Date: 2013-08-01

Fuel efficiency target to impact auto sector steel demand

Fitch Ratings said that tough new vehicle fuel efficiency targets in Europe and the US are likely to lead to lower sales volumes for steel companies. But higher prices for lighter, stronger steels should favor well-funded manufacturers that have the resources to invest in product development over companies that make less sophisticated components, such as heavier structural parts.

However, steelmakers will have to make lighter products without compromising strength or safety in the face of competition from aluminium, magnesium or carbon fibre alternatives. Arcelor Mittal has indicated that components made from its third generation Advanced High Strength Steels will be up to 27% lighter than those made using current grades, while retaining similar strength. A weight reduction of this magnitude implies a similar fall in steel volumes consumed by the automotive industry.

Fitch said that we expect companies such as Areclor Mittal or South Korea's POSCO to be relative beneficiaries of the changes because they have the financial resources to invest in new product development and have close global partnerships with auto manufacturers.

The continued increase in the number of vehicles produced, due to demand from emerging markets, should offset some of the decline. The new steels will also sell at a significant price premium to existing standard automotive grades reflecting the additional processing required and the special characteristics of the steel. Arcelor Mittal's high strength Usibor steel, for examples, is press-hardened with an aluminium-silicon alloy coating.

Auto manufacturers are targeting weight reduction to meet additional higher fuel efficiency targets for the next generation of vehicles developed between 2017 and 2020.

In Europe current proposals are for a CO2 emission target of 95 gram per kilometer by 2020 on average for the industry with a subsequent reduction to a target corridor of 68 gram per kilometer to gram per kilometer by 2025. It remains unclear if these proposals will be passed into legislation.

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