Automotive Steel Segment A Bright Spot For Steelmakers

BMI View : As the Chinese economy rebalances towards a more consumption-driven growth model, demand for automobiles will remain strong, creating opportunities for steel manufacturers such as ArcelorMittal, which plan to supply high-grade automotive steel to automakers in China.

ArcelorMittal, the world's largest steelmaker, announced on June 14 that it plans to use its Chinese joint venture (JV), Hunan Valin Steel Co, to supply ultra-high-strength steel to meet fast-growing demand from China's automotive sector and offset the slackening demand seen in other product segments. The firm's strategy chimes with BMI's bullish outlook on the Chinese auto market.

BMI forecasts domestic auto production to grow at an average rate of 7.4% per annum over the 2014-2018 period, to hit 31.7mn vehicles by 2018. It has been our long-held view that suppliers and automakers alike will face attractive market opportunities due to these heady growth rates over the coming years.

Bullish Production Outlook To Bolster Suppliers
China - Domestic Auto Production, Units (LHS); % growth (RHS)

BMI View : As the Chinese economy rebalances towards a more consumption-driven growth model, demand for automobiles will remain strong, creating opportunities for steel manufacturers such as ArcelorMittal, which plan to supply high-grade automotive steel to automakers in China.

ArcelorMittal, the world's largest steelmaker, announced on June 14 that it plans to use its Chinese joint venture (JV), Hunan Valin Steel Co, to supply ultra-high-strength steel to meet fast-growing demand from China's automotive sector and offset the slackening demand seen in other product segments. The firm's strategy chimes with BMI's bullish outlook on the Chinese auto market.

BMI forecasts domestic auto production to grow at an average rate of 7.4% per annum over the 2014-2018 period, to hit 31.7mn vehicles by 2018. It has been our long-held view that suppliers and automakers alike will face attractive market opportunities due to these heady growth rates over the coming years.

Bullish Production Outlook To Bolster Suppliers
China - Domestic Auto Production, Units (LHS); % growth (RHS)

The JV, which starts operations this month, has a CNY5.2bn (USD835mn) facility with an annual production capacity of 1.5mn tonnes. The factory will focus on making steel used in structural parts, chassis and wheels in the auto sector as well as steel used to make household appliances. According to ArcelorMittal, the JV will supply a wide array of automakers operating in China including foreign brands such as Volkswagen AG, General Motors Company and Ford Motor as well as domestic carmakers such as Zhejiang Geely Holding Group Co. and Chery Automobile Co.

Another trend, which will provide a tailwind to the auto sector, is the rebalancing of the Chinese economy away from an investment-led model to one where consumption makes up a bigger share. This shift in resources away from construction and heavy industries towards the consumer goods sector will provide strong support for vehicle demand, and concurrently, ensure auto production growth remains resilient to fulfil this demand.

In fact, this economic rebalancing will go on to create winners and losers in the steel sector. There is significant overcapacity in the Chinese steel sector, as the economic rebalancing has resulted in a slowdown in demand growth for steel used in the construction industry. As the accompanying chart below highlights, the surplus in the crude steel balance will gradually narrow over the coming years as domestic steel manufacturers shutter their excess capacity in the face of falling demand growth, weak margins and Beijing's push to eliminate overcapacity in heavy industry.

Strong Automotive Steel Demand Bucks Trend
China - Crude Steel Balance

On the other hand, demand for high-end automotive steel remains robust and this has created a shortage for this type of steel in the market. Before ArcelorMittal's Chinese JV was ready for production, the firm previously imported steel produced outside the country to supply automakers in China. Steel manufacturers are now moving into this underserved market by setting up domestic JVs to produce automotive steel ( see 'Rebalancing Presents Niche Opportunities In Steel Sector', October 2013), which is a high margin product, and we remain positive on the growth potential of this market.

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This article is tagged to:
Sector: Autos, Metals
Geography: China
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