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Auto industry recovery takes metals along on the ride

Keywords: Tags  auto industry, auto production, auto sales, flat-rolled steel market, Paul Taylor, National Automobile Dealers Association, Don Johnson, General Motors Ford

With the second quarter beginning, a key question for the metals sector is which gear is America in right now? By early March the answer appeared to be “drive.” The Dow Jones Industrial Average had reached a four-year high, jobless benefit claims were at a four-year low, the unemployment rate had fallen for four straight months and economists said that all 12 major economic indicators were pointing upward.

But well before all that news, the auto industry was in recovery throughout 2010 and 2011, leading the way in creating demand for steel, aluminum and other metals. The industry’s fortunes have a direct bearing on sales of flat-rolled steel, a staple of the automotive industry’s North American assembly plants.

Just a few months ago things looked much bleaker. But fears of a double-dip recession in the United States, a pending European economic collapse and supply chain interruptions caused by the Japanese earthquake and tsunami in March didn’t detour U.S. auto sales in 2011.

The auto industry is on track to sell about 14 million vehicles this year, analysts predict, well above the 12.7 million cars and light trucks sold last year and 11.5 million in 2010 and a significant rebound from 2009, when only about 10 million vehicles were sold (see graph). However, the figure is still far below the 17-million-vehicle level reached in the early 2000s, when the industry was riding high, credit was readily available and cars were racing out of showroom doors.

As the U.S. economy continues to improve this year, Paul Taylor, chief economist at the National Automobile Dealers Association, predicted that 13.945 million new cars and light trucks will be purchased or leased in 2012. Taylor cited three key factors for the increase: aging vehicles, affordable credit and aggressive incentives.

A significant factor that will drive new-vehicle sales in 2012 is pent-up demand in the market caused by more consumers
shopping out of necessity to replace their
aging vehicles. “With the (average) age of cars and trucks on the road today at nearly 11 years, consumers can no longer delay making a purchase of a new or newer vehicle,” Taylor said.

Another factor that is likely to result in higher auto sales this year is the availability of affordable credit from competing lending sources for auto loans. “Interest rates on new-car loans will remain historically low in 2012, due in part to policy decisions by the Federal Reserve Board to keep rates low and the U.S. economy growing,” Taylor said. “As a result, affordable credit will be widely available in 2012, with more automaker finance companies offering low-interest and interest-free loans for up to 60 months.”

Taylor noted that both domestic and international automakers will wage an aggressive battle to capture U.S. market share in 2012 by rebuilding a diverse selection of vehicle inventory at dealerships, ranging from cars and crossover vehicles to truck-based sport utility vehicles.

“Auto sales typically increase with the exposure given to new vehicles during the auto show season in the first quarter and beyond,” he said. “Lower vehicle costs for car buyers through manufacturer incentives and rebates, combined with low interest rates, will support stronger sales in 2012. And higher prices on used vehicles mean higher trade-in prices when shopping for a new car or truck.”

The U.S. auto industry sold slightly more than 910,000 vehicles in January, an 11.2-percent increase from the same month last year. Chrysler Group LLC continued the momentum that it enjoyed in the last half of 2011, with January sales up 43.5 percent, and Mazda Motor Corp.’s sales were up 68.2 percent from a year earlier. The European brands captured 9.8 percent of the industry market in January, with Volkswagen Group sales up 47.9 percent, Audi AG sales 19.7 percent higher and Daimler AG sales up 23.3 percent. The small-car segment captured 19.9 percent of the industry market, with sales up 13.3 percent.

Even though January sales were higher than a year earlier, they were down from what industry analysts described as an unusually strong December. Still, automakers are sanguine.

“I would characterize the consumer mode as one that has an element of caution. We’re still seeing some volatility in some of the economic news, but in general it is much more positive than it was six months ago,” said Don Johnson, General Motors Co. vice president of U.S. sales operations. “This tells us that our forecast for the year of a slowly growing industry ending up between 13.5 million and 14 million units is still bang on” (AMM, Feb. 2, 2012).

Ford Motor Co. economist Jenny Lin said that employment gains in recent months and improved job prospects for consumers will continue to support vehicle sales, as will low interest rates guaranteed to last through late 2014. She deemed improvements in the manufacturing purchasing managers index and durable goods orders as “very encouraging, suggesting that the positive momentum should continue in the first quarter.”

One of the clear signals that manufacturing gains are having an impact on the metals sector was that U.S. steel production rose 7.9 percent in 2011 compared with the previous year, according to the American Iron and Steel Institute. Final figures show that mills produced an estimated 95.6 million tons of raw steel last year vs. about 88.6 million tons in 2010, operating at an average capability utilization rate of 74.7 percent vs. 70.4 percent in 2010.

Many analysts and metals sector executives have attributed much of that growth to the rebound of the auto industry—growth that continued well into the first quarter of this year. By March 10, U.S. steelmakers had produced nearly 19.2 million tons of steel at an average capability utilization rate of 77.7 percent, up 7.1 percent from 17.92 million tons at an average capability utilization rate of 74.5 percent in the same period a year earlier.

The AISI report wasn’t the only good news closing out 2011. The big three Detroit automakers—General Motors, Ford and Chrysler—held a key inventory advantage over their competitors, which led to higher U.S. new car and light truck sales late last year, Taylor said. “The Detroit Three dealers had nearly 50 percent of the inventory available for sale during December, and collectively enjoyed sales increases of more than 12 percent for the month,” he said. “The inventory advantage for manufacturers based in North America will provide sales momentum during the first quarter of 2012.”

Economic growth has slowed in Europe as a result of the sovereign debt and banking difficulties there, he added, but Volkswagen, with manufacturing plants in the United States as well as Europe, made significant U.S. sales gains in December.

To better compete with the Detroit brands, Taylor expects auto manufacturers in Asia and Europe to focus on the growing U.S. light vehicle market by accelerating their efforts to rebuild inventories of cars and light trucks at U.S. dealerships.

“Looking ahead, aging light vehicles currently on the road at more than 10.7 years old, affordable credit and added incentives from manufacturers struggling to regain market share will drive stronger light vehicle sales as 2012 unfolds,” Taylor said. “Interest rates remain at historic lows and cash incentives are likely to be a part of several automaker efforts to regain market share.”

The late burst of sales last year has carried over somewhat into 2012. Manufacturing jobs increased by 50,000 in January, adding to the 32,000 created in December, according to U.S. Labor Department figures. Many analysts said that auto sales have been a major contributor to the good jobs news.

Of the 50,000 increase in factory employment, 44,000 came from makers of durable goods, such as vehicles, metals and other parts used in automobiles. Job growth was seen in fabricated metal products, machinery, and motor vehicles and parts. Durable goods manufacturing has added 418,000 jobs over the past two years, according to the Labor Department statistics.

But there is still a long way to go, as the Steel Manufacturers Association (SMA) pointed out last fall in “21st Century Steelmakers,” its public policy statement. As many as 5 million U.S. manufacturing jobs were lost during the first decade of the 21st Century, the trade group said.

SMA member companies account for more than half of the steel produced in the United States, and the association noted that restrictive taxes, as well as environmental and trade policies, hamper the nation’s manufacturing sector. The SMA has called for a “manufacturing leap forward,” spurred by a smaller budget deficit, adjustments in international currency relationships, tax policies that encourage domestic manufacturing, a national energy program and a major initiative to rebuild U.S. infrastructure.

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