Automobile industry’s steel demand
The automobile sector is the second largest steel consumer in the US. Vehicle sales posted their best year since 2007. In this part of the series, we’ll explore why the automobile sector could post strong numbers in 2015 as well. This will lead to higher steel demand from automobile companies.
Lower gasoline prices
Lower crude oil prices impact the economy in multiple ways. One of the benefits is that it increases US households’ disposable income. Going into 2015, higher disposable income and a strong job market bodes well for automobile demand. The above chart shows the seasonally-adjusted automobile sales in 2014. The demand increased in the second half of 2014. This can be verified in the above chart.
The automobile sector’s strong demand is especially promising for AK Steel (AKS) and ArcelorMittal (MT). These companies produce high-strength steel products for automobile companies. U.S. Steel Corp. (X) is also focusing on automobile sector—under its Carnegie Way program. These companies form the investment universe for the SPDR S&P Metals and Mining ETF (XME). Currently, Nucor (NUE) is one of the ETF’s top holdings.
Last year, car buyers in the US turned to leasing. More than 25% of the vehicles sold on leases in 2014. This is the highest percentage of vehicles sold on leases ever. Historically low interest rates and the launch of new vehicle models drove customers to dealerships in 2014.
The same trend could continue in 2015. Investors should understand that a higher number of leased vehicles would increase resale markets’ supply. However, that risk is still a couple of years away. For now, automakers could continue their good run into 2015.
In the next part of this series, we’ll look at the energy sector’s expected steel demand.