January 17, 2023

The research firm AutoForecast Solutions believes that the ongoing semiconductor shortage will weigh on global automotive production this year, and there are potential consequences for both the steel and aluminum markets. AutoForecast estimates that North American vehicle production will be down 900,000 units, while European production could drop by over 800,000. As for Asia, they expect Chinese production to be down by nearly 200,000, while the rest of Asia could be lower by 700,000. This brings the total estimated global loss to at least 2.6 million units.

These estimated losses for 2023 add to the nearly 8.1 million vehicles since January 2021. According to AutoForecast’s estimates, North American production has been hit the hardest, with 3.29 million total vehicles lost in 2021 and 2022.  According to the American Iron and Steel Institute's (AISI) Automotive Program, the average North American vehicle contains 1,980 lbs of steel, of which approximately 1,480 lbs are flat-rolled products. Approximately 486 lbs of aluminum are used in each vehicle as well. (Source: Argus)

As automotive production has dropped in recent months, so too have steel prices. Prompt-month (January) CME HRC futures are down nearly 50% from the highs of mid-March. This could be a good time for steel end-users to hedge future needs into 2023 by buying CME HRC swaps. Using swaps converts a variable cost into a fixed cost, thereby ‘locking in’ a price for the hedged steel. Since CME HRC swaps are thinly traded, we suggest using limit orders to establish a specific steel price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (1/17/2023)

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