While major steel producers are investing millions to increase
electrical steel production capacity, the rapid growth of the
hybrid and electric vehicle segment could potentially cause
material demand to outpace supply from 2025.
As the automotive industry battles the semiconductor shortages,
which have prevented the production of 9.3 million units to date,
the rapid expansion in growth of EV sales raises questions about
the future availability of sufficient electrical steel needed to
produce electric motors to meet the electrification targets set by
regulators and OEMs around the globe.
Several major steel producers have announced investments in new
xEV steel capacity over the next three to five years, but will this
be sufficient to meet the specific grade and regional requirements
of the xEV market?
What is electric steel? Why does it matter for
automotive?
Electrical steel, or silicon steel, is an iron-silicon alloy
that possesses superior magnetic properties to other types of steel
alloys making it optimized for a variety of electrical machines
ranging from power and distribution transformers to electric
motors.
While electrical steel is estimated by IHS Markit to account for
only 1% of the 2 billion metric ton 2020 global steel market, its
supply is being considered as an increasingly critical input to
OEMs' electrification plans as well as various energy transition
initiatives. An important automotive application of electric steel
in automotive is electric motors. These systems convert electrical
energy into mechanical energy by energizing copper windings in a
stator, which creates a magnetic field then causing the rotor to
spin.
The commercial electrical steel market is divided in two major
categories: grain-oriented electrical steel (GOES) market and the
non-oriented electrical steel (NOES) market.
This distinction is fundamental to understand which type of
electrical steel the automotive industry has an exposure and what
mitigation strategies might be required. GOES is used in static
machinery like transformers, which require unidirectional
magnetization, while NOES is used in rotating machinery like motors
and generators, which require multidirectional magnetization.
Applications for NOES are extensive and include consumer
appliances (washing machines, dishwashers, etc.), heating,
ventilation, and air conditioning (HVAC) (including domestic
refrigeration), automotive applications, small, medium, and large
industrial motors, power generators, pumps etc. Because of the
significantly higher volume of demand for rotating machinery,
global NOES production in 2019 significantly exceeded the quantity
of GOES produced that year.
Carmakers have a direct exposure to NOES, but they are
indirectly also exposed to GOES.
- NOES is a direct material input used in electric motor
manufacturing for both hybrid and electric vehicles, as well as in
many low-power motor applications, ranging from high duty cycle
motors like those used in electric power steering, oil, and fuel
pumps to short time duty motors like those used for comfort and
convenience like electric seat adjustment or sunroof. Some 35 to 45
low-power motors are fitted on average per car, with about 20 in
the B segment and 80 in the E segment (with some extremes like the
Mercedes S-class that has more than 100 motors). - The critical difference between the different motor types is in
the NOES grade being used. For reference, mild hybrid motors use
less than USD10 of high-grade NOES, while battery-electric vehicles
will use anywhere between USD60 to USD150 per motor of an extension
of high-grade NOES, referred to as xEV grade, which in some
configurations can even represent more than USD300 NOES content per
vehicle, for example, when featuring individual traction motors on
the front and rear axles to independently power the four wheels,
like in the Rivian R1T. This xEV grade is where capacity constraint
concerns are emerging.
While this article will focus on specific concerns around
xEV-grade NOES, it should be noted that GOES is critical to support
the rollout of much-needed EV charging infrastructure. OEMs
therefore have in indirect exposure to this electrical steel
subsegment also, meaning it is critical for the automotive industry
to understand and manage their exposure to both categories of steel
alloys. Many steel mills also employ common production equipment
for GOES and NOES. This further compounds the risk owing to the
increased difficulty in understanding producer capacity allocation
strategies.
Is there an imminent shortage of xEV NOES for the auto
sector? Why?
NOES capacity has been sufficient to satisfy the needs of the
different industrial sectors over recent years, however increased
demand from the automotive sector, in particular with OEMs'
acceleration in their electrification drive, is likely to result in
significant pressure for steel manufacturers to serve both the
automotive sector and the other sectors that use this steel alloy
from 2023 onward.
