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Mainland Chinese medium- and heavy-duty trucks (MHDTs) have
entered a bear market since mid-2021. Although the market staged a
slight recovery following the easing of power shortages and
injection of policy stimulus from late last year, unexpected
headwinds brought by the Russia-Ukraine crisis and domestic Omicron
outbreak plunged the market back into weakness in the second
quarter of 2022. Amid pandemic-induced lockdowns in Jilin and
Shanghai, production of MHDT hit the lowest reading for April over
a decade. In our May forecast, we downgraded the mainland Chinese
MHDT production for 2022 by 5% to 1.13 million units, a decline of
23% compared with 2021.
External geopolitical tensions drive up producer costs
As raw materials represent 20-30% of the cost of production for
heavy trucks, raw material costs partially determine the
profitability of truck producers. Owing to the global economic
restoration from the COVID-19 scare, commodity prices have
undergone an upcycle since late 2020. The rally gained more steam
in the first quarter of 2022 with the outbreak of the
Russia-Ukraine war. Specifically, the cold-rolled steel price that
accounts for over 60% of the total raw material costs for a heavy
truck surged by 3% in March 2022 from the level of January,
expanding the growth to more than 40% as compared to the same
period of 2020. Also, the diesel price raised by 15% and passed the
RMB9,000 per metric ton mark through January-March 2022. In
contrast, the movement of selling prices for heavy trucks were
rather flat under slack demand, as fuel price inflation elevated
the operating costs while oversupplied trucking constrained freight
rate growth. As a result, the truck producers’ purchasing and
selling prices logged significant differentiation, despite an
increase in price of CN6-level models. Such weak inflation
pass-through effect has made truck makers to bear the brunt of the
profit margin squeeze especially after dumping of CN5-level trucks.
With the Russia-Ukraine crisis expected to deepen into 2023,
short-term truck production is therefore cut by around 25,000 units
in the May outlook.
Internal pandemic resurgences exacerbate supply chain
disruptions
The Omicron wave had triggered massive lockdowns in Jilin
Province (March 11-April 28), Shenzhen City (March 14-20), and
Shanghai City (March 28-May 31) since March 2022, resulting in
widespread business disruptions and logistics snarls. Although
there are few MHDT manufacturers in the epicenters of the pandemic,
Changchun City and Shanghai City host over 40 big supply bases
serving core components to mainstream models covering above 90% of
truck production. Starting from mid-April, FAW Jiefang’s Changchun
plant and most suppliers managed to resume work in the closed-loop
system, but labor shortages under the mobility control disabled
them to function at normal capacity. Meanwhile, rigorous
containment measures such as traffic restrictions, nucleic acid
test and quarantine requirements, as well as closure of toll
stations pent up road freight demand and caused wider repercussions
of component shortages, which in turn dampening truck production.
Under the circumstances, the total loss of MHDT production in the
second quarter is estimated to reach 100,000 units. With ramping up
efforts to smooth logistics and restore business, the work
resumption rate of enterprises above designated size in Shanghai
City improved to 96% by mid-June and will fully recover from July.
Coupled with expansionary policies and sufficient capacity
reserves, these could support MHDT production to pick up and offset
the pandemic-induced loss in the second half.
A further downgrade to outlook is under assessment, as the
government’s reliance on the “dynamic zero-COVID” strategy and
capital outflows led by the Fed’s tightened cycle are likely to
weaken business sentiment and subdue demand recovery. On the other
hand, the rebuilding of dealer inventories of CN6-level MHDTs
climbed from 280,000 units in early this year to 380,000 units by
April, way higher than the typical rates of 150,000-170,000 units.
Additionally, there were more than 70,000 units CN5-level new
trucks (sold as used trucks) remaining in the market, exacerbating
de-stocking pressures.
This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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