Taking the brakes off auto production

By IM Staff
Published: Monday, 08 June 2020

Steel mills and service centers expect a slow restart to auto making, reports Gregory DL Morris.

After a jarring suspension of automobile manufacturing in response to the global Covid-19 pandemic, the restart of car production will be less like the green flag at the start of a race and more like a green light at a busy intersection: everyone wants to go, but only a few will have a chance to proceed at a time.

"Everyone has lost sight of inventory," said Peter Neuberger, president of G&L Tube, a subsidiary of O’Neal Industries. "Our suppliers don’t know how many coils we have, and we don’t know how many tubes all of our customers have. I do know that we were still shipping to assembly plants for a few weeks after they stopped, so we assume they have a few weeks of inventory.

"We have excess inventory, too," he added. "And when the assembly plants say they are restarting, that means just getting back on site and preparing. We may not order steel for three or four months."

For all the merits of enterprise-resource planning and supply-chain management software, much of the system still relies on shoe-leather and human expertise to report actual levels. Generally, a mill or service center gets a blanket purchase order (PO), covering as much as a year, which serves as an agreement on price and total volume. Actual planning begins two or three months in advance of a shipment or release date, with fine-tuning possible until about a fortnight before.

"At two weeks out the PO goes hard," Neuberger said. "If you’ve got 10,000 feet on order at that point, you’re getting it." 

He explained that most of the blanket POs in the auto sector are still in force, but suspended by contractual force majeure declarations. "We are not going back into production until the FM is lifted, or at least we have a commitment for delivery from a customer.

"That is why we are anticipating a slow restart," Neuberger continued. "The second quarter was really depressed. We hope the third quarter will get back to 50% of pre-pandemic levels."

Unknown automotive demand
A key industry-wide unknown is what high US unemployment levels will do to vehicle sales. Given all the market uncertainties, companies throughout the supply chain are doing their best to work together. The American Iron & Steel Institute said that it "has continued our collaboration, through virtual means, to develop efficient ways for applying the new grades of AHSS with our producer members, OEMs, and suppliers. In addition we have taken this time to provide training to enable engineers to hit the ground running when production does come back on line."

Several sources concurred that some model years will be shuffled: some of 2021’s will be cancelled and the current model run into next year. Conversely, some makers will use the opportunity to retool and just start making 2021 models. Some types may be dropped entirely.

"I would not be surprised if the car makers have already made those decisions," said one source. "I would also not be surprised that they have not told any of their suppliers yet."

US Steel announced operating reductions in late March and during its first-quarter earnings call on April 30. "In several instances, we moved up planned maintenance to coincide with the change in demand," Anthony Ashe, vice president of sales, marketing, and business development, told Metal Market Magazine. "In adjusting our footprint to accommodate with the changing Covid-19 landscape, one of the Gary Works blast furnaces was banked, a method that can provide hot iron within a week of restart. This provides flexibility to start, based on market demand."

The company has also realized benefits from its automotive research center. "We spend a tremendous amount of time and resources working with our customers in development of new materials, such as our XG3 Advanced High Strength Steel (AHSS)," he added. "Those same Qualification & Launch teams in Troy [Michigan] are leading the engagement with our customers and our internal support teams to efficiently manage both the wind down and the ramp up that’s starting just now," in mid-May.

"We see signs of strength in the automotive recovery," said Ashe. "Reductions in April were not as large as expected and there are indications of strengths in some geographies and specific vehicle platforms. We have taken a balanced approach to slowing production to balance OEM production, inventories, and demand, yet provide flexibility to support the automotive OEMs as they ramp back up." 

Based on conversations with OEMs, service centers, stampers, and analysis of market communications, "We believe that there are different demand and inventory levels depending on varied demographic factors," said Ashe. "While we are in the middle of [overall] reductions of demand, there are some cities and states where demand is relatively strong and car inventories are depleted. That is largely a function of financing deals, and that particular location’s socioeconomic impacts from the pandemic."

Signs of resilience
Outside of automotive, some metals end-use segments have been resilient. "We have a broad range of customers and markets," said Ashe, "such as appliance, electrical, industrial, and packaging. [The latter] has been extremely strong and we’ve been pleasantly surprised with the resiliency in the appliances." 

Phil Gibbs, metals and mining director and equity research analyst at Keybanc Capital, confirmed "folks shipping auto steel have not gone to zero. They have gone lower, but they have not gone to zero because materials need to be procured well in advance of manufacturing. Demand for cars has imploded, but it is important to recognize that the supply chain has not gone to zero. Inventories will be out of whack for a few months, but mills have done a good job."

