COVID-19 Weekly Automotive Market Update 9/9/2020

September 09 2020
CBB

Canadian Black Book COVID-19 Market Update

SUMMARY

• Statistics Canada reported last week that unemployment fell 0.7% in August to 10.2%, which is a marked improvement compared to a record level 13.7% set in May 2020.
• Statistics Canada also reported that in August 2.5 million Canadians are working from home, down from the peak of 3.4 million in April. The resulting lack of vehicle usage for commuting is keeping billions of kilometers off of the Canadian vehicle fleet, generally improving the quality of the used vehicles population.
Canadian Wholesale used vehicle prices strengthened again this week. Cars were up by 0.14% and Trucks rose by 0.10%, both milder increases versus past weeks.
U.S. Wholesale used vehicle prices this past week saw Trucks continue to rise in value with a moderate gain of 0.18%. However, Cars were down by 0.22% after fifteen weeks of increasing values.
• The Canadian Black Book team notes that used vehicle supply levels remain tight, and despite the recession, demand for used vehicles remains strong.
• The average days to turn for used car inventory ended the week at a 14-day moving average of 52 days, which is much lower than typical levels for the industry.
The Canadian dollar gained $0.003 last week, a strengthening trend which commenced in July. Over the long term, continued gains will make Canadian used vehicles more expensive to acquire for export to the U.S.

In the opening few days of September, we continue to see wholesale values strengthen in the Canadian marketplace. This past week, we noted that Cars rose in value, on average, by 0.14%. Trucks were also up for the week by 0.10%. This continues a seven-week positive trend for the Truck segments and a four week run of positive value increases for Cars. It is noteworthy that the U.S. wholesale market saw gains for Trucks of 0.18%, however, Cars fell by 0.22%, ending a fifteen-week streak of increase in values. This slowing of value gains may mark the beginning of an expected value decline for the latter part of 2020.

This past week, the Canadian automotive industry reported new car sales volumes for August. Desrosiers Automotive Consultants estimate that light vehicle sales for the month were down 8.9% from August 2019. This is a much weaker result from the 4.9% decrease seen in July 2020 as compared to July 2019 results. With so few OEM’s voluntarily reporting sales the numbers are an estimate. At the end of the month of September, we will see more decisive numbers reported by the manufacturers as the third quarter concludes.

Last week there was also some very positive economic news related to employment. Statistics Canada released its monthly Labour Force Survey for August, which surveys 50,000 Canadian households to understand their status with respect to employment and unemployment. The study concludes that the unemployment rate fell 0.7% points to 10.2% for August.

The Canadian unemployment rate was as high as 13.7% in May, which is an all-time record. The number of people employed in Canada is now within 1.1 million of the pre-COVID-19 February level. It is important to remember that during the last recession (2008-2009), it did take almost nine years for unemployment to return to its pre-recession rate.

Sept 9, 2020, Canadian Unemployment Rate
Source: Statistics Canada. Table 14-10-0287-01 Labour force characteristics

Last week, the Canadian Federal Government announced that it now has signed agreements with four international biotech companies for vaccines. The announcement detailed that Canada now has secured a guaranteed minimum of 88 million doses of vaccine, with options for an additional 102 million doses, for a total of 190 million.

It was also reported (Globe and Mail, September 5, 2020) this past week that the federal government will extend the loan program (Canada Emergency Commercial Rent Assistance Program) for commercial landlords into September to help support small businesses during the pandemic. This is certainly positive news for the many businesses who are struggling to restart their enterprises during the crisis.

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 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 wholesale market in Canada remains primarily an online-only marketplace.
• The major auctions do not currently have vehicles physically running through the lanes, however in most cases there are opportunities for prospective bidders to view the vehicles, in the days leading up to the weekly digital auctions.
• The CBB team continues to monitor wholesale market results from the online auctions.
• It remains unknown as to when physical auction operations will return to the pre-pandemic format of in- person bidding and cars running down the lanes and across the blocks for bidding.

Auction Volume

So far in September, CBB’s analyst team reports that auction volumes remain strong. The upstream and private sales auction channels have been very successful so far this year. In many cases the success of the upstream channels can divert inventory away from open public auctions. The number of vehicles available for sale is not at a typical level for September. However, we do estimate that auction wholesale volumes are around 80% of the normal pre-pandemic level.

Supply shortages again dominate market feedback this past week. We have noted that the number of days to turn for vehicles listed for sale by retailers has fallen again for the first week of September. The national average is now 52 days. To put that number in perspective, the national number was 75 days to turn back at the end of May.

The shortage in product is a result of the market’s behavior during the challenging year that has been 2020. When lockdown actions first halted much of the industry in Canada, this created greatly reduced numbers of trade-ins to feed auctions and for retailers to sell. Tens of thousands of lease returns, a very large source of used vehicle supply, were extended, postponing the return to market of these vehicles. At the same time, the number of repossessions in the market also shrunk the number of vehicles available for sale at wholesale.

