Recovery of the North American auto industry has been surprisingly strong, especially in the last several months, making it perhaps the most robust sector in the U.S. economy. This is good news for automotive parts and metals suppliers, who continue to hitch a ride with carmakers out of the economic doldrums.
“Normally automotive trails GDP in an economic recovery. Things get better and then people start buying cars. This time around it’s backwards. The auto industry recovered before the general economy,” says Bernard Swiecki of the Center for Automotive Research in Ann Arbor, Mich. (see related sidebar).
He is not alone in this assessment. “Automotive demand has been excellent, better than it has been for a long time,” says Doug Richman, chairman of the technical committee of the Aluminum Association’s transportation group and vice president of engineering and technology at Kaiser Aluminum Corp., Foothill Ranch, Calif.
Following slow and steady increases ever since the economy began to recover, auto production has seen strong growth thus far this year, reports George Magliano, senior economist for New York-based IHS Automotive. North American auto output reached an annualized 15 million vehicles in February, a 22 percent improvement year on year.
While production is not likely to maintain this heated pace, 2012 promises to be good for everyone in the auto supply chain, says Mark Cornelius, president of Morgan & Co., West Olive, Mich. This includes not only metals suppliers, but also parts suppliers, some of whom suffered a setback last March when the earthquake and tsunami in Japan disrupted the supply chain.
Now with the Toyota, Honda and other Japan-based New Domestics cranking up production to make up for lost volumes—at the same time the traditional Big Three try to hang on to their opportunistic market share gains—experts predict full-year North American auto output will reach from 13.9 million to 14.5 million passenger cars and light trucks in 2012. This compares to 13.1 million light vehicles produced last year and just 8.6 million made in 2009 during the depth of the recession.
Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., predicts that North American auto output could exceed 16 million light vehicles by 2015, which would boost demand for steel and aluminum significantly.
While automotive parts suppliers are concerned that rising gasoline prices, volatile material prices and contagion from the European debt crisis could dampen demand or squeeze margins, they generally continue to be optimistic about the next 12 months, says Dave Andrea, vice president of industry analysis and economics for the Troy, Mich., based Original Equipment Suppliers Association.
Cornelius is not surprised by the positive outlook among parts suppliers, many of whom source their raw material from service centers. “With all of the bankruptcies in the last few years, the supply base got weeded out. Those that are left are seeing signs of significant recovery ahead,” he says.
Not only is their capacity utilization up significantly, but the vast majority were profitable in the first quarter, Andrea adds. “We foresee that [part] suppliers’ production schedules will remain strong.”
Supplier margins vary with the auto platforms they support and the products they supply, so an overall increase in the vehicle build will not necessarily translate into higher profits for an individual company, Andrea notes. For example, suppliers whose parts use rare earths are seeing dramatic cost increases. Likewise, those that operate further downstream, such as fastener suppliers, are more at the mercy of swings in material prices.
All parts suppliers are monitoring their margins carefully, Andrea says. Some are changing the designs of components to use lower cost materials where possible without affecting the parts’ performance. They also are trying to control costs through the price negotiation process, adding escalator clauses into materials contracts.
The biggest wildcards to affect the automotive product mix and the materials content of vehicles over the long term is the price of gas and more stringent federal corporate average fuel efficiency requirements. CAFE standards for passenger cars jumped to 29.5 miles per gallon this year, up from 27 mpg, and call for a further step up to 38 mpg in 2017, 40 mpg in 2020 and 46 mpg (and possibly as high as 54.5 mpg) by 2025.
“We have found that the percent of trucks vs. passenger cars sold tends to be a direct function of gasoline prices,” says Ronald Krupitzer, vice president of automotive applications for the American Iron and Steel Institute, Washington, D.C.
According to the Center for Automotive Research, crossover utility vehicles currently hold a 23.5 percent share of the U.S. auto market, followed by midsize cars with 21.3 percent, small cars with 19.9 percent, pickups with 13.4 percent, SUVs with 7.7 percent, luxury cars with 7.5 percent, vans with 5.2 percent and large cars with 1.7 percent.
America’s love affair with large, truck-frame-style SUVs seems to have cooled in favor of the lighter, car-based CUVs, experts agree. Only about 25 percent of U.S. vehicles currently are built on truck frames vs. about 50 percent historically, says Richman at Kaiser, with about half of those pickup trucks and SUVs being used for commercial purposes.
This shift toward smaller vehicles also opens up opportunities for aluminum, magnesium, carbon fiber and plastics suppliers, Krupitzer admits, as carmakers strive to remove mass from their vehicles without compromising passenger safety. He is optimistic the steel industry will maintain its share of the auto market, however, through the use of new high-strength and advanced high-strength steels and new manufacturing technologies that allow them to be used where needed. (For more detail on the steel industry’s automotive materials strategy, see Krupitzer’s column in this month’s Business Topics, page 2.)
