The automotive industry's recovery is a tale of two trends - production and sales - and while a strong rebound in production has a more immediate impact on demand for steel, so far the bounce back has been greater in sales.
This has translated into a slower rebound in steel demand, American Iron and Steel Institute (AISI) chief economist Timothy Gill said.
“The auto market situation has certainly been a negative hit. Shipments of [hot-rolled coil, cold-rolled coil], galvanized sheet, some bar products – they are all down on a year-over-year basis through the first five months of the year,” he told Fastmarkets.
“It’s too early to confirm from the data, but it’s likely that shipments to the auto industry have been rallying to some degree as auto production has picked back up,” Gill added.
The hit to steel has been concentrated in CRC and galvanized sheet, according to John Catterall, vice president of the automotive program at AISI. “Car and truck bodies are predominately constructed from cold-rolled material because gauges have been reduced due to lightweighting,” he said.
Fastmarkets’ weekly price assessment for steel cold-rolled coil, fob mill US was at $31.25 per hundredweight ($625 per short ton) on Thursday July 30, down by 3.8% from $32.50 per cwt on July 23 and 20.9% from this year's high of $39.50 per cwt in mid-January.
Fastmarkets’ weekly price assessment for steel hot-dipped galvanized (base) steel coil, fob mill US was at $31 per cwt on July 30, down by 3.1% from $32 per cwt a week earlier and 21.5% from this year’s peak of $39.50 per cwt in mid-January.
Shipping data from the AISI highlights the impact of Covid-19 by steel product category.
Shipments of cold-rolled sheet fell by 11.9% in the first five months of 2020 (to 3.94 million net tons), far exceeding the 3.7% decline in HRC shipments (to nearly 8.8 million tons).
The hit to galvanized sheet was even greater, with a 13.8% drop in shipments to 5.52 million tons.
Raw steel data also provides some hints about the impact of the Covid-19 induced shutdown and subsequent restart of the automotive industry, according to Gill.
“We have more recent data on overall raw steel production, and we know that has picked up. Raw steel production fell by 40% from late March through late April. Capacity utilization fell as low as 51% in early May, but it has rebounded to 59% since then,” he said.
Steel capacity utilization was 58.9% for the week ended July 25, according to AISI data. For the year to July 25, US facilities produced 44.55 million tons of steel, down by 20% from nearly 55.71 million tons in the same period of 2019.
This year, steel capacity utilization peaked at 82.7% in the week ended January 18 and bottomed at 51.1% in the week to May 2, according to AISI.
This twist on the relationship between automotive production and sales is a break from what normally happens during a downturn, according to Charlie Chesbrough, senior economist and senior director of industry insights at Cox Automotive.
“Normally when we have a recession, consumers pull back and factories are humming along and incentives are needed to move them,” he told Fastmarkets.
“This time, however, factories shut down the same time consumer demand shut down. Now we see demand coming back much faster than supply from the depths of the crisis, while inventories are down significantly,” he added.
Demand has been driven, in part, by 0% interest rate financing and extended loan terms that have sent consumers shopping for new vehicles, Chesbrough said.
Typical new car buyers have a somewhat higher income, and job losses among this population segment have been much lower than for lower-income households, which usually don't buy new vehicles, he noted.
Light vehicle sales volumes stood at a seasonally adjusted annual rate of 13.05 million units in June, according to data from the Federal Reserve Bank of St Louis updated on July 31, up from 12.2 million units in May. Volumes had plunged to 8.74 million units in April after reaching 16.77 million units in February.
Strong demand from the automotive sector has led to facility restarts. Cleveland-Cliffs Inc, for example, cited auto demand for the decision to resume operations at facilities that had been temporarily idled due to the Covid-19 pandemic.
Similarly, U.S. Steep Corp pointed to strong demand from the sector, among others, to justify its decision to restart various blast furnaces and increase prices.
General Motors Co chief financial officer Dhivya Suryadevara told CNBC on July 22 that the company expected new car sales to reach a seasonally adjusted annual rate of 14 million units for the second half of 2020.
