The auto industry is facing material headwinds today, including weakening sales and rising costs. That's not a good backdrop for companies that supply large domestic carmakers like Ford (F 6.24%) and General Motors (GM 2.71%). Integrated steel giant Nucor (NUE 1.08%), however, isn't worried. In fact, it still expects to grow its auto business in the years ahead no matter what happens. Here's what's going on.
Definitely not a great picture
Domestic automobile sales have started to slow down in 2019 after a run of solid performance. New-vehicle sales fell 2.4% in the first half of the year, according to Automotive News. Some industry watchers expect the second half of the year will be even worse than the first half when the final numbers come in. That said, there are mixed signals coming from the big auto companies. For example, third-quarter U.S. auto sales for Ford were off by 4.9% year over year, while General Motors saw a pickup of 6% in the quarter but a roughly 2% year-to-date decline through the first nine months of the year. An interesting undercurrent is that both Ford and General Motors have benefited from strength in the truck space, highlighting a key trend: Auto companies are selling more expensive vehicles.
While higher average selling prices have helped support financial results at the automakers, it makes vehicles even more expensive to buy for the general public. That is showing up in seemingly booming used-car sales, helping out companies like CarMax. If customers are increasingly buying used, they aren't buying new -- and that's bad for carmakers and their suppliers. Now, add increasing costs, notably including wage demands from the unions, and automakers don't appear to be in a great position. If sales of high-priced vehicles hit the skids (perhaps because of a recession), there will be trouble in this highly cyclical industry.
On that note, industry suppliers around the world have noted weakness in the auto space, with industrial giants like Eaton and 3M highlighting the sector as increasingly troubled during recent quarterly conference calls. But here's the interesting thing: Steel giant Nucor is excited about its auto business, despite the signs of weakness -- and the numbers back up that assessment.
Expanding a niche
Automotive steel is complex, with the steel industry working to increase strength and reduce weight to help the automakers meet stringent efficiency standards for their vehicles. In other words, the steel that gets sold to carmakers is a specialty product. That's the exact type of market niche that Nucor likes, and it has been working to expand in that area. In spite of the uncertainties in the auto industry, when asked about the sector during the steel company's third-quarter conference call, Nucor CEO John Ferriloa explained:
If you look at the tonnage that we sent into the automotive business this year compared to last year, we're up about 15% constant into automotive this year as compared to last year. So we continue to grow our market share and although the pie is shrinking, we continue to get a bigger piece of that smaller pie. We feel real good about where we are in automotive. We are confident that we'll continue to grow and we look at next year we are projecting for 2020 and 2021 even more tonnage going into those markets.
So, despite what looks like an industry slowdown, Nucor has been able to materially grow its auto sales in 2019. Though that's an impressive feat, what's more interesting is the CEO's confidence for the next couple of years. The near-term trends could change, of course, but the bigger picture is that the auto industry is still a niche that Nucor thinks it can exploit no matter what is going on more broadly. This actually isn't all that unusual -- it's the type of thing that Nucor does on a regular basis.
For example, it is building a couple of mills that make commodity reinforcement bars used in construction. There's nothing particularly special about the product here, except that it's putting the mills in areas where there is little competition. This is notable because it will give Nucor a cost edge since other steel mills have to truck their product into these regions. Even if the construction market turns down, these new mills could still take valuable market share because of the cost advantage they are expected to enjoy. It's the same basic plan: exploit a niche where Nucor can create a competitive advantage.
Nothing new for Nucor
At the end of the day, the auto sector could turn higher or lower and Nucor wouldn't care. It is focused on providing the best product it can at the lowest cost it can. Over the long term, that has consistently led to success. And it's what the steelmaker does throughout its business as it seeks to gain an edge over its competition. The company has clearly shown the benefit of this approach in the auto sector, where it is growing despite the industry's ups and downs. But it is really a sign of the steel giant's approach more than a commentary on the auto sector. In fact, if history is any guide, Nucor is more likely to try and take advantage of a downturn by investing more than it is to pull back. That's the type of business approach that long-term investors could learn to love.