Published September 21, 2009

COE quota may see sharp cut in mid-year review

By SAMUEL EE

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(SINGAPORE) An impending supply shock in certificates of entitlement (COEs) for vehicles could be in the works, which will point to soaring COE premiums ahead.

What's ahead? With scrappage lower than expected this year, some foresee a quota reduction of even 30%

The highly anticipated mid-quota-year review is scheduled to be made known this week, keeping COE watchers on edge.

The second bidding exercise for September will close on Thursday at 4pm instead of the usual Wednesday because of today's public holiday. This is usually the time when the government announces changes to the quota for certificates of entitlement halfway into the quota year (QY). And QY09, from May 2009 to April 2010, already started the year 24.1 per cent smaller than QY08 at 83,789 COEs.

But most in the motor industry believe the mid-quota-year review will shrink the number of COEs even further. This is because while part of the quota allows the vehicle population to grow 1.5 per cent (based on the vehicle population of 872,027 as at Dec 31, 2008), the bulk is to replace vehicles likely to be deregistered. And so far, scrappage has been lower than expected.

So a cut in supply is expected - and, subsequently, rising COE premiums.

'Some people have even mentioned a 30 per cent cut but 10-20 per cent is more likely,' says Jason Lim, sales manager at multi-brand distributor Cycle & Carriage.

He explains that this is because he believes the government will not want the market to be adversely impacted by too large a drop in COE supply.

Over at a luxury dealership, a senior executive predicts a 15 per cent reduction in COEs, with the immediate reaction being surging premiums. But he adds that what happens six months down the road 'ultimately depends on the state of the economy'.

'The year-end festive season and Chinese New Year period should add pressure on premiums but beyond that, the uncertainty about a V or W-shaped recovery may cushion further rises,' he says.

One market player who is pessimistic about this week's quota announcement is Vincent Ng, product manager at Kah Motor, the authorised Honda distributor, who says he is looking at a drastic 30 per cent reduction.

One reason is that the monthly deregistration rate from April to August this year has been consistently lower compared with the same month a year ago, ranging from 19 per cent to 29.4 per cent.

'The minister for transport has indicated that he wants the COE quota to reflect the actual rate of deregistration more accurately,' says Mr Ng. 'This means that based on the current trend, the cut should be about 30 per cent.'

Specifically, he says that could result in up to 900 fewer Category A 'small car' COEs, 391 fewer Cat B 'big car' COEs and 430 disappearing from the Cat E open category per month.

The current monthly quota is 2,791 Cat A COEs, 1,519 Cat B COEs and 1,432 for Cat E.

'Since demand doesn't look like it's going to soften soon, that can only mean that premiums will rise significantly,' says Mr Ng.

Cycle & Carriage's Mr Lim is more sanguine about commercial vehicle COEs though. Cycle & Carriage also carries goods vehicles and this COE category was hit hard by a 28.1 per cent shortfall at the start of QY09. Mr Lim is of the opinion that after the substantial cuts for Category C over the last two years, there will not be a further drop.

'At most it will be a very slight change because commercial vehicles are used for industry and with the economy growing again, a further cut may hurt the recovery,' he says.