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Automotive Metals Market

Detour Ahead?

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If the Trump administration relaxes fuel-efficiency and emissions standards, will it help the American auto industry or slow the pace of innovation? 

The recovery of the North American automotive industry, now in its eighth year, seems to have amazing staying power, which is good news for suppliers of steel and aluminum. Opinions are mixed, however, about the possible effects of regulatory changes now under consideration in Washington.

As part of his America First agenda, President Trump has proposed new trade policies designed to discourage the outsourcing of jobs to low-wage countries, including renegotiating the North American Free Trade Agreement and levying a border adjustment tax on imports. The administration also has proposed relaxing “burdensome regulations,” including vehicle fuel efficiency goals and standards for reducing greenhouse gas emissions. Striving to meet a corporate average fuel economy standard that calls for the nation’s fleet to achieve an average of 54.5 miles per gallon by 2025 has driven unprecedented innovation by makers of steel and aluminum as they work with vehicle manufacturers to reduce the weight of cars and trucks. Easing fuel economy and emissions targets is unlikely to ease the sense of urgency automakers and their suppliers feel about making vehicles as efficient as possible, experts say.

Last month, President Trump withdrew the Environmental Protection Agency’s final Light Duty Vehicle Emission Standards determination issued in early January just before President Obama left office, restoring the originally scheduled mid-term review. The EPA, under its new administrator Scott Pruitt, will issue a new 2022-2025 emissions proposal later this year to be followed by a final rule in 2018. The National Highway Traffic Safety Administration’s CAFE standard of 54.5 mpg is also under mid-term review, and a final rule will be issued next spring. 

Jody Hall, vice president, automotive, for AISI’s Steel Market Development Institute in Detroit, believes NAFTA has helped North America be more competitive in the global automotive arena and has spurred U.S. investment in Mexico and Canada. Should NAFTA be renegotiated, it could slow future investment, she says, though it is unlikely to change the supply chain that is already in place. 

The proposed implementation of a border adjustment tax or BAT, which rewards exporting but penalizes importing of inputs, components and finished products, has created tremendous concern in the auto industry, says Bernard Swiecki, senior project manager with the Center for Automotive Research in Ann Arbor, Mich. The problem, he notes, is that auto supply chains are very complex with inputs coming in from around the world. 

With automotive materials and components crossing the border in different forms as many as four or five times, a BAT would be a very unwelcomed development, says Ricardo Fioramonte, ice president of sales and marketing at Gerdau Special Steel North America, Jackson, Mich. Such a tax could add dramatically to the cost of each vehicle.

There has also been talk in Washington of as much as a 20 percent tariff on imports. “If there is anything close to that, it could be devastating,” says Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa. Plummer notes that almost 60 percent of the 3.4 million light vehicles produced in Mexico last year were exported to the United States. 

Placing tariffs on imports from a country like Mexico would raise the price of vehicles to American consumers, but it would not necessarily shift auto production from Mexico to the U.S., experts say. In fact, it could actually cost American jobs. For example, the Chevrolet Trax, when assembled in Mexico, has 55 percent U.S. and Canadian content. The same vehicle, assembled in South Korea, has only 5 percent North American content, says Mike Jackson, senior manager for North American vehicle production forecasting at London-based IHS Markit.

“A drastic or abrupt change in the supply channels could create some sourcing problems,” adds Tim Bilkey, managing director at Voss Industries, Jeffersonville, Ind. Auto production’s continued strength, combined with the Trump administration’s plans to bolster the energy sector, also could squeeze metals availability, warns John Anton, director of steel analytics for IHS Markit’s pricing and purchasing service. “The question is if there will be enough sheet production capacity to support both the automotive and energy markets.”

