ArcelorMittal Continues Automotive Push With Opening Of New Plant In China

by Trefis Team
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ArcelorMittal (NYSE:MT), the world’s largest steel producer by sales, recently announced the opening of an automotive steel plant in the Loudi Economic Development Zone, situated in China’s Hunan province. The plant is owned by Valin ArcelorMittal Automotive Steel Company (VAMA), a joint venture between ArcelorMittal and Hunan Valin Iron and Steel Company, in which ArcelorMittal holds a 49% stake. The total investment in the plant was $832 million. [1]

The opening of this automotive plant in China is a part of ArcelorMittal’s strategic focus on automotive steel. Given the recovering demand and pricing environment for steel, automotive steel with its relatively high and stable margins, constitutes an important focus area for the company. [2]

See our complete analysis for ArcelorMittal

Steel Demand And Prices

The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy.((ArcelorMittal’s 2013 20-F, SEC))

Steel prices have fallen over the last few years, driven primarily by falling demand due to adverse macroeconomic conditions in the developed economies, and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. [3] Over the course of the last year or so, steel prices have recovered somewhat, driven by an economic recovery in the developed economies, particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. [4]  While it has faltered somewhat lately for the Eurozone, it has still remained above 50 for all months in 2014. [5]

However, faster growth in steel demand in the developed economies will be offset by a slowdown in steel demand growth in China. As per World Steel Association estimates, Chinese steel demand is expected to rise only 3.1% in 2014, as compared to 6% in 2013. [6] A slowdown in Chinese economic growth, particularly in investment and factory output, has tempered the demand for steel. [7] A crackdown on pollution caused by factories by the Chinese government has added to the slowdown. Overall, the Chinese market is characterised by an oversupply of steel, as Chinese demand for steel is estimated to be 721 million tons in 2014, with Chinese steel capacity estimated to be 1 billion tons.((Global Steel Demand  To Slow As Chinese Economy Cools, Financial Times)) Steel production stood at 779 million tons last year. [8]

Overall, global steel demand is expected to rise 3.1% to 1.52 billion tons in 2014, down from 3.6% in 2013, primarily due to lower Chinese steel demand. ((Global Steel Demand  To Slow As Chinese Economy Cools, Financial Times))

With demand for steel still recovering, and a pricing environment that is still relatively subdued, ArcelorMittal has focused on its automotive steel sales. Automotive steel commands relatively higher margins, with 20-30% of the average selling price being attributable to the value-added nature of the product. ((Global Natural Resources Conference, ArcelorMittal Company Presentation))

The Hunan Automotive Plant

The annual production capacity of the new plant will be 1.5 million tons, including 800,000 tons of cold rolled coils, 200,000 tons of aluminum-coated coils and 500,000 tons of hot-dip galvanised coils. It will cover a large range of automotive steel products, including those for visible structural parts, chassis and wheels. [1]

VAMA aims to sell the steel produced at its Hunan plant to international carmakers and automotive suppliers, as well as promote high-end solutions for domestic car manufacturers and their suppliers. These include ArcelorMittal’s major customers in China, such as Volkswagen, GM, Ford, PSA, Daimler-Benz, BMW, Toyota, Honda, Renault, Fiat and Nissan, as well as leading domestic manufacturers such as Geely, Chery, Dongfeng, Guangzhou Auto, Shanghai Auto and Changan.((Valin ArcelorMittal Automotive Steel Co Inaugurates Landmark Automotive Steel Plant In China, ArcelorMittal Press Release))

China currently imports around 1.5 to 2 million tons of automotive steel every year. The new plant, with production capacity of 1.5 million tons, will aim to substitute these imports with domestic production. [9]

ArcelorMittal’s Automotive Focus

Automotive steel is a major thrust area for ArcelorMittal. As per the company’s estimates, its flat products accounted for approximately 17% of the global automotive steel market in 2013. ((ArcelorMittal’s 2013 20-F, SEC)) Shipments of automotive steel accounted for around 16% of ArcelorMitttal’ s total shipments in 2013. ((ArcelorMittal’s 2013 20-F, SEC)) The company’s automotive steel shipments are mainly delivered in the natural geographic markets of its production facilities in Europe, North and South America and South Africa. [10] With the addition of the Hunan automotive plant, the company will significantly expand in China as well.

Automakers globally have been focusing on reducing the weight of their automobiles in order to meet increasingly stringent norms for emissions and fuel efficiency. For example, the U.S. government targets improvements in automobile fuel efficiency from 27.5 miles per gallon in 2012 to 54.4 miles per gallon in 2025. [11] In view of this situation, automotive steel has faced serious challenges from aluminum as a potential substitute material, as automakers look to make lighter cars in order to meet more stringent regulatory standards.

ArcelorMittal has invested heavily in R&D in order to produce advanced high strength steel (AHSS) grades that cater to automobile manufacturers’ needs for fuel economy, safety and reduced carbon dioxide emissions. The company is focused on preventing Original Equipment Manufacturers (OEMs) from turning to alternative materials. Prominent examples of ArcelorMittal’s innovation are the S-in motion project, introduced in 2010, which reduces the body weight of a typical C-segment vehicle by up to 19%. In June 2013, ArcelorMittal launched an innovative ultra-lightweight steel car door, which is 30% less expensive than an aluminum door. Further solutions developed for the pick-up trucks market, offer up to 23% weight savings. [10]The company has increased collaborations with OEMs on co-engineering activities. In 2013, Honda launched a new MDX SUV model incorporating ArcelorMittal’s integrated door ring concept, which combines the benefits of laser welding technology with the high performance of press hardened steel, combining substantial weight savings with a major advance in crash-resistance.((ArcelorMittal’s 2013 20-F, SEC)) The company has thus emphasized on R&D as it strives to keep automotive steel the material of choice for automakers.

Other Developments And The Road Ahead

The company’s recent acquisition of Thyssenkrupp’s steel plant in Calvert, Alabama is aimed at increasing its presence in the North American Free Trade Agreement (NAFTA) automotive steel market, in addition to the market for energy steel. The Calvert plant is a state-of-the-art facility which is capable of producing advanced high strength steels. ((Global Natural Resources Conference, ArcelorMittal Company Presentation))

ArcelorMittal’s management has reiterated its commitment to automotive steel as a major focus area in the company’s strategy. Thus, the company’s thrust on the automotive sector is set to continue. ((Global Natural Resources Conference, ArcelorMittal Company Presentation))

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  1. Valin ArcelorMittal Automotive Steel Co Inaugurates Landmark Automotive Steel Plant In China, ArcelorMittal Press Release [] []
  2. Global Natural Resources Conference, ArcelorMittal Company Presentation []
  3. Steel Billet Prices, LME []
  4. U.S. Manufacturing PMI, Trading Economics []
  5. Euro Area manufacturing PMI, Trading Economics []
  6. Global Steel Demand  To Slow As Chinese Economy Cools, Financial Times []
  7. China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters []
  8. China Steel Mills Have No Cash To Meet Standards-Industry Body, Reuters []
  9. ArcelorMittal’s Path To China Not Paved With Steel, Financial Times []
  10. ArcelorMittal’s 2013 20-F, SEC [] []
  11. Steelmakers Must Step On Gas To Keep Car Work, Financial Times []
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