Chesbrough forecast new vehicles sales at 13.2 million units for 2020, and does not see a full rebound to last year’s 17 million units until the first quarter of 2021.
Auto's bumpy ride
In terms of production, the auto industry's journey during the pandemic has followed a more difficult path than new vehicle sales.
While US light vehicle assemblies for 2019 averaged 10.53 million units on a seasonally adjusted annual basis, the first-half 2020 average fell to 6.58 million units and second quarter of this year logged an average of 3.63 million units, according to vehicle assembly data published by the Federal Reserve.
Looking more closely at individual months, the severity of the downturn and the extent of the recovery can be more clearly delineated. From the high of 11.08 million light vehicle assemblies in February, production fell to 6.99 million units in March and 80,000 units in April.
Volumes recovered modestly to 2.56 million units in May before reaching 8.27 million units in June.
The first-half light vehicle assembly rate marked a 4.15-million-unit (39%) drop from the first half of 2019, when the seasonally adjusted annual average totaled nearly 10.74 million units, Federal Reserve data from July 2019 show.
Katelyn Drake, an analyst at market research organization LMC Automotive, estimated that extended pandemic-related shutdowns reduced planned vehicle production by 2.8 million units in the first half of 2020, with full-year production forecast to be 3.4 million units (21%) below levels recorded last year.
Drake attributed the auto industry's slow ramp-up in production to a lag in reopening by most factories in Mexico versus the US. While most factories in the US and Canada opened on May 18, automakers in Mexico did not resume production until the end of May - and in some cases not until June 16.
Plants are now required to immediately suspend operations and implement sanitization procedures if an employee tests positive for the virus. If a supplier has to shut down, if only for hours, it could force assembly plants to close their doors as well, since most of them have just-in-time shipments, Drake added.
Domestic producer advantage
One positive for steel is a shift in consumer preferences away from low-mileage cars toward high-mileage light trucks and sports utility vehicles (SUVs), which are typically produced domestically. This shift creates more demand for domestically produced steel, according to Gill and Catterall.
“Over the last several years, the relatively low price of gasoline has helped to move the market in the direction of light trucks and SUVs. Consumer preferences have evolved over time. That segment continues to gain market share,” Catterall said.
Light trucks, which include SUVs, represent 77% of total sales volumes, he noted.
"That may have something to do with declining gasoline prices. This is good news, as a little more steel goes into these vehicles,” Catterall added.
One industry source indicated that pent-up demand is unlikely the big driver of new light vehicle sales, noting that consumers are likely to buy as their earnings and financial situation permit.
“I don’t know that demand was jammed that badly. Having an 10-12% unemployment rate is not consistent with a dramatic growth in auto demand,” this industry sourced added.
Steelmakers have been able to respond to rising demand while sales continue to improve. “I don’t anticipate that’s going to be a problem. For one thing, [electric-arc furnace steelmakers] just by the nature of the process are very flexible and can adjust to market conditions,” the same source said.
This source noted that the integrated mills are a little bit of a different story, though.
This is "due to the nature of the production process with blast furnaces. They take longer to shut down safely and effectively and longer to ramp back up,” he said.
“We have already seen three of them have now restarted a couple of US blast furnaces. These are sophisticated planners. They know when their customers are looking for their products,” this source added. “If there are going to be supply chain bottlenecks, I’m confident it’s not going to be the steel that’s causing it.”
When it comes to purchasing, the consumer is alive and well, Chesbrough noted. “One thing we are seeing is that people are still willing to buy,” he said.
Chesbrough expects steel factories to meet any rise in auto demand. “It will take awhile to get factories up to production,” he said.
But given that the size of the market for new sales has declined overall, steel factories don't have to come all the way back to where they were before the pandemic.
“We’ve knocked millions off the number of vehicles produced in this market. If steel wasn’t going to have a problem with [the] old market, they will not have a problem with the new market,” Chesbrough said.