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                                    A Novel Year

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                                    A Novel Year

                                    Coronavirus outbreak shuts down assembly plants across North America, leaving the supply chain to wonder how quickly production ramps back up when conditions improve.

                                    The novel coronavirus is turning 2020 into a very challenging and highly uncertain year for the North American automotive market. The outbreak has resulted in the Big Three and some transplant automakers temporarily halting operations out of North American assembly plants.

                                    When the production facilities were initially idled in early March, the hope was they would be back running by the end of the month. Yet as of early April they remained closed, with restart dates still unknown. Abey Abraham, managing director of DuckerFrontier*s automotive and materials practice says this has already begun to have a ripple effect upon the automotive supplier base, even though some North American automakers, including General Motors and Ford, have taken cues from the Chinese auto industry and have stepped up to produce ventilators and possibly personal protection equipment and other needed materials.

                                    ※Overall, 2020 is going to be a tough year for steel demand, specifically auto- and energy-related steel demand,§ says Tyler Kenyon, a metals and mining research analyst for Cowen & Co. He estimates there will be a 10 percent decline in underlying steel demand, including a 15 percent drop in auto-related steel demand, based not only upon the recent auto OEM products cuts, but prospects for more restrained consumer spending and rising unemployment.

                                    Only a few months ago, industry observers predicted only a slight easing on North American output, stabilizing at a still-high level historically. The forecasts at the beginning of the year anticipated production of about 16.5 million units, with possible slight gains to make up from the 40-day GM strike in the second half of 2019. All that has changed. Now several industry analysts, while admitting that they can*t be certain given the fluid nature of the marketplace, are estimating that North American auto output could tumble 10 to 20 percent in 2020.

                                    From the earlier projections of the mid-16 million mark, new projections are much lower. Michael Robinet, executive director for automotive advisory services at IHS Markit, believes production will be down significantly to about 13 million to 14 million vehicles in 2020, largely due to the impact of the COVID-19 pandemic. Not only aren*t the Detroit Three automakers 每 as well as Tesla, which also shut down some of its operations 每 expected to produce the same number of vehicles this year, but several foreign-owned auto OEMs, including Volvo, Volkswagen, Nissan and Subaru, have been seeing some softness.  

                                    Kristen Dziczek, vice president of research for the Center of Automotive Research, is forecasting U.S. auto sales will fall to 13.1 million to 15.6 million units, down from 17 million light vehicles last year and its 17.5 million unit peak in 2016. But she points out that the situation is very fluid, very much depending upon the course of the COVID-19 pandemic and how much impact it would have upon the U.S. economy, given that U.S. automotive sales don*t tend to increase unless there is robust 每 3 percent more 每 GDP growth. As of early April, there was little doubt that the U.S. economy had already fallen into a recession.

                                    Although some type of rebound is expected either later this year or next year, Abraham says it remains unknown when that will occur and what form it will take, although he believes it is very unlikely the 16.7-million unit North American production that had previously been forecast for 2021 will be achieved.

                                    There are so many different variables, Robinet points out, including how quickly it takes for the automakers to come back online, how quickly the auto supply chain will be able to get up and running and if there will be any supply interruptions. ※But perhaps the most important variable will be how quickly demand comes back,§ he says, maintaining that it is more likely to be a U-shaped recovery of U.S. auto sales than a V-shaped recovery.

                                    Robinet*s expectation is that U.S. auto production could return sometime between mid-April and mid-May, depending on when each state and/or municipality comes back up. ※The auto supply chain is very integrated,§ he explains. ※As such, the industry will need to come back online in unison vs. separately from a regional perspective.§

                                    The moves to curtail production were followed by actions at U.S. Steel mills, with several plant closures announced in March. AK Steel temporarily idled its Dearborn Works and Rockport Works facilities, ArcelorMittal idled two blast furnaces at its Indiana Harbor facility and one at its Dofasco operations and U.S. Steel idled its No. 4 blast furnace at its Gary Works and its blast furnace at its Granite City Works.

                                    There have also been some aluminum idlings. For example, in early April, Arconic idled its operations in Tennessee and Massena, N.Y. In mid-March Constellium announced it would be reducing or suspending activities at its aluminum manufacturing sites in North America, Europe and Asia. On the other hand, there is the potential for some additional capacity. Novelis* new 200,000-ton-per-year Guthrie, Ky., plant is slated to come online in the second quarter. The company also announced an expansion at its Greensboro, Ga., plant that, upon completion in 2021, will expand its automotive closed-loop recycling capabilities.

                                    Longer term, the eventual implementation of the United States-Mexico-Canada agreement, as early as July 1, is expected to have a positive impact upon North American suppliers to the automotive market, particularly those from the U.S.  One requirement of the deal is 70 percent of the materials going into North American autos will need to be sourced from the region.  

                                    The content rules will have a more favorable affect upon steel suppliers to the industry, maintains Dziczek. The steel needs to be melted and poured in North America, but aluminum does not, largely because Mexico doesn*t have any aluminum smelting capacity. ※So, we might continue to see imported aluminum ingot and billets that are then rolled and formed in North America.

                                    The future metals mix is very much in flux, especially with the Trump administration announcing at the end of March that it would be rolling back the Obama-era U.S. fuel efficiency and greenhouse gas emissions regulations. This could have an impact upon automakers* lightweighting efforts and thus the materials they will use for their future vehicles.