At the same time, the aluminum industry is working to make its case for a larger slice of the automotive pie. Aluminum’s share has been creeping up gradually for the past 40 years, but Dick Schultz, managing director of Ducker Worldwide, Troy, Mich., expects an unprecedented jump in the coming years as carmakers struggle to reach the government’s aggressive fuel-efficiency goals. Aluminum’s share of the average U.S. passenger car will go from the current 343 pounds up to 550 pounds by 2025 despite its higher cost, Ducker predicts, mostly through gains in the use of aluminum sheet and extrusions in body structures and closures.
Over the same time period, steel content per vehicle will decline to 46 percent from the current 58 percent, with a shift from mild steels to high-strength low-alloy and advanced high-strength steels, Ducker forecasts. With the shifts in steel and aluminum content, as well as increases in the use of magnesium and certain other lightweight materials, the average vehicle will be approximately 400 pounds lighter, Schultz says.
Steel industry executives foresee a much different scenario, with steel holding on to most of its share.
Steelmakers such as Nucor, ArcelorMittal and ThyssenKrupp are working vigorously with the auto industry, through joint projects such as the Auto Steel Partnership, to develop lightweight steel solutions in automotive design.
“Steel remains and will continue to be the low cost, low emission lightweight material solution for automobiles,” says John Ferriola, president and chief operating officer of Nucor Corp. Charlotte, N.C. Steel—particularly steel produced through the minimill process—is much more environmentally friendly than alternative materials in their production phase, he says. “As automobiles increase their fuel economy, the material production phase becomes more important in the total lifecycle assessment of each car. By 2025, we estimate the production phase of a vehicle will have more impact on the environment than the use phase of that vehicle.”
Keith Laurin, director of automotive sales for ThyssenKrupp Steel USA LLC, Calvert, Ala., admits that aluminum has inherent advantages for some powertrain applications, as well as in wheels and some closures. But for high-volume applications, steel holds up well, both in terms of reducing weight and cost, he says. “There is more and more activity on steel design initiatives and such new auto manufacturing technologies as tailor rolled blanks and hot stamping, which bodes well for steel,” Laurin says. “Steel will prove itself.”
“We have done studies that show auto companies can use advanced high-strength steels without a significant cost penalty [vs. mild steel] and, in many cases, there is a cost benefit,” adds Robert Dicianni, marketing manager for ArcelorMittal USA, Chicago. “Even though the steel they are buying is more expensive on a per-ton basis, they use less of it, which results in the potential for a cost benefit.”
Not all steelmakers currently make the more advanced high-strength steels, and make them well, notes Dicianni. “Companies that are lagging behind today will try to catch up over the next several years, and companies that are leading today will try to move into even more exotic steel grades.” As a result, Krupitzer adds, just about every North American steelmaker serving the automotive market is either adding new lines or upgrading existing ones, bringing on new high strength steel, annealing and galvanizing capacity.
Nucor, for example, has invested over $1 billion in the past three years on new equipment and new products designed to grow its automotive business. The company has installed vacuum degassers at two mills, has invested $300 million on SBQ expansion, and spent over $100 million to expand its sheet width capabilities to 72 inches, among other improvements. Approximately 10 percent of Nucor’s sheet business is now automotive related, Ferriola says.
In January, Severstal North America hot-commissioned a 500,000-ton-a-year exposed hot-dipped galvanized and exposed hot-dipped galvanneal line in Dearborn, Mich., which will produce, among other products, high-strength and advanced high-strength steels for the automotive market. Some of the capacity from that line will also be used by other high-end markets, including the appliance and furniture industries.
Much of the galvanized capacity at the new ThyssenKrupp Steel USA facility ramping up in Alabama is aimed at supplying the automotive market, particularly the New Domestic facilities in the South. U.S. Steel reportedly is restarting another galvanized line in Hamilton, Ontario, in May.
Aluminum producers are making similar moves, including Alcoa’s $300 million investment in its Davenport, Iowa, facility and Novelis Inc.’s $200 million Oswego, N.Y., expansion.
At the end of the day, achieving the needed fuel economy will not just be a matter of choosing steel or aluminum. Automakers will have to take a holistic approach to materials, design and technology, says Richman at Kaiser. “Weight reduction is expected to deliver about a 2-3 mpg improvement in fuel efficiency, but the new CAFE standards require at least a 22 mpg improvement. Weight reduction can account for about 10 percent of that reduction, but the rest needs to come from new technologies.”
Richman maintains that the aluminum industry doesn’t see the new advanced high-strength steels as competition. “The steel industry has done a superb job with what they can do,” he says, but the auto industry will have to think beyond advanced high-strength steels—and even beyond aluminum—to meet its ultimate goals. “The vehicle of the future is not going to be a monolithic vehicle,” he says. “The body in white will have aluminum, steel, magnesium and other materials in it, as well.”