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Must-know: Why it makes sense to hold on to steel companies

Part 3
Must-know: Why it makes sense to hold on to steel companies (Part 3 of 6)

Must-know: Why auto sales put steel companies in top gear

Rising auto sales

After analyzing construction activity, we’ll take a look at the automotive industry. The automobile industry is the second biggest consumer of steel. ArcelorMittal (MT) is the largest supplier in this segment, with United States Steel Corporation (X), Nucor Corporation (NUE), and Steel Dynamics (STLD) also supplying to major auto companies. Auto sales aren’t just increasing in the U.S. Auto sales are increasing globally.

It’s important to note that the SPDR S&P Metals and Mining ETF (XME) is an exchange-traded fund (or ETF) that invests in steel companies in the U.S.

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Auto sales reach pre-crisis levels

While the construction industry is still a shadow of its pre-crisis levels, auto sales have been steady. The previous chart shows the seasonally adjusted auto sales figures. As you can see, the recovery of the automobile industry has been much faster and steeper, when we compare it with construction recovery. The seasonally adjusted annual rate (or SAAR) has been greater than 16 million for five months in a row. This year also marks a fifth consecutive year of an increase in sales.

Can auto sales maintain the momentum?

According to estimates, the U.S. economy is expected to grow by ~3% this year. The consumer confidence index is improving and banks are confident of lending. These points are good for the auto industry and would counter the impending interest rate hike.

Bill Fray, the Toyota division vice president, commented recently, “Rising consumer confidence, coupled with momentum in the marketplace, boosted auto sales in July.”

A lot of these sales have been driven by discounts and zero interest rates offered by companies. A section of analysts have questioned the sustainability of the rising sales, but the mood at dealerships and auto companies is buoyant. New models, rising consumer confidence, and attractive discounts are expected to keep the auto sales high in the near term.

Next we’ll look at the energy sector, which is another key consumer of steel products

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