COVID-19 Weekly Automotive Market Update 11/17/2020

November 17 2020
CBB

SUMMARY

• Last week Canadian wholesale vehicle prices for Cars and Trucks declined for the fifth week in a row. These price adjustments are smaller than what would be expected for this time of the year.
Car segments decreased in wholesale value, on average -0.16% last week.
Truck segments’ wholesale prices decreased by -0.21%.
U.S. wholesale used vehicle prices weakened again for both Car and Truck segments last week. Car wholesale prices fell significantly by -0.82% and Trucks were down by -0.35%.
COVID-19 case trends in Canada have made a turn for the worse, sparking concerns about further restrictions on citizens and commerce, as is currently the case in many European nations.

The path to collective success for the Canadian auto sector and the global economy, for that matter, has everything to do with our mutual success, or failure, at dealing with the COVID-19 virus. Over the past number of weeks, results in Canada on this front have been particularly discouraging. Case counts have taken a turn for the worse. On Monday of this past week, Canada registered 6,905 daily cases, a new all-time record level, more than ten times higher than the worst day during the spring months. Ontario continues to book record days after record days, as does Quebec, B.C., and Alberta. The most immediate concern is that the trend could result in severe restrictions on business, similar to what was the case in the spring. For the automotive sector we hope in the case of a new lockdown, dealerships can remain open with appointments for sales and services. If retailers are mandated to close again, this will halt sales and introduce more volatility into the wholesale vehicle market.

This past week, Prime Minister Trudeau commented on government’s expectation of the timing of a potential vaccine. This was on the heels of the well-celebrated news of a promising vaccine that Pfizer, along with its German partner BioBTech, shared at the beginning of the week. Trudeau says he hopes to see vaccines available in Canada in early 2021. Canada has bought the rights to about 300 million doses of vaccines from a number of potential suppliers, including 20 million doses of Pfizer’s.

Given the monumental task of immunizing the entire population, this will take quite some time. Some estimates are that it will take the better part of two years, after a viable vaccine is available, to inoculate most of the population. Recently, the International Air Transport Association estimated it would take the cargo capacity equivalent of 8,000 Boeing 747 jets to transport vaccines globally.

In the meantime, interruptions of new vehicle production are expected. This past week media reported that 100 employees of a Toyota parts plant in Elmira, Ont., have been asked to self-isolate, after several others tested positive for COVID-19. Again, this past week, production of the Chevrolet Corvette halted as well the production of some of GM’s full-size SUV products in Texas, due to a lack of parts from suppliers.

Not surprisingly, with record level case counts, consumer confidence continues to falter after an initial rebound. It will be interesting to see if the news of a promising vaccine gives consumers a boost in sentiment in the coming weeks. According to the Bloomberg-Nanos Index, which is conducted weekly, the proportion of Canadians who believe the economy will weaken in the next six months is now at a four-month high. Similarly, the Conference Board of Canada’s October index dropped significantly, with the largest monthly decline since April. In that case, the main concerns were over future employment prospects.

Last week Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, said the country is likely to emerge from the pandemic a changed nation. We should expect a lower outlook for potential growth and permanent change to the labor force and work environment. In order to combat the effects of the pandemic, some thinking outside of the box will need to target both social and economic goals. Specifically, investment in education, infrastructure, and the greening of our economy will support a lasting recovery. The Canadian bank now projects potential output will be 3% lower for 2022 versus their pre-pandemic forecast. The expectation is that lower levels of capital investment will account for most of the projected decline in economic growth.

CURRENT WHOLESALE MARKET OVERVIEW

Canadian Black Book’s Automotive Analyst team has a combined 70+ years of insight and experience in the automotive industry. Through ongoing communication with auctions, dealers, remarketers, finance companies and vehicle manufacturers, our dedicated team of Canadian market analysts closely track vehicle prices in order to independently monitor and report the market via daily price updates. In addition, our survey personnel and industry analysts attend (virtually at the present time) major auctions in Canada daily.