Bilkey is among the many who are optimistic about auto production and sales for the next few years, barring a major supply chain disruption. “It’s hard to believe that volumes will remain at 17 million-plus for another three or four more years,” he says. But that’s what the experts are forecasting. 
North American auto output hit another record in 2016 at 17.8 million light vehicles, more than double the 8.6 million in 2009, Jackson notes. Sales are likely to decline slightly this year to about 17.6 vehicles as dealers work down a temporary buildup of inventories. He predicts that by 2023, North American output could climb to 18.5 million vehicles, even though U.S. demand for automobiles is expected to slow in 2018. 

Vehicle sales may plateau in the U.S., but at a high level, and they could stay there for five or six years, Swiecki says. “Typically, we would have already entered the downside of the cycle a year or two ago and would have already seen significant declines.” 

Low gas prices at the pump continue to boost sales of larger vehicles, which is a positive for metals suppliers. While North American output of passenger cars declined 8 percent last year, production of light trucks, including pickup trucks, minivans, sport utility vehicles (SUVs) and crossover utility vehicles (CUVs), increased 7 percent, Jackson says.

As recently as 2010-12, the vehicle mix had been 60 percent passenger cars and 40 percent trucks. Since then, the figures have flipped, says John Tomas, director of global automotive marketing for Arconic, the New York-based aluminum maker. 

According to Plummer at Metal Strategies, trucks accounted for 61.9 percent of all vehicles produced in North America last year. The top three selling vehicles in the U.S. are pickup trucks. Light trucks have also become more popular elsewhere in the world, supporting North American light truck exports. Although the amount varies by model, light trucks use nearly twice the amount of steel as passenger cars, as well as more aluminum. 

Demand for CUVs—small SUVs built on a unibody like a passenger car—has been especially strong, says Gerdau’s Fioramonte. In addition to being larger than traditional passenger cars, CUVs have many light truck features, such as all-wheel-drive transmissions, which add more gears and shafts to the vehicle. Thus, their designs use more special bar quality steel, in addition to higher volumes of sheet products. 

Rising consumer confidence and job growth suggest that the truck segment could make further gains, says Swiecki. “When we have a good economy and cheap fuel, these are the vehicles that Americans buy.” 

The mid-term review of the CAFE standards could see the target moved down to about 50.8 mpg, says Hall at SMDI. The 54.5 mpg mark was originally set assuming that light trucks would account for only 40 percent of all North American light vehicles. “This doesn’t mean the fuel economy or GHG emissions standards will be relaxed. It’s just based on the mix of vehicles being sold,” she points out. 

Others predict the standards will be lowered or the automakers’ deadline will be extended. “In any case, the auto industry will always be planning for the future—including beyond the four to eight years that the Trump administration will be in office—anticipating that the changes will eventually become necessary. They are just hoping they might have a little more time to work on it,” Hall says. 

Even if the NHTSA does adjust the CAFE standard in its final ruling, that will not likely change the pace of automakers’ R&D aimed at improving the fuel efficiency of their vehicles, says CAR President Jay Baron. “Many cars are on global platforms. If you reduce the regulations in the United States, that doesn’t make the car competitive in China, Europe or wherever else
it might be sold.” 

Metals suppliers take a similar view. “Whatever happens regarding the fuel economy regulations, we will continue to collaborate with our customers to offer them lightweight solutions at the lowest possible cost,” says Ganesh Panneer, vice president and general manager of automotive at Atlanta-based Novelis, Inc.

But it does inject uncertainty into the market, including what the ultimate mix of steel, aluminum and other materials will be, says Charles Chesbrough, senior economist at the Original Equipment Suppliers Association, Southfield, Mich. “While we aren’t hearing that companies are ending their investment strategies, I would not be surprised if some put investments on hold.” 

Jackson at IHS Markit notes that different automakers are taking different approaches to the materials they use. Ford, for example, will double down on the initial move with its aluminum-bodied F-150 pickup truck and introduce other aluminum-intensive vehicles including its Super Duty and Expedition models. Meanwhile, General Motors and Chrysler are taking a more mixed material approach. Certain new models, such as the Cadillac CT6 and Chrysler Pacifica, do use a significant amount of aluminum, but aren’t as aluminum intensive. 

