U.S. Sales Will Advance Again; Could Hit 18 Million By 2017.

U.S. Sales Will Advance Again; Could Hit 18 Million By 2017.

Falling Oil Price Might Do More Harm Than Good Though.
Electric Vehicles, Plug-in Hybrids Will Tread Water.
Weak Yen Might Prove Big Fillip For Japanese At Detroit Expense.

The good times will keep on rolling in the U.S. in 2015 for the sixth year in a row, although some ominous dark clouds are gathering on the horizon for local manufacturers, in particular from the Japanese rejuvenated by the falling yen.

Diving fuel prices will raise profitability in the U.S., as consumers feel less pressure to buy small, cheap fuel-sippers and can splurge on big SUVs. Electric vehicles will present an even less attractive proposition. Huge investments in improving fuel efficiency to meet strict 2025 U.S. will have to continue, but the rules could be watered down by the new U.S. Congress.

Among headline forecasters, Fitch Ratings said light vehicle sales in the U.S. next year will grow by about three per cent to 16.8 million.

LMC Automotive expects a further improvement in sales next year after about 16.5 million is hit in 2014.

Standard & Poors calls for steady but moderating light-vehicle sales for the next 12 to 18 months.

IHS Automotive reckons continued improvement in employment, home prices and confidence levels along with moderating fuel prices should sustain auto industry momentum in 2015.

“Growth should be driven by continued economic improvement, increasing consumer confidence, strong consumer credit conditions and lingering pent-up demand. However, as sales approach the pre-recession peak, manufacturers will need to adjust from what has been a growth environment to a more steady-state situation. This will test the pricing and production discipline in the post-recession period,” Fitch Ratings said.

Investment bank Morgan Stanley said manufacturers have invested hundreds of millions of dollars in fuel efficient technology and they will maintain a long-term trend of improving fuel efficiency.

$5 gasoline required
U.S. gasoline prices falling towards $2 a gallon will hit electric car sales, which require gas prices of closer to $5 to make the economics work. Hybrids and plug-in hybrids will suffer too, Morgan Stanley said.

There is a possibility that the 54 mpg rule for 2025 might be cut to closer to 50 mpg in 2017, it said.

“A prolonged stint at or near the $2 gallon mark would, in our view, deal a decisive blow to most EV projects that are aimed at providing an economically viable payback vis-a-vis prevailing internal combustion technology,” Morgan Stanley analyst Adam Jonas said.

Jonas excluded Tesla Motors from this because of its place in the premium sector.

Morgan Stanley said the fall in gasoline prices might have more negatives than positives. It would allow manufacturers to make a bit more money as buyers opt for bigger, more profitable vehicles.

“(But) a drop in the price of (oil) mis-aligns auto supply and demand in ways that may not be favourable to profitability for manufacturers and suppliers alike,” Jonas said.

Lower oil prices would also hit pickup truck demand in U.S. oil boom areas. Emerging markets like Brazil, Venezuela, Russia and the Middle East would suffer.

Yen threat

Jonas also warns that despite current sales progress, the U.S. market might be closer to a cyclical peak than many believe, even though he believes sales will reach 18 million by 2017. And the falling yen will allow the Japanese to take a big bite out of U.S. domestic manufacturers market share.

“With the Japanese yen now at close to 120 (to the dollar) the stakes are getting even higher as it is effectively placing an extra $3,000 to $5,000 in profit per unit into the hands of Japanese auto manufacturers which will allow them to bring to market attractively designed and engineered vehicles at great prices, pressuring domestic rivals,” Jonas said.