Auction Insights

• The Canadian wholesale auctions continue to operate in an exclusively online-only format, as they have for almost eight months now. The switch away from in-person bidding in the lanes was due to the numerous restrictions and concerns regarding health and safety due to COVID-19.
• The various Canadian wholesale auctions allow potential bidders to visit the auction yards to inspect vehicles booked for upcoming sales. Come auction day, bidding is online only, however most auctions are using a live auctioneer to facilitate sales.
• It is uncertain as to when Canadian wholesale auctions will be able to return to in person bidding in the lanes. The typical large market auctions attract hundreds of attendees, which is not permissible under the various governments’ restrictions.

Auction Volume

November auction volumes are declining, as is typical for this time of year. November through early March are quieter times for the wholesale market, at least in years past. In recent weeks Canadian Black Book has noted about a 20% decline in volumes overall. This is also a symptom of tighter supply in general.

As a reminder, the industry was expecting to see a record number of leases returning to the market. We are now three years after the best sales year on record; hence those 36-month leases are finished. Given the tight supply in general, a large portion of lease returns are being purchased by retailers processing the lease returns and not moving to wholesale. Of the lease return vehicles not purchased by the grounding dealers, many are processed through the private upstream channels of the leasing company.

For November it is our expectation that the wholesale market will continue to remain short of vehicles. Over the past week, our proprietary market analytics tools reported that the number of days to turn for used vehicles listed for sale by retailers again decreased by two days to 46. The trend over the past four months has been a steady decline, from a high of 75 days, at the end of May. The low for the year of 45 days, was back on October 11. For the level to be more normal, we would need to see a gain to above 60 days, which is a significant gap. Moving into the slower time of the year, when businesses need to “remember November adage,” we also expect that retailers, given all the uncertainty, may also be strategically keeping inventory levels much lower than normal, for the time of year.

The new vehicles market also continues to experience selective shortages of vehicles. The industry is in the midst of the switch to the 2021 model year. Our team estimates that 50% of the 2021 model year is now on sale. Once we cross the January 1 threshold, some of the 2022’s will begin to appear. Given that the global battle against COVID-19 has taken a turn for the worse in recent weeks, it is to be expected that interruptions to component production and vehicle assembly are inevitable. The disappointment of not being able to source a 2020 may drive some consumers to shop for a lightly used vehicle. This switchover will place some added demand on the used market, in a time when supply remains exceptionally low.

CBB Days to Turn November 17, 2020

Auction Sales Rate

The sales success rate or sell-through rate at auction was approximately the same as the previous week at 60%. These rates overall are trending lower. We are noting that some consignors are not budging on their floor prices, often despite the lack of interest in their offerings. Over the past week, one lane we observed only registered a 24% sales rate, despite some price discounting. These lower rates suggest that buyers and sellers may have very different opinions on the value of the merchandise.

CURRENT WHOLESALE PRICE TRENDS

Car and Truck segments average wholesale values declined last week. Car segments fell by -0.16%, and Trucks by -0.21%. These are larger declines compared to the previous two week’s results. Two weeks ago, there was a -0.26% decline for Cars and -0.19% for Trucks.

For the past five weeks, both Car and Truck segments have, on average, seen declines in values. The average weekly decline during the last month has been -0.14% for Cars and -0.11% for Trucks. Compared to the same period last year, these declines are much smaller in magnitude. By comparison, for all of November 2019 we noted an average weekly drop of -0.39% for Cars and a -0.29% loss for Trucks. The fundamental rules of supply and demand are to be blamed here. With shorter supply, prices are not undergoing the seasonal decline we would normally see at this time of year and therefore showing smaller levels of depreciation. Looking back at the past eight weeks, the prices of Cars have only changed on average by -0.09% per week, compared back to 2019 when prices changed by -0.33%, which is a large difference. On the Truck side the average weekly change for the past two months is -0.04% and last year it was -0.25%.

