Industry Trend Analysis - Anti-Diesel Policy Pressuring Demand - MAR 2018

BMI View: Consumer uncertainty and increasingly punitive policy against diesel vehicles will continue to place downside pressure on refined fuel demand in the United Kingdom. This view has begun to manifest itself, with weak new diesel vehicle sales over 2017, with macro-economic factors compounding the negative trend.

A combination of Brexit-uncertainty, weakening consumer purchasing power and, importantly for the UK's long-term fuels demand trajectory, increasingly punitive policy measures against the internal combustion engine (ICE), were reflected in weak new vehicle sale over 2017. Full-year vehicle sales data shows a marked decrease in the purchase of new diesel cars in the UK. Compared to 2016, total new car sales were down by 5.7%, with new diesel sales falling by 17.1%.

We continue to hold a bearish long-term outlook for refined fuel consumption in the United Kingdom, particularly for diesel, as further gains in engine efficiency and increasingly punitive emissions and fuel standards drag on domestic demand. Over 2017, the introduction of an increased 'T-Charge' in London, the 2040 fossil fuel vehicle ban (see '2040 Diesel/Petrol Sales Ban: Intitial Thoughts ' , August 1 2017) and, most recently, an increased tax on new diesel cars that fail to meet new emissions standards (see ' Quick View: Diesel Tax Impact Lim ited', November 24 2017) have combined to continue momentum behind the broader trend of increasingly punitive policy stances against ICEs.

Diesel Sales Suffer From Policy Backlash & Brexit
United Kingdom: New Vehicle Registration
Source: SMMT, BMI.

In the longer term we maintain that the UK's (and other developed markets') policies concerning gasoline and diesel vehicles, and vehicle emissions more generally, will become stricter - particularly as urban air pollution continues to become an increasingly politicised and socially-sensitive issue. This continues to inform our view for diesel consumption to decline in the UK as consumers move away from older diesel vehicles, more efficient engine technology is adopted and electric vehicles continue to penetrate into the passenger car market.

Whilst 2017 saw a drop in new vehicle registrations, used car sales as a whole showed modest growth to the third quarter, with used diesel car sales registering 4.2% y-o-y growth from the same period in 2016. Importantly for policy-makers, the trend of fewer new diesel vehicles (due in part to punitive policy measures) and continued strength in the second-hand diesel market may be counterintuitive to the aims of reducing overall emissions.

Used Car Sales Remain Steady
United Kingdom: Used Car Sales
Note: g/km = grams of carbon dioxide per kilometer. Source: SMMT, BMI

Whilst the drop in new diesel sales in particular over 2017 would have been partly driven by the aforementioned shift in policy and consumer sentiment, it would be naive to assume the drop was purely a product of increasingly strict emissions policy. Instead, there are a range of factors that would have also impacted sales. Notably, the UK's decision to exit the EU has affected demand through its negative impact on consumer and business confidence, the economic uncertainty it creates and the vehicle price inflation created by depreciation in the pound. Similarly, another drag on consumer demand for new cars continues to be the decline in household real incomes. With inflation running above 2% and with Brexit uncertainty keeping businesses from granting pay rises, real wages in the UK are set for a year of decline in 2018, which will continue to pressure new vehicle sales.