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Auto Steel is a Global Bright Spot

By Reuben Gregg Brewer - Mar 27, 2014 at 12:48PM

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AK Steel has been talking about the positives of the U.S. auto sector; essentially the same trend that ArcelorMittal is working to take advantage of in China.

The steel industry has been plagued by overcapacity in recent years. However, there have been some bright spots, including the auto sector. AK Steel ( AKS ) has been touting its growth in that sector domestically, but China is also seeing increased demand for lightweight auto steel. ArcelorMittal ( MT -1.99% ) is looking to sate that demand.

Too much steel, mostly
AK Steel hasn't been shy about its concerns over imported steel, with CEO James Wainscott saying in the third quarter that, "...we should not have to compete with unfairly traded imports, which are dumped here at below-cost prices and are subsidized by foreign governments, which is exactly what we are competing against today."

(Source: Bundesarchiv, via Wikimedia Commons)

He was specifically speaking about electrical steel, an important industry segment for the company. However, he isn't alone in his concern about the impact of the global steel industry's overcapacity. For example, Nucor ( NUE 2.73% ) CEO John Ferriola has called overcapacity the, "...greatest threat..." to the industry, singling out China as a prime culprit.

That said, both AK Steel and Nucor have been doing well in the auto sector. AK Steel, for example, saw sales in the auto sector rise by 8% in 2013. And, while electrical steel is important for AK Steel, the auto sector is even more important because it represents about half of the company's business.

Nucor's Ferriloa noted in his company's fourth quarter conference call that, "...automotive is very strong now... we believe it will continue to be strong for a while. So our focus will be to continue to move into more automotive applications." He's looking for 5% growth in that segment in 2014.

A global phenomena
So even though the steel industry is suffering through overcapacity concerns, there's clearly sizable demand in some areas. And that's particularly true for companies capable of producing the right varieties of steel, like AK Steel in the auto sector. However, this isn't just a U.S. trend. China's auto sector is growing up fast and that means notable demand for auto steel.

That's why ArcelorMittal has a 49% stake in an auto steel joint venture with Valin Steel Co Ltd of China. According to Wang Jun, chairman of the joint venture, "As China's automotive industry continues to grow rapidly, demand for automotive steel is also rising both in terms of volume and quality." ArcelorMittal is hoping this joint venture will gain market share from the 1.5 to 2 million tons of automotive steel imported into China annually.

But ArcelorMittal isn't alone, South Korea's POSCO ( PKX -1.13% ) noted growth in the auto sector when it reported 2013 results, with auto steel sales up 8%. It just built an auto steel plant in China, so it too, is hoping to gain market share as more Chinese auto steel is made domestically. It's worth noting that POSCO is expanding its auto steel presence in India and Mexico via new plant openings, as well.

(Source: Taneli Rajala, via Wikimedia Commons)

Everyone loves cars
Clearly, auto is a bright spot for steel the world over. That's backed by results at big automakers like Ford ( F -3.67% ), where CFO Robert Shanks noted during his company's fourth quarter conference call that the company's wholesale volume in China was up 50% in 2013. No wonder the broader steel industry is excited about the auto market. For starters, there's growth around the world. And secondly, based on the import of auto steel into China, there isn't much in the way of oversupply and dumping going on.

Although this one niche in the steel industry isn't enough to justify jumping aboard a steel maker, it does provide a glimmer of light at the end of the tunnel. AK Steel is big in the niche, but it's been losing money for five straight years. Nucor, which has only posted a loss once in the last decade, might be a better bet if you are looking to invest in a U.S. company. For direct Asian exposure, POSCO and ArcelorMittal are good options, but make sure to closely examine their global footprint before buying in.

And it's worth looking beyond steel in China's auto sector...

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

ArcelorMittal Stock Quote
$27.59 (-1.99%) $0.56
Ford Motor Company Stock Quote
Ford Motor Company
$19.14 (-3.67%) $0.73
AK Steel Holding Corporation Stock Quote
AK Steel Holding Corporation
Nucor Corporation Stock Quote
Nucor Corporation
$110.50 (2.73%) $2.94
POSCO Stock Quote
$59.47 (-1.13%) $0.68

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