While in 2022, with some apprehension and assuming no other
upstream and downstream disruption, we expect OEMs' orders being
fulfilled. We foresee a structural capacity deficit to satisfy the
automotive sector's requirements, which will require significant
capital investment in the coming years.
Of the over 11 million tons of NOES produced in 2020, xEV-grade
NOES accounted for a total of 456,000 tons, but as far as the
automotive sector is concerned, this is by far the most
critical.
There are different reasons why a capacity crunch for xEV-grade
NOES might emerge.
- There is limited room for new entrants: Only
14 companies are currently capable of manufacturing xEV-grade NOES
that meet global OEM requirements. More manufacturers may decide to
enter this sector in the future, however major barriers to entry
exist caused by capital expenditures associated with cold rolling,
annealing, and coating equipment, manufacturing know-how,
OEM-supplier relationships, and patent protection. OEMs are now
able to purchase high-quality NOES from an increased (albeit still
limited) number of high-volume electrical steel suppliers. - Concentrated manufacturing footprint: Some 88%
of the manufacturing is concentrated in Greater China, Japan, and
South Korea and then exported to other regions usually in the form
of steel coils. Supply is extremely limited in North America. There
are only five mills globally that have a broad product offering
that meaningfully covers the full spectrum of products and only one
of them is located outside of Asia. - Scope to change material or steel supplier is
limited: Owing to the correlation between the efficiency
of a motor and an EV's operating range, differences in core loss (a
critical measure of the input electrical energy wasted as heat
during magnetization) between competing NOES products suppliers can
have significant impacts on OEM purchasing decisions, particularly
for OEMs that purchase electrical steel laminations in high
volumes.While OEMs and tier-1 traction motor manufacturers may have
multiple mills on their approved sourcing list, most programs only
have one PPAP approved steel mill. Material characteristics are
also matter of litigation among suppliers.For example, in October 2021, Nippon Steel sued Toyota and Baoshan
Iron and Steel (Baosteel), a subsidiary of the state-run China
Baowu Steel Group, which is the largest steelmaker in the world.
Nippon Steel claims the steel supplied by Baowu to Toyota for its
hybrid motor cores violates its patents on composition, thickness,
crystal grain diameter, and magnetic properties. - Downstream processes also face bottlenecks:
Aside from the limited number of steel manufacturers capable of
producing xEV NOES, bottlenecks may emerge across the entire
downstream motor supply chain. Not only are there only 20 motor
core lamination stampers which can cater the OEMs' needs, but there
are also only five companies that can produce these unique stamping
presses and fewer than 10 independent tool shops with the
competency to fabricate the unique stamping dies that can support
state-of-the-art motor designs.Lead times for certain pieces of key production equipment have
doubled over the last four years. Furthermore, not only are many of
these companies small, family-owned businesses that have capital
constraints limiting their ability to scale, a good portion of
these have not traditionally significantly participated in the
automotive industry.
How much xEV-grade NOES do OEMs need in the medium term?
How big is the shortage?
The global gross demand for xEV-grade NOES required for the
manufacturing of traction motors in hybrid and electric light
vehicles is expected to grow from 320,000 tons demanded in 2020 to
just over 2.5 million tons by 2027 and in excess of 4.0 million
tons by 2033.
Based on capacity data from Metals Technology Consulting, a
significant concern emerges around capacity constraints in 2023. It
is highly unlikely mills can support market demand from 2025 onward
without significant additional investments. However, adding
capacity in 2025 requires mills to make decisions imminently. The
situation looks even more dire when factoring in that most
xEV-grade NOES mills can only sustain 90% capacity utilization over
extended time periods.
Due to the exponential growth of electrified vehicles in the
coming years, there remains a risk of electrical steel supply not
meeting demand between 2023 and 2025. Despite projected capacity
increases, a structural shortage of 61,000 tons is likely to occur
in 2026. Without further major investments, this shortage could
rise dramatically to 357,000 tons in 2027, culminating to a 927,000
tons shortage by 2030.
Which OEMs are more exposed?
