Remember peak oil theory? It was all the rage just a few years ago.
Serious books were devoted to the idea that the world was running out of crude. Deep thinkers pontificated about its potentially dire impact on human civilization.
But then all that peak oil talk peaked. Thanks to the fracking revolution, it became clear that the world actually has plenty of oil. Supplies can now be turned on or off almost at will, as prices rise and fall.
Turns out the future is a lot harder to predict than the peakists thought. But once a peakist, always a peakist. It seems to be a tough habit to break.
Now they’re busy predicting other peaks. Such as: the planet’s peak carrying capacity; peak sustainable population levels; peak food production; peak allowable carbon emissions levels; peak stock market levels; and of course, peak auto.
Yep, peak auto. It’s a major focus right now in the car business, where a growing number of analysts fret that North American auto sales have already hit a ceiling, and are destined to flatline or even head south.
There is some sense to this, of course. As the old stock market adage goes, trees don’t grow to the sky. And so it is with auto sales, which have set annual records for several years running and may be poised to run out of gas, as interest rates rise and the economic recovery matures.
The fear of softer sales ahead is reflected in the sluggish stock prices of major auto manufacturers such as General Motors and Ford, and the weak performance of key Canadian auto parts suppliers such as Magna International and Linamar, which topped out a year ago.
Despite a big stock market rally since February, Magna’s share price remains nearly 30 per cent below its 52-week high, while Linamar is down almost 40 per cent. Both stocks trade at rock-bottom price-earnings multiples of less than 10 times.
It’s a similar story with GM. After posting record annual profits last year and stronger first-quarter earnings, GM’s shares have backtracked this year, sliding about 13 per cent. Since December 2013, the shares are down about 28 per cent.
GM’s languishing stock even prompted company CEO Mary Barra to complain publicly Tuesday at the company’s annual meeting in Detroit.
“I absolutely think, and we think, we’re undervalued right now,” she said. “We’re going to continue to work to keep making sure people understand exactly the mission of General Motors and what we’re working toward. I believe that as we continue to do that, that’s something that will take care of itself.”
Well, maybe. And maybe not. For now, it’s all about the fear of peak auto, says David Whiston, an analyst with Morningstar in Chicago.
“This is the biggest issue for investors,” he told Bloomberg. “A lot of people think it’s peak auto and there’s no reason to own auto stocks right now.”
Besides growing angst over the prospect of weaker sales, the industry is rattled by fears of potentially disruptive technological change, from self-driving cars to ride-sharing services that could curb demand for new vehicles.
LMC Automotive, a U.S.-based industry consulting firm, recently cut its 2016 U.S. vehicle sales forecast by 100,000 units to 17.7 million. Although that’s still above last year’s record of just under 17.5 million units, the pace of growth is slowing, it noted.
“Vehicle sales growth appears to be flattening out,” Jeff Schuster, LMC’s chief forecaster, told Automotive News, a leading industry trade publication.
“While this is driven by an array of variables, including slow economic growth and stock market volatility, a pattern is emerging sooner than anticipated. While we do not anticipate a retraction in volume over the next 12-18 months, strong year-over-year growth will be difficult to come by.”
Not everyone buys the peak auto theory, however. Carlos Gomes, senior economist and auto industry analyst at Scotiabank, says the current auto sales cycle will run stronger and longer than the naysayers predict.
He expects Canadian car and light truck sales to reach 1.9 million units this year, a hair above last year’s record tally, while U.S. sales reach a record 17.7 million units.
“U.S. households are in much better financial shape than they have been in quite a while. At the same time the average age of the U.S. vehicle fleet is at record highs, so that tells you that there is still significant replacement demand ahead,” he says.
“Most other analysts I guess are looking at the fact that we’ve had an extended cycle and the fact that credit has been fairly easy, so the fear is that as rates potentially go up, that could tighten and cause auto sales to soften. That’s the debate that’s going on.”
As for me, I side with Gomes. Any rise in U.S. interest rates is likely to be gradual and protracted. Meanwhile, the U.S. labour market, despite last month’s weak jobs report, has tightened considerably over the past year or two, while U.S. house prices have steadily climbed.
The wealth effect from higher house prices and the probability of higher wage gains ahead should provide enough fuel to keep auto sales humming for at least another couple of years, and maybe longer.