. In
contrast, the movement of offering charges for significant vehicles had been
rather flat under slack need, as fuel value inflation elevated
the functioning prices when oversupplied trucking constrained freight
rate progress. As a end result, the truck producers’ buying and
providing charges logged sizeable differentiation, regardless of an
enhance in selling price of CN6-level versions. This kind of weak inflation
move-by influence has created truck makers to bear the brunt of the
income margin squeeze primarily just after dumping of CN5-level trucks.
With the Russia-Ukraine crisis anticipated to deepen into 2023,
short-expression truck manufacturing is thus slice by all-around 25,000 units
in the May possibly outlook.

Inner pandemic resurgences exacerbate provide chain
disruptions

The Omicron wave had activated significant lockdowns in Jilin
Province (March 11-April 28), Shenzhen Metropolis (March 14-20), and
Shanghai Metropolis (March 28-Could 31) because March 2022, ensuing in
widespread enterprise disruptions and logistics snarls. Even though
there are several MHDT companies in the epicenters of the pandemic,
Changchun City and Shanghai Metropolis host around 40 major source bases
serving core factors to mainstream designs covering higher than 90% of
truck creation. Setting up from mid-April, FAW Jiefang’s Changchun
plant and most suppliers managed to resume operate in the closed-loop
program, but labor shortages under the mobility command disabled
them to purpose at usual capability. In the meantime, rigorous
containment steps this kind of as website traffic limitations, nucleic acid
exam and quarantine necessities, as nicely as closure of toll
stations pent up highway freight need and triggered wider repercussions
of ingredient shortages, which in transform dampening truck generation.
Below the conditions, the complete reduction of MHDT generation in the
next quarter is approximated to access 100,000 units. With ramping up
endeavours to smooth logistics and restore company, the get the job done
resumption rate of enterprises over selected dimensions in Shanghai
Town enhanced to 96% by mid-June and will fully get better from July.
Coupled with expansionary policies and enough capability
reserves, these could assist MHDT manufacturing to pick up and offset
the pandemic-induced reduction in the second 50 percent.

A more downgrade to outlook is underneath evaluation, as the
government’s reliance on the “dynamic zero-COVID” tactic and
money outflows led by the Fed’s tightened cycle are likely to
weaken business enterprise sentiment and subdue demand restoration. On the other
hand, the rebuilding of dealer inventories of CN6-stage MHDTs
climbed from 280,000 units in early this 12 months to 380,000 models by
April, way larger than the common premiums of 150,000-170,000 units.
Additionally, there had been additional than 70,000 units CN5-stage new
trucks (bought as utilized trucks) remaining in the current market, exacerbating
de-stocking pressures.

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Posted 06 July 2022 by Cassie Liu, Automotive Analyst, IHS Markit&#13
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This write-up was printed by S&P Worldwide Mobility and not by S&P International Ratings, which is a independently managed division of S&P World wide.

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