Our team expects drastically increased volume of repossessions over the duration of 2020. Much higher than expected levels of unemployment along with the looming closures of many businesses in Canada are expected to result in larger numbers of repossessions. More supply will be created when the repossessed units and postponed lease returns arrive in market. This increased supply, at a time when demand has an uncertain future, will drive prices downwards before a lasting recovery takes place.

Auction Sales Rate

The sales success rates in Canadian auctions were again lower this past week versus what we have observed so far this summer. It seems to be emerging as the start of a trend, perhaps towards more traditional sales rates. For the first week of the month, we noted a high sales rate of 92% in one auction lane and a low of 30% in another lane. On average, our observed sales rate was approximately 60%; again much lower than rates we have been seeing.

September kicked off with large numbers of bidders online, yet perhaps buyers are being more selective and looking for better prices from consignors.

CURRENT WHOLESALE PRICE TRENDS

Market Level View

For the first week of September, the Canadian Black Book team noted that both the Car segments and the Truck segments (which includes SUV, Crossovers, Pickups and Vans) increased in wholesale value. The increases are smaller than some of the big weeks we have seen over the last two months; nonetheless, the overall market trend remains positive. This marks the fourth week in a row of positive movement for Cars, and the seventh consecutive week of increases for Trucks.

For the week of August 31st, the CBB team reported that the Car segments increased in wholesale price by an average of 0.14% across the nine segments we track. The average weekly change over the last four weeks has been +0.17%. This is certainly a different market than what we witnessed in early April, where we had two consecutive weeks with decreases of 0.51%. Although Cars continued to strengthen in value this past month, they have not increased at the same rate as the Truck segments. Over the past four weeks, Trucks have increased on average 0.44%, which is over two and a half times the average Car value increase during the same period of time.

This past week, the Full-Size Car segment posted the largest gain of 0.44% in wholesale value, which is not a new record for the segment, but is still a very strong showing. This was followed by Compact Cars at 0.32% and Luxury Car at 0.20%.

There was only one Car segment that lost value this past week, by a marginal amount. The Premium Sporty Car segment fell by 0.01%, as the typical peak selling season for that segment begins to wind down for 2020.

The Canadian market’s Truck segments continued their positive gains last week. For the first week of September, the grouping of thirteen segments rose in value by 0.10%. This is the smallest weekly increase for Trucks over the past seven weeks. The increase in Car and Truck values appear to be slowly tapering as summer winds down.

For the week of August 31st, the Sub-Compact Luxury Crossover segment was the largest gainer at 0.69%. This was not a record-setting result, but was still considerably above the average increase for the week. There was a tie for the second largest increase last week, where both the Compact Crossover/SUV and Mid-Size Crossover/SUV segments increased by 0.38%. The third-place result belongs to the Minivan segment which increased by 0.28%.

Three segments were down in value this past week. The biggest decrease was seen in the Full-Size Van segment at -0.36%. The Compact Luxury Crossover/SUV and Mid-Size Luxury Crossover SUV both declined by 0.09% over the week.

Presented in our chart below is the output from one of our proprietary market analysis tools, Visual Analytics. In the graph (Canada – Weighted % Change in Value by Segment for 2- to 8-year-old models), we graphically present the trended changes in wholesale value week-over-week. The data set is based on our team’s review of data 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. The data presented in the graph goes back to March of 2019 to allow the reader to appreciate the weekly value change trends over a longer period and before the pandemic crisis.

When examining the graph, one can see the normal trend was a steady stream of weekly declines, starting in June of 2019, far in advance of COVID-19. Then 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 when so many areas in Canada were under mandatory shutdown orders and many others saw voluntary closures of dealerships.

As we kick-off the month of September, the market continues in positive territory and wholesale values have increased. We have not seen any declines since the week of August 7th when the Car segments saw a small decline of 0.04%. The truck segments have not seen any decline since the week of July 17th, when they decreased by 0.14%. The growth trend has been softening, and it is our expectation that this fall will see a further erosion of values before lasting stability slowly return to the market.

CANADA AND USA MARKET COMPARISON

Last week, the U.S. wholesale vehicle market saw Truck values continue to strengthen, while the trend has suddenly swung to negative territory for the Car segments. In the U.S., Cars were down by -0.22% after fifteen weeks of increases in value. Trucks/SUV/Vans were up by 0.18% for the week, giving them a fifteen-week winning streak.

The Canadian dollar remains a great deal stronger compared to the first two months of the crisis, but it did weaken slightly in trading last week, posting a decline of $0.003. A weaker Canadian dollar typically helps to keep values strong. Conversely, a stronger dollar makes exported Canadian used cars more expensive to buyers in the critical U.S. market.

