Ford (NYSE:F) just updated its 2013 guidance and provided a somewhat dour outlook for 2014. The shares fell hard. If you own steel manufacturers you have to ask yourself if Ford's tough year is going to translate into a tough 12 months for the steel industry.
The big headline grabbing quote from Ford wasn't that 2013 was likely to be a good year for the company. It was that "Ford generally remains on track to achieve its mid-decade outlook, but its targeted global Automotive operating margin of 8 percent to 9 percent is at risk." Investors don't like it when a company says that it is "at risk" of missing projections. No wonder the shares gaped lower on the news.
Worse for Ford shareholders, the automaker warned that next year will be a tough one with lots of new product launches pressuring results amid heightened industry competition. While that's bad news for Ford, it doesn't mean steel manufacturers like AK Steel (NYSE:AKS), U.S. Steel (NYSE:X), and Nucor (NYSE:NUE) need to worry.
Sales and Aluminum
However, looking a bit harder at Ford's 2014 sales estimates changes that view a bit. Essentially, the only market in which the automaker is expecting notable growth next year is China. That country is expected to see at least a 600,000 vehicle volume uptick. The United States and Europe could see growth, but the low end sales volume estimates are for essentially flat or lower sales.
That's not surprising since Europe and the United States are both mature markets. However, flat sales doesn't translate into more steel demand. Couple that with a shift toward lighter materials like aluminum, which Ford is planning to use in an updated version of its popular F-150 pickup, and U.S. steel producers could be looking at a tougher auto market.
A dimming bright spot
A demand slowdown in the auto space would be a big problem for steel. That's because, as Nucor CEO John Ferriola said during his company's third quarter conference call, "energy and automotive are two of the strong markets out there today..." If auto sales slow at the same time that alternative materials gain share of key products, Nucor might not have much to crow about on the auto front. And, it has "a very strong participation..." in autos so Nucor would definitely feel the pinch.
So would AK Steel, which gets about half of its sales from the auto sector. That said, James Wainscott, AK Steel's CEO, offers a positive: "The outlook for 2014 is also quite good and even beyond that as automakers begin to look at making more automobiles in America for consumption here and for export around the world."
Building more cars domestically for export would clearly offer an offset for the steel industry hit if U.S. sales trends slow at automakers like Ford. But will it be enough to stem the impact of the nascent shift toward alternative materials like aluminum and carbon fiber?
Not the end of the road
Clearly Ford's announcement isn't the end of the road for steel. But U.S. Steel's CEO Mario Longhi pretty much summed up an industry wide trend when he explained that, "The U.S. automotive market is a strategic priority for us..." If Ford's 2014 call is the start of a slowdown, steel makers could see a recent bright spot dim. That would be bad for U.S. Steel, Nucor, and AK Steel. If you own any steel shares, you should be keeping a close eye on the auto sector right now.
Why is China's market such a focal point? We offer more insight here:
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford and Nucor. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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