EV affordability drive may help retain SBQ demand: analyst

A drive by electric vehicle (EV) manufacturers to improve the affordability of their cars may upend an expectation by some market observers that future EV dominance of automotive production will sharply reduce demand for special bar quality (SBQ) steel

According to Phil Gibbs, senior equity analyst for metals and aerospace at KeyBanc Capital Markets Inc, a growing focus on EV affordability “is going to pivot the conversation back a little bit toward steel,” Gibbs told Fastmarkets in an interview on March 2.

Cost-conscious EV makers who previously dismissed the material for some components and parts may want to revisit SBQ, given that the cost of competing metals and materials are “multiples” of those for steel, according to Gibbs

There’s a reason why SBQ has a pole position in automotive in general, relative to other modalities

Gibbs said, referring to SBQ’s lower cost when compared with other steel products.

Manufacturers of the internal combustion engine (ICE) automobiles rely on SBQ steel for tough precision parts and components that face high stress levels, such as crankshafts, bearings and gears.

Gibbs disagrees with the view of some in the market who say SBQ “is going to lose all its share and go to zero in autos.”

The challenge for SBQ is that steel also weighs more than other competing materials, and EV makers focus on reducing overall body weight to improve the range of EVs.

SBQ steelmakers have taken up that challenge and are “doing their best to evolve [steelmaking] technology” to meet the needs of EV manufacturers, the analyst said.

A lot is at stake for SBQ manufacturers: Automotive market demand represents 2.25 million-3 million tons a year, half of the estimated overall annual SBQ demand of 4.5 million-6 million tons, according to Gibbs.

SBQ steelmakers “have clearly realized they’re not going to have as much content [vs ICE automobiles],” but EVs also require axles, suspension systems, wheel bearings, gears and other parts made from SBQ, the analyst noted.

“The strengthening and the light-weighting and the ability to make these tough precision parts — all that you need in electric vehicles as much as you would need them in internal combustion engine autos,” Gibbs said.

The analyst pointed to Gerdau Special Steel North America’s $400 million investment in its Monroe, Michigan SBQ plant over the past decade as evidence of the industry’s commitment to the future of SBQ steelmaking.

Gerdau’s continuing investment in the Monroe mill allows the steelmaker “to cater to the future needs of our clients and continue searching for solutions for hybrid and electric cars segments,” Gustavo Wernek, Gerdau SA president and chief executive officer, said on March 1, during the company’s fourth quarter 2022 earnings call in Sao Paulo, Brazil.

Affordability has become a focus for EVs, in part because higher prices and soaring financing costs are steadily shrinking the pool of potential buyers, Gibbs explained.

So far, growth of the EV market has been largely in sedans, “a market that has been shrinking for two decades,” Gibbs said.

Future growth is more likely to come from EV versions of the mid-sized to large vehicles preferred by US consumers, the analyst said.

While EV sedan prices have edged upward, from around $30,000 to around $45,000, EVs for larger sized cars have moved upward from around $50,000 to around $70,000, Gibbs said.

“So, you know, are you going to tell somebody who has a preference for mid-to-large sized vehicles that they’re going to make that change?” Gibbs asked.

Trying to sell EVs with an appeal to reducing the potential customer’s carbon footprint is not a winning argument with these buyers, Gibbs said, “because if they were driving mid-to-large vehicles, to begin with, they totally don’t [care] about miles per gallon.”

Gibbs said senior executives in the EV sector are “worried” that the affordability challenge will slow the advance of EV market share from current levels, citing Tesla’s focus on affordability at the company’s investor day event on March 1.

The next generation of Tesla is designed to be built in much smaller factories with fewer parts, Tesla senior design executive Franz Von Holzhausen said at the event. “[This] means we can build factories faster, with less capital expenditures and more output per unit.”

Von Holzhausen said the new “third edition” of Tesla’s manufacturing platform will make it possible to reduce the cost of making the next generation vehicle by “as much as 50%.”

Fastmarkets’ monthly price assessment for steel bar hot-rolled special bar quality (SBQ) 1-inch round 1000 series (carbon), fob mill US was $64 per hundredweight ($1,280 per short ton) on February 17, up by 3.23% from $62 per cwt on January 20.

Fastmarkets’ monthly price assessment for steel bar cold-finished 1-inch round 1018 (carbon), fob mill US was $85 per cwt on February 17, rising by 2.41% from $83 per cwt on January 20.

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