Steel prices squashed as auto demand and output go into reverse

Almost everywhere you look, auto production and sales are falling and putting pressure on one of the major end-user segments of steel.

News within the space of a fortnight that British Steel was insolventand Ford’s Bridgend plant in the UK would cease production in 2020 was somewhat emblematic of the challenges faced by carmakers and their steel suppliers.

According to the World Steel Association, a typical car comprises around 900 kg of steel, 34% of which is used in the body structure and 23% in the engine block and gear mechanism.

On most estimates, more than 10% of UK steel is consumed by local car manufacturers. In the US and Germany, the proportion is far higher at around 25%. Almost 14% of ordinary carbon steel and 25% of special steel that Japan produces is destined for the country’s carmakers.

But prices of hot-rolled coil, the base steel product used in car manufacturing, have slumped in nearly all major markets. In the US, Midwest HRC prices have dropped to $570/short ton, down 37% from a year earlier, according to S&P Global Platts. Prices are now well below where they were before the 25% import tariffs were imposed by the Trump administration in March last year.

In Europe, demand is so tepid that the world’s largest steelmaker, ArcelorMittal, is cutting production by up to 4.5 million mt this year and has laid off 1,400 workers in Italy for 13 weeks. Northern European HRC prices rallied slightly in early June but are down around 12% from a year ago.

Manufacturing as a whole is weak across many global markets, as can be seen in monthly purchasing managers’ indices. The auto sector is a major contributor to this weakness as people are no longer buying cars at the same rate as before.

Car registrations in the US have generally trended downwards since peaking in late 2014. In the first quarter of this year, US auto sales fell 2.5% on last year, while European car registrations dropped by 3.3% in the same period.

The situation is little better among Asia’s established carmakers. Car sales in Japan between April 2018 and March 2019 rose just 1.2% on the same period a year earlier. South Korea's Hyundai Steel said recently it expects the automobile sector to slow this year.

Normally when rapid demand and production growth is required, emerging Asia comes to the rescue. But last year China’s car sales and production fell for the first time since the early 1990s as consumers found it harder to access credit to buy new cars due to Beijing’s deleveraging campaign. China's vehicle output and sales in April of 2.05 million and 1.98 million units were both down 15% on the same period a year earlier, according to the China Association of Automobile Manufacturers (CAAM).

There is a sense that car ownership growth has been so enormous in China over the past decade that it had to plateau at some stage.

At around 6-7% of steel consumption, car manufacturing in China is not yet as important to the steel sector as in other countries. Property construction and infrastructure remain the key drivers of steel demand.

Indian car output drops

India's auto sector accounts for around 10% of steel consumption and is set to grow at 6-7% CAGR over the next five years, according to S&P Global subsidiary, CRISIL. In April, India's vehicle production fell 11% on the year before to 2.36 million units, the Society of Indian Automobile Manufacturers said, citing lower government spending, the impact of the election and production cuts by companies.

Are there common reasons why global car sales are falling? Each country has its own individual set of circumstances, of course. But analysts point to environmental factors, ride sharing, better public transport and urban apartment living as reasons for the decline in car purchases.

Most of the positive car sales and output growth data is occurring in the electric vehicle segment, which is coming off a low base but will likely be the future of the car industry. Over January-April, China’s “new energy vehicle” production of 368,000 units was up 58.5% on year, while sales of 360,000 vehicles rose 60%, according to the China Association of Automobile Manufacturers, which predicts that NEV sales will reach 1.6 million units this year, an increase of 30% on last year.

South Korea’s Hyundai Motor plans to build a dedicated electric vehicle production facility by 2020 for its upcoming range of EVs, with about 44 models to be introduced by 2025.

Other metals, such as lithium, cobalt, nickel and copper, will be in greater demand as the car industry transforms. Fully electric vehicles use up to 80kg of copper while conventional cars use around 10-20kg, according to the  US-based Copper Development Association. An NEV battery typically consumes at least 10 kg of nickel.

The steel versus aluminum debate will continue to rage as carmakers seek ever lighter materials. But it seems that car manufacturing may not become as strong a driver of steel consumption in emerging economies as in developed ones.