by Lisa Reisman
Has aluminum or even carbon fiber eaten steel's lunch in the auto sector?
Some say yes, and according to this cleverly titled article, "Steel is Cooked if this Auto Trend Catches Fire," AK Steel (AKS) and Nucor Corp. (NUE) should receive a "warning shot across the bow." But we think Motley Fool has it wrong in at least one sense - not all steel companies will suffer the same "light-weighting" fate.
Let's examine the two companies in the Fool article, AK Steel and Nucor.
AK Steel's automotive sales comprised 45% of total revenues in 2012 as compared to 36% in both 2011 and 2010, according to the latest annual report. Certainly the automotive sector remains critical to the growth (some would argue survival) of the company. AK Steel has also taken an aggressive stance in another of its markets, GOES (grain-oriented electrical steel), by jointly filing an anti-dumping case with competitor Allegheny Technologies (ATI). Industry insiders in that market, however, believe the case has more to do with a lack of innovation and R&D on the part of the domestic producers (Allegheny Technologies and AK Steel) than anything else.
And that raises an interesting question. How much innovation and R&D has the steel industry poured into automotive to continue to develop lighter high-strength steels? The answer looks like some, for sure, but probably not enough and certainly not enough to stop the aluminum or carbon fiber momentum.
Ford Motor's (F) decision to switch to an aluminum body on the F150 did not go down well within the steel industry, according to insiders. But that switch does not impact all steel companies equally. Perhaps a better way to think about the impact of light-weighting on the steel industry involves identifying how much automotive exposure each steel company has and which companies must lead the way from an R&D standpoint.
On the first point, Nucor likely has less than 10% of total sales coming from the automotive industry (Nucor does not break down sales by industry, only product group), whereas companies such as US Steel (X) and ArcelorMittal (MT) have a substantial percentage of their revenue coming from the automotive sector. "About one fifth of the global car production is made from ArcelorMittal steel, and we have an industrial presence in 22 countries spanning four continents," according to Arcelor's website.
In fact, in 2011, ArcelorMittal's automotive division globally generated over $14.2 billion in revenue for the 13.4 million tons of flat steel it produced. U.S. Steel shipped approximately 3.2 million tons of steel to the "transportation sector," which includes automotive shipments, according to its latest annual report. Total U.S. Steel shipments for the year based on 2012 data equated to 21.7 million tons with transportation totaling 14.5% of its revenues. Severstal (OTC:SVJTL) also has significant automotive exposure.
But the steel industry does not appear as financially healthy as it did prior to the recession. Nucor sits in a strong position comparatively, but because it has the least amount of automotive exposure, the company has less of an incentive to invest big in automotive steel applications.
And that's too bad, because the automotive sector - currently one of the largest for the steel industry - will need to ratchet up its game to avoid the anticipated loss of "steel share" within the average car: from 1,542 pounds to 980 pounds.