BMW's (NASDAQOTH:BMWYY) new i3 all-electric vehicle has taken a detour from usual car-building techniques, integrating advanced materials to reduce weight. That's helped the company increase the vehicle's range, reduce recharge times, and is a warning shot across the bow of steel companies like AK Steel (NYSE:AKS) and Nucor (NYSE:NUE).
A weighty issue
One of the biggest factors in how far an automobile can travel for a given amount of energy boils down to physics. Heavier objects are harder to move—lighten the object and it moves more easily. That's why car companies have been looking to integrate lighter metals into their cars. AK Steel and Nucor are both working to create lighter, yet still strong metals to meet that need.
And the resurgence of the U.S. auto industry has been a boon to results in an industry that has been struggling. To give some perspective on that, AK Steel generates about half of its revenues from auto customers. And Nucor considers the car market key to its growth, noting that automotive is one "of the strong markets out there today" in its third quarter conference call.
Fiber is good for you
BMW's new i3 should be a big concern to this steel duo. The automaker has chosen to shift from steel to carbon fiber, trumpeting the use of "extremely strong, yet lightweight Carbon Fiber Reinforced Plastic" in advertising. That's the type of high-tech product made by companies like Hexcel (NYSE:HXL) and Cytec Industries (UNKNOWN:CYT.DL).
Although the technology is used in many fields, the most public shift has been in aviation. For example, by using light weight but strong carbon fiber technology, Boeing's (NYSE:BA) 787 uses 20% less fuel than similarly sized aircraft. That's just the tip of the iceberg, though, because Hexcel brags that its materials are used "on virtually every commercial and military aircraft produced in the western world."
Cytec, which focuses on creating value-added products, counts aerospace, structural adhesives, automotive and industrial coatings, electronics, inks, mining, and plastics as key markets. Although you can find the company's materials in golf clubs, the real growth area is in gaining market share in automobiles and aviation. While BMW's i3 is at the leading edge in the auto arena, the technology is already proving itself at Boeing.
Big trouble in big steel?
That's why you need to watch BMW's i3. For example, one of the reasons why AK Steel and Nucor have experienced such success in the auto space is safety. Steel has historically been the strongest, and thus safest, material to use. If the i3 flounders because customers aren't comfortable with the carbon fiber shift, steel companies will have more time to adjust. If customers don't mind carbon or, worse, if it turns into a selling point, other automakers will jump on the carbon bandwagon.
The next issue to watch will be safety. If BMW's i3 scores poorly in safety testing or if real life results prove that carbon fiber isn't as safe as steel, then there is less to worry about. If carbon holds up to steel's standards, however, AK Steel in particular could face increasing pressure on its top and bottom lines.
Price, though, is probably the biggest hurdle for the technology right now. Carbon fiber is expensive. It's one thing to put it in an airplane and another to put it into a car. BMW is a high-end car company, so it can charge a premium price and get away with it. Ford (NYSE:F) would find that tactic more difficult.
That will help protect steelmakers like Nucor and AK Steel for now. But carbon fiber prices will fall over time. If the price falls enough, the material could even invade other steel strongholds like washing machines, refrigerators, and air conditioners.
Keep a watchful eye
Carbon fiber isn't posing a huge threat to AK Steel or Nucor today. However, BMW's use of the material in the i3 will be an important test for you to watch. If the material proves itself, and the price comes down enough, big steel could see carbon makers like Hexcel and Cytec Industries turn into fierce competitors in more than just the auto space.