Moody's: High fuel prices may hit European car parts revenues

Recent rises in fuel costs may hit the revenues of tyre, brakes and automotive spares suppliers, according to Moody's Investors Service comments published today (7 November 2012). According to the report, the potential loss of revenue is “credit negative” for rated automotive spare parts suppliers.

The biggest downside risk from a 5 per cent aftermarket contraction in Europe is seen at brake manufacturer TMD friction, which could feel a 3 per cent hit to its revenues in this scenario and Michelin which is expected to see revenues drop 1.8 per cent if this were to happen. However it is not just an aftermarket problem, Moody's expects that higher fuel prices could also affect suppliers that focus on automotive manufacturers.

“We expect motorists in Europe to increasingly adopt more energy-efficient driving behaviour or avoid using their cars to keep their fuel spending under control,” says Rainer Neidnig, a Vice President – Senior Analyst in Moody’s Corporate Finance Group and co-author of the report. “As this behaviour reduces wear and tear, we could see demand for replacement car equipment such as tyres and brakes to decline, at least temporarily, thereby affecting auto suppliers’ aftermarket revenues.” 

European auto suppliers with substantial aftermarket exposure will probably experience a decline in revenues and earnings in the short term. Michelin (which is rated as Baa1/Prime-2 stable on the Moody’s scale), Continental AG (Ba2 positive) and lightmaker Hella KGaA Hueck & Co. (Baa2 stable) may also experience a decline in revenues, but the ratings agency is confident these firms will be able to offset this. 

Moody’s expects that higher fuel prices will have only a minor effect on automotive suppliers Schäeffler AG (B1 positive), Valeo SA (Baa3 stable) and Rheinmetall AG (Baa3 stable. 

As well as the shorter term effects, high fuel costs are also expected to affect demand patterns for new cars in the medium term and this could affect suppliers who supply car manufacturers, or original equipment manufacturers. However, Moody’s view is that the effect will be less clear: “drivers may delay new car purchases or choose smaller cars, which will harm suppliers’ revenues. On the other hand, higher fuel prices will probably accelerate demand for more fuel-efficient cars, which will help suppliers that can provide fuel-saving technology to manufacturers.”