During this unprecedented crisis, the U.S. market has kept ahead of the Canadian market, in terms of the timing of value shifts, as well as in the magnitude of the changes. As you can see from the graph below, which compares the Used Vehicle Value Retention Index for both countries, the U.S. market was quicker to begin to recover, and the recovery has been much larger than what we have seen in the Canadian market. As a reminder, this index tracks the actual retained value of two to six-year-old vehicles. It is not a forecast, but rather actual market results. In both markets in the past few weeks we have seen a slowing in value increases, which may signal the start of a downturn. That said, both markets will always reflect their own unique situation as it relates to supply and demand.

One market’s prices trends, up or down, does not always mean the other market will follow suit. This has been the case during the COVID-19 crisis. The countries’ approach to the management of the virus and associated lockdowns, and subsequent influence on the economy, have been sharply different. In Canada, the lockdown measures and forced business closures, specifically in Ontario and Quebec, were quite severe. Much of the U.S. took a more optimistic view of the crisis and lifted lockdown measures early, if there were any at all, and the resultant impact to businesses was not as drastic. Over the longer term, the comparatively fewer cases of the disease in Canada and fewer deaths may lead the Canadian economy to recover with less lasting damage in relative comparison to the neighbouring U.S. economy.

USED WHOLESALE PRICE PROJECTIONS

Wholesale Price Impact Under the Most-Likely Economic Scenario

Prices in Canada at wholesale paused their steep decline, which began in late March, at the end of June. This change of direction signaled the beginning of a significant rise in values, as has been the case in the U.S. market.

To recap 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, the values rose by a remarkable 3.18%, or 3.20 Index points. August saw a new record gain of 3.73 Index points or 3.60%. This is the largest increase in the history of the Index which commenced tracking the market in January of 2005. The CBB Index is now 0.19 points higher than one year ago, and 0.83 points lower than January of 2020.

Canadian Black Book’s outlook reflects a new economic reality – our team expects that projected values will continue to stay below pre-COVID-19 projections over the next two years.

Short-Term Outlook (Fall/Winter of 2020)

We project a drop in wholesale prices compared to a pre-COVID-19 baseline this fall/winter as the Canadian economy suffers through the 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 be 10% lower, on average, compared to our Spring 2020 pre-COVID-19 projections, during the remaining months of 2020. We expect to see more declines through the fall months, with recovery beginning early 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 ground and will only decline by 8%. This is a revision to our previous forecast, which was made in mid-August, as the recovery 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.

Wholesale Price Impact Under a Severe Recession Scenario

In this scenario, we project a 25% drop in wholesale prices compared to a pre-COVID-19 baseline this fall/ winter, with a very slow recovery in 2021. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023. The differentiating factor between CBB’s Most Likely Scenario and the Severe Recession Scenario is our success at combating the spread of the virus. If a particularly large subsequent wave of COVID-19, or waves, were to push parts of the economy into lockdown mode, the recession would deepen further.

RETAIL ENVIRONMENT

Retail Prices

We enter September with a negative trend in listing prices, similar to what has been observed since early June of this year. The trend in retail asking prices has been quite different compared to those in the wholesale market, where values have been strengthening. The conclusion from the data is that Canadian retailers’ used vehicle margins are still under pressure and profit levels continue to be squeezed during the crisis. The 14-day moving average for retail asking prices, shown by the green line in the graph below, has fallen by 3.2%, since the first week of June’s peak. In the same period, wholesale prices have increased by over 6%, thereby compressing margins by over 9%. The total fall in listing price is $927, a very significant amount for retailers.

During this same period of time CBB has noted, as mentioned, that days to turn for inventory remain considerably shorter than earlier during this pandemic. The conclusion is that retailers are turning inventory quite quickly, but for much lower gross profit levels.

Below is Canadian Black Book’s analysis of vehicles listed for sale by retailers in Canada. It does not include vehicles offered for sale by their owners. The noted asking prices do not necessarily relate directly to the final transaction price, as retailers do have flexibility on each deal. Market feedback remains that supply of good used vehicles is coming up short. As supply grows in the coming months, we expect both wholesale prices and active listing prices will fall.

Retail Insights

• New light vehicle sales for August of 2020, as estimated by Desrosiers Automotive Consultants, were down 8.9% as compared to the same period last year.
• This result is significantly lower than July numbers, where sales were down by a smaller margin of 4.9% for the month.
• The August result better illustrates the natural level of vehicle demand is during this uncertain time. As we get further along in the year there is less “pent up demand” reflected in the sales numbers. With dealerships closed in large numbers nationally, early in the pandemic, some initial results after reopening were acknowledged to include increased demand deferred from earlier in the spring.
• For the rest of 2020, in fact, until an effective vaccine for COVID-19 has been widely deployed, it is expected that the disruption of new car supply, and new car parts, will continue to be a factor globally.