                                    The Trump administration*s new environmental rules are expected to require automakers to achieve only 1.5 percent annual increases in fleetwide fuel efficiency through 2026 to 40 miles per gallon, compared with the Obama-era rule which had required a 5 percent annual increase to a corporate average fuel economy of about 55 miles per gallon over that same time frame. However, given the great number of automotive platforms that are global in nature, many industry observers say they expect the push for innovations to find lighter weight auto solutions to continue.

                                    Also, Ganesh Panneer, Novelis Inc.*s automotive vice president and general manager, says the new rules could face a legal battle from California and certain other states looking for more stringent environmental standards. ※No one knows how it will go,§ he says. John Catterall, vice president of the automotive program of the American Iron and Steel Institute, agrees, explaining the AISI believes that a well-crafted, CAFE/GHG program can be done.

                                    DuckerFrontier*s Abraham points out that since the Obama-era rules went into effect, automakers had already made a significant amount of fuel efficiency and GHG emissions gains in their vehicles. He says that even with the Trump administration*s new environmental rules, both the automakers and their parts suppliers will continue to pursue those aims.

                                    Not all of the trends are troublesome. The vehicle mix continues to see gains made in the share of light trucks vs. passenger cars or sedans, at least prior to the pandemic, and the low oil prices that have both preceded and were influenced by the crisis should not change that. Those vehicles are more supportive of metals producers that sell into the auto sector.

                                    Christopher Plummer, managing director of Metal Strategies Inc., says sport utility vehicle and pickup trucks consume about 80 percent more steel on average than passenger cars. Even crossover utility vehicles, which have a car unibody as opposed to a truck frame, still consume about 25 percent more steel than a sedan. It is a similar story for the light truck vs. passenger use of aluminum.
                                     
                                    While it is hard to forecast what will happen this year given the current circumstances, Michelle Krebs, executive analyst for Cox Automotive notes that in 2019 about 70 percent all U.S. light-vehicle sales were of light trucks vs. passenger cars. She says that once the COVID-19 spread abates and consumers begin buying autos again, the light vehicle share of U.S. auto sales will continue to make gains, partly because Ford, Fiat Chrysler and, to some degree, GM, announced that they were largely getting out of passenger car business.
                                     
                                    Plummer says light trucks accounted for 73 percent of North American auto output last year with the U.S. light truck share being the highest, at 75.9 percent. As of early March, which was before the Trump administration announced its intention to roll back U.S. federal environmental standards, he was estimating both the North American and U.S. light truck shares would inch farther up over the next several years. DuckerFrontier*s Abraham says that while it is far from certain in the current business environment, it is expected the North American light truck share could grow to about 75 percent by 2025.

                                    While traditionally light trucks have been largely identified as being comprised of SUVs and pickup trucks, CUVs have become a large, and growing, portion of the light truck market. In fact, IHS Markit*s Robinet observes they accounted for 44 percent of all North American auto output and will start approaching about 50 percent of the market by 2021 before plateauing.

                                    Another variable in the auto mix is the electrification of automobiles. Electric vehicles, particularly battery electric vehicles, currently account for a very small share of the total U.S. market 每 as well as the auto market everywhere but in China, Plummer says. EVs accounted for just 2.3 percent of total U.S. auto output last year.

                                    That is likely to eventually change, CAR*s Dziczek says, with most automakers introducing ※an onslaught§ of BEV, plug-in electric and hybrid vehicles, which could make it one of the fastest-growing vehicle segments in the U.S. In fact, Novelis* Panneer says, assuming consumers get over their range anxiety and are willing to buy these new vehicles, EVs alone could make up 8 to 12 percent of the U.S. auto output by 2030, which could have an impact upon metals usage. He maintains that aluminum has a strong value proposition for BEVs given that one way to increase their range is to make them lighter, countering the weight of their batteries.

                                    AISI*s Catterall, however, sees it differently, saying he expects a number of larger traditional automakers to make EVs using a steel architecture. ※It is cost-effective to use steel (including advanced high-strength steel, which can be used for lightweighting) for the vehicle*s primary structure. They need to conserve their money to invest in the battery packs, sensors and cooling systems in the non-electric parts of the vehicle.§ Bala Krishnan, ArcelorMittal*s director of automotive product applications, points out that after building its first two luxury models with aluminum, Tesla shifted to a blend of steel and aluminum for the body and chassis of its Model 3 vehicle.

                                    Catterall added that when it comes to range, given battery costs have come down, it might be more worthwhile for the automaker to add greater battery capacity in its EVs vs. spending more on lightweighting.

                                    There are also more materials implications to EVs. Plummer notes that they use approximately 150 pounds of non-oriented electrical steel per vehicle on top of the electrical steel needed for charging infrastructure.

                                    As far as the automotive materials mix in general, Plummer says over the past several years total steel coil consumption per vehicle has been declining, going from 2,234 pounds per vehicle in 2010 to 1,920 pounds per vehicle currently, with much of that decline being for mild steel and, to a lesser extent, high-strength low-alloy steel. On the other hand, AHSS use has increased to about 440 pounds per vehicle from 225 in 2010, even as the new, Gen3 AHSS is just starting to make its way into the market.

                                    Dziczek says CAR*s Technology Roadmap for Materials and Manufacturing paper forecasts overall steel content will continue to fall over time, with mild steel going from 15 percent in 2020 to 4 percent of vehicle content by 2040. On the other hand, there will continue to be some improvement in use of AHSS and Gen3 steels.

                                    Where auto sales and production will go from here 每 particularly in the short to medium term? That question is just too hard to answer, other than understanding 2020 will be a challenging year. Robinet says suppliers are going to have to be flexible and will have to react quickly to changes in the market. ※Unfortunately, that will take a lot of effort.§

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