Improving fuel efficiency is not only about making vehicles lighter. Changes in drive train technology are equally important, say the experts. This has both positive and negative implications for steel bar producers. Smaller engines generally use less special bar quality steel, but because new engines are more powerful, there has been some switching from cast iron to steel crankshafts. Advances in transmissions, including the new 9- and 10-speed speed gear boxes, call for more SBQ. “There also has been a need for cleaner, more tailored chemistries, which is good news for SBQ,” says Shawn Seanor, executive vice president for sales and business development at TimkenSteel in Canton, Ohio.

From 2015 to 2025, assuming the CAFE standards remain at 54.5 mpg, the total amount of steel sheet per average light vehicle will decline by 454 pounds to 1,780 pounds, estimates Plummer at Metal Strategies. That will include declines in both mild and high-strength low-alloy steels, countered by gains in advanced high-strength steels and ultra-high strength steels. At the same time, aluminum content will rise to an average of 210 pounds per vehicle. 

Hall says automakers have told SMDI they prefer to use AHSS in body and chassis components because of its cost effectiveness and strength. “The added strength of AHSS allows auto engineers to use less of it to deliver the same or even better performance in the vehicle while achieving mass reduction,” she says. “Also, the automakers’ capital intensive infrastructure is already set up mainly to handle steel grades.”

The first of the long-awaited third generation AHSS grades, which offer similar strength with better ductility, are starting to hit the market. Hall notes that those already commercialized, including a 1,180 megapascal grade, are better described as introductory Gen 3 grades. More true Gen 3 products are expected later this year.

Aluminum continues to make inroads into automotive applications, largely at the expense of mild steel. Tomas, at Arconic, says aluminum’s growth has exceeded his expectations. Panneer at Novelis holds a similar view. He says 5000 and 6000 series aluminum alloys have competed effectively against mild steels in vehicles, while some high-yield or 7000 series aluminum alloys have made smaller gains versus high-strength steels. 

Aluminum is inherently lighter than steel, but it is also more expensive. Aluminum has found wide application in hoods, deck lids and other closure panels, but at a cost. Aluminum usage may be nearing a critical mass as it approaches the limits of automakers’ cost sensitivity, Jackson says.

Processors serving the automotive supply chain are wondering whether to place their bets on steel, aluminum or both. Michael Kruse, vice president of marketing at Heidtman Steel Products in Toledo, Ohio, says his company has chosen to concentrate solely on steel for the time being. “We are keeping the door open to possibly change our minds sometime in the future, but right now we would rather concentrate on processing steel, including AHSS, which we have worked with for many years,” he says.

To date, the role of the service center in the automotive chain has been somewhat limited, adds Robert LeClercq, director of automotive for Heidtman Steel. The primary opportunity is in toll processing. “Our services are needed to process the steel being used, but mills are looking to sell AHSS directly to the auto OEMs. This has made it hard for service centers to engage in materials discussions.”

Cleveland-based toll processor Ferragon Corp. launched Autolum Processing Co., a subsidiary to process automotive aluminum, in 2013. But Ferragon President Eduardo Gonzalez has since placed a new bet on automotive steel with the installation of a continuous annealing line at its HyCAL Corp. facility in Gibraltar, Mich. HyCAL produces hydrogen quenched advanced high-strength steels on a toll basis. “I believe we will produce steel that has more consistent metal properties than the AHSS currently being produced through a rapid water quenching process. It could revolutionize AHSS manufacturing,” Gonzalez claims.

Regardless of changes on the political front, which would take time to have effect, 2017 should be a good year for the automotive supply chain, even if volumes taper off slightly in the second half, Plummer says. “Automotive has been a star performer and it should continue to see solid performance for the next several years.”

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