CBB Car Segment Values, November 17, 2020

Of the nine Car segments, all but two yielded decreases, for the second week of November. The only segment to see a significant increase in value was Prestige Luxury Car at 0.27%. Luxury Car did increase, but only by 0.04% for the week.

The largest loss this week was in Sub-Compact Car by -0.77%. This is a smaller decline versus last week’s record breaker of -0.93%, yet still quite large. Over the past seven weeks the average weekly decline in values for Sub-Compact Car is -0.49%. Compact Car had a noteworthy decline of -0.59%. Capping off the top three decliners was the Sporty Car segment at -0.45% for the week.

This past week also marks five consecutive weeks of wholesale value declines for Truck values, with a loss, on average, of -0.21%, for the week. Of the thirteen market segments CBB tracks for Trucks, five were up in value and eight saw deterioration. The largest increase was seen in Compact Vans at 0.30%. Another noteworthy gain for the week was Minivan’s 0.25%. Full-Size Pickup, which has been one of the strongest performers, was only up by 0.08% for the week.

The most significant decrease for the week, across the Truck segments, was the Compact Luxury Crossover/SUV at -0.55%, its second week in a row of significant declines. Small Pickup was lower by -0.53% for the week, followed by Compact Crossover at -0.50%.

CBB Truck Segment Values, November 17, 2020

As we hit the midpoint of November 2020, Canadian Black Book reports that prices are continuing to soften. For this time of year, price drops are to be expected. This is a very different year for the industry. After nearly six weeks of much smaller value changes, more recent declines do seem to be increasing. As a reminder, these are small numbers, however, recognize that they are weekly changes, so small variations do add up over time. The CBB team expects that wholesale used values will see more significant declines, when supply levels finally improve, and as the economy continues to struggle to recover.

The less significant week-over-week swings in values are shown in the graph output below, from one of our proprietary wholesale market analysis tools, Canadian Black Book Visual Analytics. In the line graph below (Canada – Weighted % Change in Value by Segment for 2- to 8-year-old models), we illustrate trended changes in wholesale value week-over-week. The data set is based on our team’s review of transactions collected and analyzed from the Canadian wholesale market.

Car segments are displayed in blue, and Trucks are denoted by the red line. Light Trucks include Vans, SUV/ Crossovers, and Pickup Trucks. In April of this year, values showed a sharp decline as a result of the chaos created by the pandemic. As you will recall, this is the time that many areas in Canada were under mandatory shutdown orders and many other regions saw voluntary closures of dealerships.

CBB Change in Values by Segment, November 17, 2020

CANADA AND USA MARKET COMPARISON

This past week, the U.S. market continued to lose value week-over week. Both Car and Truck segments again decreased for the week. Trucks were down for the tenth week in row, with a loss in wholesale value of -0.35%. Last week, Car segments in the U.S. also showed large losses of -0.82%. This performance extends the run of value deterioration for Cars to eleven consecutive weeks. Current U.S. market declines are much sharper than what we are seeing in Canada. Over the past eight weeks, Cars in the U.S. have declined on average by -0.71%, and Trucks by -0.35%. Compared to the same time last year, the losses for Trucks were milder. In 2019 Cars declined by -0.64% and Trucks by -0.65%

Last week the Canadian dollar lost almost one cent (-$0.006), closing the week at $0.7606. Compared to one month ago, the Canadian dollar is virtually unchanged with a decrease of $0.001. Any significant depreciation of the Canadian dollar is beneficial to those exporting vehicles from Canada to the U.S. and will put upward pressure on prices. If the Canadian dollar strengthens, this of course has the reverse effect; it makes Canadian vehicles more expensive for U.S. buyers, and therefore a bit less desirable and will put downward pressure on prices. In the opinion of Canadian Black Book, as long as the dollar remains well below the mid-$0.80 range, the environment is suitable for export activity.

In Canada, we have not seen the same magnitude of decline over the past few weeks. However, during this crisis the U.S. market has often been a leading indicator of what may happen in Canada, several weeks later.