He counted ten blast furnaces down. "This is the most domestic upstream steel capacity off line in my career. I don’t even remember that many during the financial crisis." Blast furnaces are the primary source for sheet steel for automobiles. "Overall the auto segment is about 25% of domestic steel demand," said Gibbs. "That is second to construction at 40%. But for flat-rolled, auto is 40%. The integrated mills are taking it the hardest because they have the most exposure to autos and also energy. There is a magnifier effect. If overall GDP is down 5%, steel may be down 20% or 25%."

In contrast, car making accounts for 36% of aluminium consumption, at least in Europe, according to the trade association European Aluminium. Noting the deep reduction in car making, the association stated, "aluminium production in Europe (alumina, primary, recycling, semi-fabrication and some final production) is at risk." It advocates a three-part program including a "scrappage premium" for older cars, similar to what was called the "cash for clunkers," initiative in the US. The European association also urges regulatory authorities to resume operations quickly to approve new types, and that the EU should support charging stations and other infrastructure to expand alternative-fuel use.

Offering some positive news for North America, Gibbs said that with the restarts in car making, even if slow, "things probably don’t get any worse for steel. And the early auto sales data for May show strong numbers, if off a low point. "May could be 10 million units, and we could get to as many as 13."

Facing challenges
The challenges and vagaries of restarting the auto metals supply chain were readily apparent for Jamie Hansen, director of sales and marketing for the North American melt-shop division of AMI Automation. "We have a customer running a trial of our [EAF optimization] technology. For the initial trial they were sold out, so the goal was to improve productivity. As soon as the system was implemented, they switched to efficiency to save costs."

One of the keys to AMI’s technology is remote monitoring and collaboration with operators in the melt shop. "Over the weekend the customer dialed in a different power program," Hansen related. "So we called and asked. They told us, 'yeah, we knew you’d notice. We are running hard during off-peak hours when electricity is cheaper, then dialing back during days.’ They can tell us what the melt schedule is for today, but won’t know about next week."

While giving credit to the blast-furnace operators for doing what they can in such uncertainty, Hansen asserted that "in a choppy market, the EAFs will benefit." And by choppy he noted that "one client ran for five days in April, and if they run nine days in May they will be doing well."

Hansen also lauds some mills for being innovative in adding services and cutting lead times for automotive components. "One client of ours installed a paint line. It used to be a three-month lead on painted sheet from their mill to the assembly plant. Now it’s two weeks because they do the painting themselves. That is real value to the assembler. The progressive mills are the ones taking the advantages."

He also noted that as the supply chain comes back to life, some new calculations will be made about value. For years inventory has been seen as a cost, rather than insurance against supply-chain upsets. "The problem today is not waiting for parts domestically. The problem is if you are waiting for a part from Italy," he said.

Truck sales dented
Most of the attention in the North American road-vehicle market has been about the consumer segment, passenger cars and light trucks. While cars are an important segment, "trucks are the backbone of the economy," said Steve Tam, vice president of (American Commercial Transportation) ACT Research. "Trucks have still been working."

Commercial-vehicle manufacture was largely unaffected in March, but was shuttered for most of April. That includes Mexico. The closures were strictly for worker safety, not because of supply-chain or sales issues.

"Truck sales have declined," said Tam, "but not dried up completely the way we saw in cars. Sales were dented but did not disappear. The decline was about 25%, but that was still 12,000 to 13,000 Class 8 vehicles," which are the heavy tractor/semi-trailers.
There had been a hope that truck manufacture would be able to resume about the same time as light vehicles, but by press time it seemed as though the soonest could be early June. As with the car lines, "the restart will have some lag because the supply chain will be starting at the same time," said Tam.

Most optimistically, those concerns are strictly logistical, not in terms of supply. "In our conversations with OEMs they have not expressed any concern about steel," Tam stressed. "The expectation is that the manufacturing and logistics will be slow walking, so the assembly plants are not worried about metal."

There is also little long-term concern for structural changes in the segment as have been expressed for car making. "People have done a very good job in the past couple of months finding substitutes for travel," said Tam. "But there is no substitute for freight. There might be some change at the margin but we don’t see much change.

"There may be some slowing as the economy slows," he added, "but there may also be an increased need for trucks because new public-health rules could slow the velocity of [each shipment]."