The shortage is expected to particularly impact OEMs that are
targeting a high share of hybrid and electrical models as part of
their future product sales. Albeit battery electric vehicles (BEVs)
manufacturers, particularly pure-play OEMs like Tesla are more
exposed, there is also an exposure for OEMs wanting to hedge their
electrification bets with a higher hybridization share in their
mix, like Toyota for example. Additionally, the likes of Jaguar,
Mini, Volvo, Mercedes-Benz and Alfa Romeo that intend to sell only
plug-ins or EVs from 2025-30 onward, alongside larger OEMs like
Renault-Nissan-Mitsubishi and Volkswagen.
OEMs with a large share of vehicle builds in Europe also face
serious headwinds as the supply-demand imbalance looks to be the
most pronounced in that region, especially when factoring in cost
competitiveness challenges resulting from tariffs on imported
material.
Which region has the biggest gap?
Region-specific effects to OEMs will likely be directly driven
by the production capabilities of domestic steel suppliers and the
import tariffs in place in the region. In regions that are
projected to demand significantly higher volumes compared with
domestic supply, import tariffs can heavily affect operating
expenses for OEMs that purchase motor cores at high volumes. For
example, in the United States, Section 232 applies high duties,
approaching 200%, on NOES imported from seven non-EU countries and
quota-based tariffs on NOES imported from the EU.
Europe is the region with the highest supply imbalance, but to
date, North America still has a major blind spot for NOES
electrical steel production. Cleveland Cliffs (formerly AK Steel)
is the only local producer of NOES. Cleveland Cliffs' NOES and GOES
manufacturing shares common production equipment. Cleveland Cliffs
is considerably focusing more on grain-oriented steel production to
address the increasing regional demand for electrical transformers,
thus reducing available xEV-grade NOES capacity.
The U.S. Steel-owned Big River Steel plant in Osceola, Arkansas,
United States starts NOES production in the third quarter of 2023.
This will bring 180,000 metric tons of NOES capacity per year
online, 45,000 of which will likely be allocated to xEV-grade
NOES.
Considering the aggressive vehicle electrification targets set
by the Biden administration's infrastructure bill, the time
required for Big River Steel to start xEV NOES production, and the
further time required for it to ramp up production to full
capacity, OEMs in the region will likely continue to face limited
local supply options, driving up motor costs in the short term and
hurting their international competitiveness.
Are steel manufacturers investing to fill that capacity
gap? Can new players solve the situation?
Steel suppliers have announced multimillion-dollar investments
to boost production of high-grade and xEV-grade NOES. However, even
when accounting for these, there will still be an investment gap.
For reference, the shortage of 650,000 metric tons by 2028 could
require some 6 to 12 new mills (depending on size and location) to
satisfy increased demand from the automotive sector.
Adding a new plant typically takes about three years for an
existing player, with roughly one year for engineering and two
years for construction. For a new player, it may take anywhere
between two to eight years to produce high-grade NOES or xEV-grade
NOES and to engineer and build the facility, on top of the initial
three years.
What else could steel manufactures do to address the
capacity constraint for autos?
The auto sector is a strategic growth area for steel
manufacturers, particularly for special steel alloys, and is
generally a major source of revenues. This could not paint a more
different picture than what is evident in the semiconductor chip
shortage. In this potential electrical steel shortage, the auto
sector is more in the driver's seat than it has ever been in the
chip shortage. The auto sector could benefit from the built-in
flexibility that steel mills have. Most mills that manufacture
electrical steel have cold mill designs. This allows critical
pieces of equipment to be shared across low-grade NOES, high-grade
NOES, and xEV-grade NOES. In several cases, mills also share
equipment between xEV-grade NOES and GOES.
Mills were purposefully constructed in such fashion to allow for
cost-effective mixed product manufacturing to mitigate risk in
product mix changes. This results in a structure where mills can
choose to allocate capacity based on market demand by product,
product profitability, and contractual obligations with customers.