USED WHOLESALE PRICE PROJECTIONS

For the month of October, the average wholesale price change was 1.40%. Looking back to previous months, wholesale prices fell on average -0.99% in March, -3.58% in April, just over -3% for May, and June was flat. In July, values rose by an incredible 3.18%, or 3.20 CBB Index points. August saw a new record gain of 3.73 Index points or 3.60%, which was the largest increase in the history of Canadian Black Book’s Value Retention Index, since it started in 2005. In September, the Index set a new all-time record high of 109, which only lasted 30 days on top, until the October Index was calculated. For October, the Index is now at 110.5 and another new record. Compared to the same time last year, the Index is up 2.3%, and compared to the start of 2020, the Index is up 2.1%. This rapid V shaped recovery shows how robust demand has been and the effects of restricted supply of vehicles in the market.

CBB Retained Value Index for October 2020 Sets New All-Time High

Our expectation is that used vehicle retail demand will weaken and we should see an increase in supply of used inventory. Due to these market forces, Canadian Black Book forecasts a drop in wholesale prices this fall and winter, relative to the highs seen in recent months. This will be followed by a more lasting recovery and greater stability of values, depending on the general state of the economy and demand for vehicles.

Short-Term Outlook (Fall/Winter of 2020)

We project a continued weakening in wholesale prices compared to the pre-COVID-19 baseline this fall/winter as the Canadian economy suffers through the harsh effects of COVID-19. In August, we revised our outlook based on positive signs, in terms of used vehicle pricing trends. We expect that wholesale prices will still be 10% lower, on average, compared to our spring 2020 pre-COVID-19 projections, over the next three to nine months. We expect to see more declines through the fall months, with recovery beginning later in 2021.

Our outlook forecasts Car segments will decline by 13% during this period of time. However, we do expect that Truck and Crossover/SUVs will lose less value and will only decline by 8%. This is an optimistic revision to our previous forecast, which was made in mid-August, as the initial rebound in values has been stronger and earlier than expected.

We also anticipate that older (more than six-years-old), less expensive vehicles in average condition will not decline as much due to increased demand for these units. The selective demand lift is expected to be driven by consumers seeking low cost, reliable transportation. COVID-19 and the resulting social distancing practices are expected to cause some regular transit riders and ride sharing customers to transition to vehicle ownership, which will fuel some incremental industry sales.

Long-Term Projections (36-Month Residual Values, Summer/Fall of 2023)

The effects of the pandemic will continue to be felt three years from now. However, we project that residual values will return to the pre-COVID-19 baseline as used supply will decline, as a result of lost retail and fleet sales throughout the remainder of 2020 and into 2021.

RETAIL ENVIRONMENT

Retail Prices

At retail, average asking prices for vehicles listed for sale on dealer lots have risen again marginally this past week. Prices have had a mild week-over-week price increase since October, after rebounding from a low for the year in mid-September. Over the last four weeks, CBB estimates average asking prices have increased by $100 at retail.

The estimated increase in listing prices, from the lowest point in September, is approximately $300. This is based on analysis of just over 85,000 vehicles on a weekly basis, listed for sale by retailers in Canada. This upward trend in price follows three months of consistent declines, that began in May.

With the price of vehicles at wholesale rising, during the rebound phase of the market, and asking prices at retail falling, our conclusion is that retailers’ used vehicle margins had been under tremendous pressure during the pandemic. We estimate that gross profits declined by just over $900 from June to September.

CBB Active Listing Prices, November 17, 2020

Retail Insights

• So far in 2020, the Canadian auto industry has reported a massive sales decline that is estimated to be 21.6%, as of the end of October.
• October sales were estimated by DesRosiers Automotive Consultants to be down by 2.1%, following a 2.4% increase in September.
• By comparison, for the year, the U.S. market was down 18.8% as of the end of October according to the Federal Reserve Bank of St. Louis’s Economic Research team.
• It is our outlook that isolated shortages of vehicles, along with lackluster levels of consumer confidence, will be the key headwinds for the marketplace leading into 2021.
• We expect small sales declines for the remaining months of 2020, as compared to 2019.
• It is also our expectation that 2021 sales, although up from 2020, will remain down considerably when compared to 2019.