New Vehicles Sales Outlook

Our New Sales Outlook remains unchanged from our last update. We forecast a significant reduction in Canadian new vehicle sales in 2020 (both retail and fleet sales) due to weaker overall demand. This is the result of several factors, including fewer kilometers driven due to remote work arrangements and lockdown initiatives, high unemployment, and a severe erosion of consumer confidence. New sales were down 34% during the first six months of the year compared to last year.

In our base economic scenario (A), we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020, to 1.436 million units. In a deep economic recession scenario (B), we project a 40% drop in new sales in 2020 to 1.149 million units. The deep recession, if it were to occur, would be brought on by extended lockdown measures due to multiple waves of COVID-19. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. At this point in time, based on the progress in containing the virus in Canada, it appears that our Scenario A is the more probable one, unless there is a large resurgence of the virus in the coming months that will lead to significant lockdown measures being implemented again.

USED VEHICLE SUPPLY PROJECTIONS

Canadian Black Book maintains our projection of higher used vehicle supply in the wholesale marketplace for the fall months due to several factors:
• Our market metrics show that used inventory is turning at a 14 day moving an average of 52 days this past week, this is down considerably from the 73 days observed in early June.
• In the past few weeks, the inventory churn rate trend has stabilized, however it remains lower than the historical norms.
• Many months of reduced 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 views this as a temporary situation, with more supply expected in the coming months, especially as lease returns and repossessions begin to happen in greater numbers.
• The delayed lease returns, resulting from lease term extensions offered by OEMs, are now coming back to market.
• De-fleeting by rental car companies due to a lack of consumer demand in the travel sector will continue. However, it is expected that these firms will try to do so slowly and strategically to avoid flooding the market and thereby reducing their own proceeds at wholesale auction.
• In Canada, 2020 and 2021 were already big years for lease maturity volumes, with falling values and economic uncertainty; this may push lease return rates up due to fewer buyouts by lease holders.
• There is the expectation of a reduction in the size of corporate fleets due to smaller operations and the desire to free up cash.

Short Term Lease Return Projections

At the beginning of 2020, lease maturities were projected to hit a record volume of more than 400,000 units for the year. Once the pandemic was underway and most manufacturing stopped, OEMs worked to facilitate lease extensions in order to push returns further into 2020, when they would be able to reliably provide replacement vehicles. Those vehicles have started to come back to be remarketed well into the fall. As a result, we project at least 60% more units will arrive in the second part of 2020 (compared to the pre- COVID-19 estimates) due to a slowdown in sales in March/April/May, along with expected late turn-ins of the lease extensions.

Rental Unit Returns

The travel industry remains hard hit by the COVID-19 crisis. Air travel for international visitors to Canada is down by 95% in 2020. With the Canada-USA border closed, at least until later this month, the number of travelers from our closest neighbour remains sharply down as well. Statistics Canada recently reported that the number of passengers being carried on aircraft in Canada hit its lowest level in 40 years.

Rental car companies have seen an increase in what they refer to as the “home city” business, which are rentals by local residents. These rentals can be used to replace a car that is in the shop for repair work or to travel within Canada. It is also expected that some uptick in rentals can be from previous ride sharing or transit users that are now avoiding that means of transport.

In a typical year in Canada, 200,000 vehicles are sold to rental car firms, or just over 10% of the total volume in the industry. These vehicles remain in operation for 12 to 18 months until they re-enter the market as used vehicles. The reduction in rental cars could very well be in excess of 100,000 units for 2020, which alone will account for more than 5% of the decline in the industry.

With such a significant reduction in business, the market will not have remarketed rental car units as a source of lightly used vehicles in 2021 and 2022 to the same degree as previous years.

Repossessions

Increased levels of repossession activity are expected to be one of many unpleasant side effects of the COVID-19 crisis. The positive side of repos are that they do create used vehicle supply. So far this year, there has not yet been a large spike in repossession activity, although many vehicles were voluntarily returned when payment could not be made.

There are several reasons for the lack of repossessions. 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 to get back on better financial footing and hopefully resume payments when the deferrals concluded. As a result, many consumers who will default on their lease or loan will do so later in the year due to the deferment. The various government assistance options have also been very helpful for consumers to make car payments if they lost their jobs during the crisis. This assistance has kept the actual number of repos lower and prevented an increase in supply in the wholesale market. Should the Federal government scale back emergency assistance programs, it would be expected to cause an increase in repossessions. Practically speaking, the time from late March until early May made repos exceedingly difficult and, in some cases, unsafe given the virus outbreak. It is expected that, in the later stages of the summer and early fall, there will be an increase in repossessions.

Professionals in the repossession business have been preparing their operations based on this expectation, and in some cases, hiring and training more staff to meet the expected demand in the latter part of 2020.