However, changeovers to tweak the product mix could result in a
capacity reduction of as much as 20%. The xEV-NOES grades that the
auto sector needs are associated with higher profit margins.
Therefore, steel manufacturers will likely prioritize auto
sector demand in the allocation of existing “swing capacities”.
This means that they will prioritize xEV-grade NOES over low-grade
NOES. However, there is a potential risk that the blanket may be
just too short, meaning that cutting high-grade NOES in favour of
xEV-grade NOES could result in subsequent shortages of high-grade
NOES. This is likely to cause downstream effects on the costs of
the plethora of low-power motors used for auxiliary systems in a
vehicle, as well as other industrial sectors.
Besides converting some capacity from other grades to xEV-grade
capacity, steel manufacturers could also boost production by
prioritizing the manufacturing of slightly thicker gauge sheets.
Counterintuitively, using thinner steel sheets does not help expand
production capacity. Techniques developed to improve magnetic
characteristics at parity of thickness consume rolling capacity,
which is a key constraint in production. For reference, 1 metric
ton of double cold-reduced 0.25 mm xEV-grade NOES takes the same
capacity as 2.5 metric tons of 0.35 mm xEV-grade NOES. There is,
however, a major limit to using thicker sheets since it requires a
painful redesign of motor cores to account for the decrease in
motor efficiency and the resulting impact on the vehicle range.
Can't the OEMs or auto suppliers manufacture motors
without NOES?
In short, axial flux motors are a design that uses GOES rather
than NOES, but it's currently only applied in niche segments,
particularly high-performance EVs, for example Ferrari LaFerrari
was the first vehicle to feature an axial flux motor. Mercedes AMG
is also going to feature this technology from 2025.
What does a mitigation strategy look like for
OEMs?
In principle, the NOES shortage risk for the automotive industry
can only be resolved through an overall increase in xEV-grade NOES
production by steel manufacturers. However, OEMs, often in
collaboration with major traction motor tier-1 suppliers, may
pursue several mitigation strategies, including the use of
alternative motor configurations and materials and greater vertical
integration in the motor supply chain.
- Alternative motor configurations: A shortage
risk of non-oriented electrical steel could be an opportunity to
potentially energize traction motor innovation. For example, OEMs
and tier-1 suppliers may try to change planar geometry of the
rotors and stators to reduce planned design scrap material in the
manufacturing process, which is typically anywhere between 30% to
45%, but in certain designs can be as high as 75%. - Greater vertical integration: OEMs may seek to
vertically integrate their motor supply chains and directly partner
with steel manufacturers to better control their inputs. OEMs are
keen to reduce their reliance on tier-1 suppliers for electric
motors for various reasons, including the ability to now benefit
from economies of scale with the higher volumes per platform, to
retain in-house critical engineering skill, and to convert a
portion of its workforce to this new value chain while internal
combustion engine (ICE) manufacturing is being phased out.For example, General Motors (GM) recently announced an alliance
with GE to create a regional supply chain for materials such as
electrical steel. By partnering with steel manufacturers,
automakers will be able to continuously push the operating range of
their vehicles with optimized NOES grades for their needs. - Thoughtful materials engineering and print
specification development: OEMs that choose not to partner
with steel mills may need to rethink how material specifications
are developed. Today, that focus is principally around optimizing
motor performance, not supply chain risk mitigation. This results
in situations where OEMs can only purchase steel from one mill in
the world because it is the only supplier that is capable.
Could this potential capacity crunch affect OEMs'
electrification drive?
This potential shortage could severely affect OEMs'
electrification plans if this is not addressed by adding more
capacity and investment in new capacity. While measures such as “swing capacity” allocation (manufacturing capacity that can
accommodate a broader product mix without major intervention to
production line configuration or process), modifying motor core
designs to reduce material usage, adopting different materials, and
integrating supply chains can alleviate NOES supply chain risks for
OEMs in the short term, increasing additional production capacity
is the only measure to address the structural imbalance between
capacity and the major demand ramp-up for electrical steel.
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Prateek Biswas, Senior Analyst, Supply Chain and Technology, IHS
Markit
