May 17, 2022

Forecast: the Russian-Ukrainian war will slow down the production of light vehicles

S&P Global Mobility lowered its light vehicle production forecast for 2022 and 2023 by 2.6 million units each year. // Picture file

S&P Global Mobility, formerly the Southfield-based automotive team of IHS Markit, has lowered its 2022 and 2023 light vehicle production forecast by 2.6 million units per year due to various global factors, including war. of Russia against Ukraine and the resulting economic sanctions.

The devastating war and the severe sanctions against Russia are already having a serious effect on the prices of energy, raw materials and agricultural products. There is also the disruption of the automotive supply chain due to logistical challenges and production stoppages related to operations at Ukraine’s western border.

“With the release of the March forecast, we have removed 2.6 million units from our 2022 and 2023 outlook, but the downside risk is huge,” says Mark Fulthorpe, executive director of global production forecasts at S&P Global Mobility. . “Our worst-case scenario shows possible reductions of up to 4 million units for this year and next year.”

With the reduction of 2.6 million units, the organization projects that 81.6 million light vehicles will be produced worldwide in 2022 and 88.5 million units in 2023. In 2022, 1.7 million units were cut in Europe alone, which overall includes just under a million units of lost demand in Russia and Ukraine.

The remainder of the reduction is split between worsening semiconductor supply issues and the loss of Ukrainian-sourced wiring harnesses and other components, both of which will impact production on other markets. Additionally, the complete loss of Russian palladium is a tail risk that is likely to become the industry’s biggest supply constraint.

The North American light vehicle production outlook has been reduced by 480,000 units and 549,000 units for 2022 and 2023, respectively. Amid the Russian-Ukrainian conflict, the March 2022 forecast update for North America reflects widespread cuts covering virtually all automakers amid the potential for the conflict and subsequent sanctions to impact the semiconductor production in the second half of 2022. , the lingering supply chain, labor and logistics issues remain significant concerns.

In total, nearly 25 million units have been removed from S&P Global Mobility light vehicle production forecasts by 2030.

Before Russia invaded Ukraine on February 24, the global auto industry had spent more than a year under conditions of limited capacity, with pent-up consumer demand estimated at up to 10 million units (or 12 percent) above this year’s achievable production, based on S&P Global Mobility Forecasts.

The sudden loss of economic confidence (via high oil and commodity prices, weak equity markets and tightening interest rates) is dampening demand and could now reduce this shortfall by around a third, although that significant pent-up demand remains.

While macro concerns are important, the supply chain (not underlying consumer demand) will continue to set the upper limit for vehicle unit sales over the medium term. The main critical issues affecting production levels after the invasion fall into two broad categories: supply of semiconductor materials (particularly via Ukrainian neon and Russian palladium) and supply of wire harnesses electrical.

Semiconductor supply problems are worsening on two fronts. First, via neon gas supply disruptions. Ukrainian suppliers control nearly half of the high-purity neon supply to the semiconductor industry, where the element is used in lasers that etch patterns onto chips. The group’s leading research suggests the immediate risks are low based on semiconductor makers holding ample inventory of gas neon lights, but visibility is poor.

The second challenge is the availability of palladium, which is used in plating and finishing semiconductors. In an additional negative twist, COVID-19 cases in China are at their highest in two years and are triggering quarantines and factory closures in northeastern manufacturing hubs including Shenzhen and Changchun. The slowdown increases the risk of losses from ‘stuck’ chips – or semiconductors for which the ‘right’ car cannot be built due to other constraints.

The group’s research also suggests that cable harnesses built in Ukraine were likely intended for around 500,000 to 1 million vehicles before the invasion. These harnesses include complex, hand-built cable assemblies. Although there are some dual supply agreements, switching will be difficult due to the already limited harness capacity in and around Europe.

If the situation is not resolved quickly, it is estimated that production relocations could take 3 to 10 months due to machine waiting times and staff training times of several months. Nearly half of cable harnesses manufactured in Ukraine are normally exported to Germany and Poland, exposing German automakers to high exposure. On the positive side, the group says that once ramped up, lost production could be quickly recovered through the end of 2022 and beyond.

Although the likelihood is low as things stand, palladium has the potential to become the industry’s biggest supply constraint. Russia produces 40% of the palladium mined in the world according to the United States Geological Survey. About two-thirds of palladium is used in vehicles, where it is the active element in catalytic converters for exhaust gas after-treatment.

If the Russian supply of palladium were suddenly interrupted, production of all vehicles using such a supply (including hybrids) could potentially stop. Although platinum is an alternative element, it is just as expensive and also largely of Russian origin. Any substitution is a regulatory minefield since design changes require regulatory re-registration, which can take months. Currently, however, S&P Global Mobility does not factor major palladium disruptions into its forecast.