Despite a few uncertainties, the automotive
market appears to have momentum going forward.
"Long term, the automotive production and
consumption markets look good," said David Martin, steel
analyst at Deutsche Bank Securities Inc., New York. "Foreign
owners of U.S. assets want to sell to that market, even though
domestic car manufacturers continue to suffer at the hands of
With most transplants opting to set up plants in the South,
Martin expects more and more steel investments will be made
where those plants are located, meaning less in the Northeast
and more in the Southeast. Offshore producers of cheaper slab,
mostly in Brazil, pose a threat to U.S. steel mills and might
even invest in U.S. rolling facilities, he said.
While he doesn't expect any significant
increase in interest rates that would impact consumer spending,
Martin wonders how many Americans are financing their auto
purchases through home equity loans at a time when the housing
market is showing signs of weakening.
"Higher gas prices are also posing a threat
to the SUV (sport utility vehicle) market, and auto
manufacturers have cut production by between 10 and 20 percent
to balance inventories, and that trend will continue," he said.
"But the steel industry is well managed and well balanced, and
it prefers to sell to the auto sector with its value-added
products and a bit of a premium."
Randy Cousins, analyst at BMO Capital
Markets, Toronto, sees the auto and housing sectors as the weak
sisters of the steel industry. The good news is that the auto
industry might have bottomed out while the transplants have
taken up some of the slack, he said. And while auto production
declined to 15.9 million vehicles last year from 16.3 million
in 2005, it wasn't a major drop.
Cousins' favorite tool of the trade is the
new orders category of the Institute for Supply Management's
business index, along with statistics from the Iron and Steel
Statistics Bureau in the United Kingdom and the Metals Service
Center Institute. The new orders index is the best for steel
pricing and demand, though, he said.
Last year, U.S. steel imports reached an
all-time high of 40.4 million tonnes, up 42 percent from 2005.
On the bright side, Cousins said import volumes are declining
partly due to weaker pricing, resulting in less incentive to
ship steel to North America vs. stronger markets around the
"The devaluation of the U.S. dollar vs. the
euro is very positive for North American manufacturing. And
although MSCI shipment figures are down from month to month, on
a yearly basis they're showing signs of firming," he said.
The steel sector views the glass as half full
rather than half empty in terms of auto production, said David
Tyerman, analyst at Scotia Capital Inc., Toronto, who relies on
monthly sales reports from the Big Three and Ward's Automotive
Reports for his analysis. "Things are better than last fall for
the flat-rolled guys, but it would be a mistake to say the
sales side is better. We still have a negative second quarter
(year over year), but it's still possible we'll have a positive
second half," he said.
U.S. auto sales declined 3 percent through
April, and the best explanation is the fallout from the
slumping housing market, Tyerman said, noting that there is
less cashing out of mortgage refinancing. "Will it get any
worse or are we at the bottom of the cycle? Certainly, the tone
of the Big Three is more cautious. And while the transplants
are performing well, it's not enough to make up for the poor
performance of the other guys. So if you're a steelmaker
selling only to the Big Three, it's ugly," he said.
Research by UBS Securities LLC, New York,
suggests things won't improve in the second half as original
equipment manufacturers remain cautious about consumer demand
as they look to reduce inventory.
Ford Motor Co., Dearborn, Mich., expects
total auto sales to decline to 16.8 million vehicles this year
from 17 million last year, while General Motors Corp., Detroit,
expects overall sales to remain flat. As a result, UBS remains
bearish toward the sector, noting a lack of "pent-up demand" to
drive sales coupled with a weak housing market.