New Vehicles Sales Outlook

Our New Vehicle Sales Outlook remains unchanged from our last update. We continue to expect the year to close out with a significant reduction in Canadian new vehicle sales. The year has dramatically impacted both retail and fleet sales, due to weaker overall demand, interruption of operations and great economic uncertainty.

There are a number of other factors at play. This includes a reduction in the number or kilometers driven by consumers due to millions of Canadians working from home. The various social distancing initiatives, resulting in high unemployment, and a severe erosion of consumer confidence, have all radically cooled the market. All these factors negatively impact consumer demand.

In our base economic scenario (A), we projected a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020, to 1.436 million units. The market is currently at a decline of 21.6%. In our initial deep economic recession scenario (B), we projected a 40% drop in new sales in 2020 to 1.149 million units. This was the scenario that was expected had retailers remained closed in large numbers, as they were in early April. Thankfully, that did not occur. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years’ time. For 2021 the return of sales to more normal levels hinge on our ability to deal with the effects of the virus and to rebuild the Canadian economy.

USED VEHICLE SUPPLY PROJECTIONS

Canadian Black Book projects a slow build-up of used vehicle supply in the wholesale marketplace, for the fall and winter months. The days to turn for used inventory remain considerably shorter than earlier in the pandemic, when inventory turnover stagnated, due to shutdowns of operations and consumers being in lockdown. For this past week, the 14-day moving average for days to turn for used cars decreased by two days to 46 days.
• Many months of reduced new and used sales, and a resulting reduction of trade-ins, has depleted the number of vehicles available to be bought and sold on the wholesale market.
• CBB believes this shortage to be temporary, with more supply expected in the coming months, especially as repossessions will begin to happen in greater numbers as personal bankruptcy filings increase and lenders begin to focus more resources on collecting past due accounts.
• Last week it was noted that the number of listings continues to increase, by approximately 13% since the low level in late July of this year.
• The current listing count is still 7% lower than the same time last year.
• For 2021 there are well over 400,000 leases expected to terminate, similar to the record number in 2020. These units coming to market in 2021 will help provide much-needed supply relief.

CBB Active Listing Volume, November 17, 2020

Repossessions

The CBB team does expect a gradual increase in repossession activity before the year concludes. We expect this to continue into 2021. It was noted that the number of insolvency filings in September rose to the highest level since the pandemic started. For the month, the Office of the Superintendent of Bankruptcy Canada reported 7,658 consumer bankruptcy filings. This is up 18.5% from August. It is also the largest increase in filings since 2017, but still remarkably down 36% from the same time last year. The positive side of repossessions is that they do create used vehicle supply for the wholesale market. So far this year, there has not yet been a large spike in repossession activity.

There are several reasons for the lack of repossessions so far in 2020. At the beginning of the crisis, lenders offered relief for customers’ loan and lease payments (anywhere from 30 days to, in some cases, up to six months). This certainly could help many consumers get back on better financial footing and hopefully resume payments, when the deferrals concluded. Even for borrowers who are behind in their payments, it appears that many lenders are continuing to work with borrowers to arrange plans for repayment that avoids the repossession of the vehicle. Prudent lenders realize that flooding the market with thousands of repossessed units will result in lower proceeds as prices will be depressed by a surge of supply.

About Canadian Black Book

For almost 60 years, Canadian Black Book has been the trusted and unbiased Canadian automotive industry source for vehicle values. Today the company has grown into a leading data provider of vehicle valuations, residual value forecast solutions and VIN decoding. Canadian Black Book tools and information are considered ‘The Authority’ for vehicle values not only by car dealers and manufacturers, but also the leasing, finance, insurance and wholesale sectors. In 2020, Canadian Black Book is bringing to market its Enhance Vehicle Matching (EVM) solution, which will allow the industry to more consistently decode 17 digit VINs down to a specific trim package, allowing a more precise vehicle valuation.

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