Gulf war would hit auto, tyremakers

An oil price spike sparked by fears of a Gulf war could send a shudder through Europe's car industry, bringing fears of reduced demand and a sudden switch to smaller, more efficient vehicles.

Crude oil prices hovered near $30 a barrel on Monday ahead of an Opec meeting as the threat of a military strike against Iraq to oust leader Saddam Hussein looms.

Economists say the cost of higher oil prices, up nearly 50 per cent since January, hits both consumers and companies. The auto sector stands to be one victim.

"I think if the preparations for war proceed, it will cast a dark shadow on the European car market as it will lead to lower car sales and a change in demand for product mix which is problematic," said Karel Williams, a motor industry researcher at Manchester University.

Analysts say sentiment on auto stocks may deteriorate disproportionately to the fundamental situation, barring a full-blown oil shock on the scale of the mid-1970s when oil prices more than doubled.

Tyre companies, reliant on oil for raw materials, would be hardest hit with truckmakers, a barometer of economic growth, and volume car makers also vulnerable. However, auto companies with efficient cars and flexible production processes designed to respond quickly to changing consumer preferences could gain.

"Tyre stocks are highly sensitive to oil prices as a significant portion of their purchasing is tied to oil derivative products," said Deutsche Bank analyst Alexis Boyer.

Deutsche says a surge in oil prices filters through to the profit and loss account with a six to nine month time lag.

A $1 per barrel rise could mean a negative impact on pretax earnings of 30 million euros at Europe's biggest tyremaker Michelin and of 20 million at Germany's Continental, says the bank. That translates to 0.15 euros and 0.1 euro respectively on an earnings per share basis.

Driven by these worries, Michelin shares have fallen over 15 per cent since the end of July and Conti about eight per cent, underperforming the DJ Stoxx European auto index, down about five per cent.

The impact on car and truckmakers, struggling to post profit growth this year amid weak auto markets, is harder to quantify.

"Oil prices have a direct impact on the transport economy and could be an important issue for the whole industry, but it is very difficult to assess it," Volvo Trucks Corp's European head Roar Isaksen told Reuters last week.

Truckmakers, which feel cyclical effects earlier than car companies and whose vehicles swallow more petrol, would be hit first.

For car owners, higher oil prices act as an additional tax, dampening economic growth and denting auto demand.

"Gasoline prices are one of many indicators that affect auto demand," said Morgan Stanley auto analyst Adam Jonas.

He argued that auto demand in Europe is sensitive to rising oil prices as heavily-taxed petrol makes up a big chunk of the running costs of a car compared to the US, where gasoline is cheaper.

Most companies decline to predict the effects of a new Gulf conflict, but analysts say volume manufacturers, such as Europe's biggest carmaker Volkswagen AG, GM Europe and Ford Europe, would be worst hit as they are most exposed to fluctuations in demand.

"A major oil price rise and greater uncertainty regarding oil availability has always been associated in the past with macro economic shocks and short-term psychological impact on the car market," said Manchester University's Williams.

However, companies equipped quickly to switch production to cater for a change in consumers' tastes - in this case towards smaller and more fuel efficient vehicles - could benefit.

"Higher oil prices could influence the (product) mix as people may consider buying smaller cars rather than gas guzzlers and trucks and companies with flexible production systems could win," said a London-based analyst. He noted one effect of the 1970s oil shock was a long-term shift towards smaller cars.

While most European companies, especially VW and PSA-Peugeot Citroen now have a range of relatively fuel efficient cars, PSA looks to several analysts to be a potential gainer due to its extremely flexible manufacturing process which allows for a short-term change in product trends.

Luxury carmakers also argue they are less vulnerable. "A conflict in Iraq would have many implications but sales in the premium segment are not affected as much as in the volume segment by oil price movements," said a BMW spokesman.

Analysts say sales of European sports utility vehicles, such as BMW's X5, Porsche's new Cayenne and VW's Touareg, to be launched later this year, would not be affected significantly unless there were a major oil shock despite their relatively high petrol consumption.

"SUVs are still a small niche in European market and are not that economically sensitive," said Morgan Stanley's Jonas, adding the conservative volumes goals would not be jeopardised.