The semiconductor chip shortage that has restrained a rebound in the automotive sector is poised to extend into mid-2022 or later, contributing to a steel inventory overhang that could dampen prices, according to analysts and forecasters.
Fastmarkets AMM
September 28, 2021
The automotive sector is a major end market that accounts for 27% of steel demand in the United States, according to Deloitte.
“It’s [a] very serious challenge because the auto industry is running out inventory,” according to David Whiston, a US auto equity strategist at Morningstar. Automakers have about 1 million units in inventory, down sharply from a year ago “and probably the lowest level in 70 years,” Whiston told Fastmarkets.
The automaker inventory levels look even more precarious in the wake of a recent significant downgrade in the forecast for North American and global auto production from IHS Markit, a London-based market information and analytics company.“
There has been significant deterioration in the near-term outlook for light vehicle sales and production in all markets,” IHS said on September 16. “This remains primarily due to the ongoing semiconductor shortage, yet is also influenced by other supply chain challenges, Covid-19 flare-ups and shipping/logistics difficulties, among other factors.”
IHS lowered its September forecast for North American production for 2021 by almost 733,000 units (5.29%), to 13.12 million units from last month's forecast of nearly 13.86 million units.
IHS' North American production forecast for 2022 has been lowered to 15.23 million vehicles, down by 1.99 million units (11.56%) from the forecast of 17.22 million new cars last month; and for 2023 IHS has forecast North American vehicle output will return to normal levels of 17.16 million units, exceeding the pre-pandemic production level of 16.31 million units in 2019.
KeyBanc Capital Markets steel equity analyst Phil Gibbs said the downgrade in IHS' forecast is an important one the steel industry should not ignore.
“While the IHS forecast may be considered pessimistic, it is believed that it reflects conditions on the ground in September,” Gibbs told Fastmarkets.
The lowered IHS forecast sticks a pin in the more inflated outlook for steel demand and pricing, according to Gibbs.“I think there was a lot of hope that the chip shortage will mitigate in [the] second half of this year. That also kept up the balloon in pricing,” he said.
The expectation of an earlier end to the chip shortage contributed to “an overbuild and overbuy of auto steel the last couple of months,” Gibbs said, referring to steel purchases within the automotive supply chain. People expected the weakness in automotive “would be all over - like magic fairy dust - in the second half [of the year]. It didn't happen. Now we are left with too much steel,” he said.
Gibbs noted that current domestic auto production is only about 80-85% of normal. Yet steel prices are at levels that typically occur when automotive production levels are 15% over normal, he noted.Gibbs was also skeptical of arguments that point to outages in the fourth quarter as a key reason steel prices are at such currently high levels.“If you had a massive infrastructure bill next year, and auto building was 20% over normal levels and oil and gas were ripping, and the economy is not losing momentum, I could buy into that [view that pricing levels reflect underlying demand],” he said.
Gibbs also noted that other commodities like iron ore, lumber and oil are trading closer to normal levels, while steel is not.Fastmarkets’ daily steel hot-rolled coil index, fob mill US was calculated at $98.25 per hundredweight ($1,965 per short ton) on Monday September 27, up by 0.32% from $97.94 per cwt on September 24.
The chip challenge
So why is it taking so long to end the chip shortage?
“It can’t get better fast. You can’t just magically open new plants and make new chips. There's a huge lead time in change in chip production," Whiston said.
Taiwan Semiconductor Manufacturing Co (TSMC), for example, has been expanding its capacity to meet automotive demand in the US and worldwide. TSMC is the world's largest chip provider, supplying 52.9% of global production in the second quarter of 2021, according to TrendForce.
CC Wei, vice chairman and chief executive officer of TSMC, offered some insight into its efforts to close the gap in chip production.“From chip production to car production, it takes at least six months to reach the automotive [original equipment manufacturers] with several tiers of suppliers in between," Wei said during a quarterly earnings conference call in July. "However, we have worked dynamically with other customers to reallocate our wafer capacity to support the worldwide automotive industry."
As a result of the shift of TSMC's production to automotive customers, Whiston said he expects the company to manufacture enough chips to meet demand from its automotive customers in the fourth quarter of 2021.Even so, the closing of the chip gap for automakers will happen gradually, Whiston said. “Optimistically, the shortage will end by the middle of next year.
”North American automakers are also working to reduce the risk of supply chain interruption that comes from relying on overseas suppliers for the bulk of their needs, according to Joseph McCabe, president and chief executive officer of AutoForecast Solutions LLC.“
If certain foreign countries control our technology, that’s a big problem,” he told Fastmarkets.“There’s more potential for captive [semiconductor] supply chains,” McCabe said, in which North American automakers acquire chip manufacturing facilities or build them domestically, especially in places like Arizona where seasonal interruptions from weather are less of a factor.
Indeed, the world's major chipmakers are beating a path to Arizona and other US states to build new chip factories.
In June, TSMC began constructing a $12-billion chip factory in Arizona, the first of six that the company said are planned in the state. However, volume production of chips at the factory will not begin until 2024.
US semiconductor giant Intel on Friday was reported to have broken ground on two new computer chip factories in Arizona in a $20-billion effort to address the chip shortage.The world's second-largest chipmaker, Samsung, also announced on Friday that it intends to build a new plant in Taylor, Texas.
Also, at least temporarily amid the current chip shortages, some manufacturers have eliminated some non-safety related chip-enabled features in some light vehicles in order to keep current production going, McCabe said.Looking more long term, once more consumers turn to electric vehicles, automakers will need even more advanced chips, thus increasing overall chip demand, he said.
