The Electric Steel Dilemma And Its Impact on Motor Vendors
Electric steel is used heavily in the manufacture of electric motors. The material is key to producing the electromagnetic field used to turn the rotor. Without the electromagnetic properties associated with this iron alloy, the performance of electric motors would be substantially compromised. Historically, motors used in commercial and industrial applications have represented a major customer base for electric steel suppliers, and motor vendors have had little difficulty ensuring prioritised supply lines. However, the share of business held by commercial and industrial electric motor vendors is being threatened by the automotive sector in the wake of electric vehicles.
As electric vehicle production continues to grow, so does the associated demand for the electric steel used in the motors to power them. As a result, the bargaining power between commercial/industrial electric motor vendors and their steel suppliers is becoming increasingly undermined. As this trend progresses, it will impact vendors’ ability to secure the electric steel necessary for production, resulting in longer lead times and higher prices for customers.
THE STATE OF THE PROBLEM
The process which takes place after crude steel is formed dictates what the material can be used for. One of these processes is referred to as “cold-rolling”, which produces what is known as “cold-rolled steel” – the type used in electric steel. Cold-rolled steel makes up a relatively small portion of overall steel demand, and the process is notoriously capital intensive. Resultingly, increases in production capacity are slow.
Over the past few years, we’ve seen the price of cold-rolled steel climb to historic levels. The federal reserve tracks the price of cold-rolled steel globally. As shown in figure 1, the price of the commodity rose to more than 400% of its price in January 2016.
Short-term COVID-related supply shocks have been one reason for the price performance of cold-rolled steel. However, increased demand from the automotive sector via electric vehicles is, and will continue to be, a contributing factor to the staying power of higher prices. Electric steel can make up as much as 20% of the bill of material in electric motor manufacturing. It is no surprise then that the average selling price of an electric motor is up 35-40% compared to January 2020.
During our research, we’ve heard multiple reports of vendors having difficulty fulfilling their supply of electric steel due to steel suppliers favouring automotive customers who are placing larger orders. We first began hearing instances of this in mid-2021, and the frequency at which this gets mentioned in vendor interviews is rising.
THE SCALE OF THE PROBLEM
The number of vehicles utilising an electric motor in the drivetrain is still relatively small compared with those using a traditional internal combustion engine. However, ambitions from the largest auto manufacturers indicate a rapid shift in this balance over the next decade. The question is, then, how significant will demand be from the automotive sector, and what is the timeline surrounding this?
To answer the first part of the question, let’s take three of the largest auto manufacturers in the world: Toyota, Volkswagen, and Honda. Together, they comprise 20-25% of the automotive market globally in terms of vehicles shipped. In 2021, 21.2 million cars were produced between these three manufacturers alone. This would imply the production of ~85 million cars in 2021. For simplicity’s sake, let’s assume a one-to-one ratio between the number of motors utilising electric steel and the number of electric vehicles sold. If just 23.5% of the ~85 million cars produced were to be electric, the number of motors needed to support this production volume would be larger than the 19.2 million low voltage AC induction motors sold into commercial and industrial applications during 2021.
THE TIMELINE
The trend toward electrified vehicles is inevitable, but determining the speed of adoption can be difficult. It is clear, however, that announcements by automotive manufacturers like General Motors, which in 2021 pledged to go all electric by 2035, have pushed the electric vehicle market into a new gear.
Interact Analysis, tracks the production of lithium-ion batteries used within electric vehicles as part of its ongoing research within the battery market. This series can be used to indicate the speed at which electric vehicles are being produced. In figure 2, we are showing this series, along with the cold-rolled steel series shown earlier. Showing these together helps demonstrate the relationship between increased EV production and the price of electric steel.
The grey line represents the number of shipments of Li-ION batteries into electric vehicle applications. This is presented as an index value, with the 2016 value representing 100%. The blue line represents the price of cold-rolled steel shown again as an index value, with the price in 2016 representing 100%. We are also displaying our forecast for shipments of batteries into EV applications, represented by the dotted grey bar.
Quickly you will recognise the sharp uptick in battery shipments between 2021 and 2022, hitting nearly 10X the number of shipments seen in 2016. Alongside this increase, you can observe the price of cold-rolled steel ticking up during the same period. The dotted grey line demonstrates our expectation for the rate at which EVs are being produced. We expect that over the next five years, the gap between supply and demand for electric steel will widen as increases in production capacity lags behind the sharp rise in demand for the commodity coming from the electric vehicle sector. This will ultimately result in supply shortages which will manifest into longer lead times and higher prices for motors.
FINAL THOUGHTS
The solution to this problem lies in the hands of steel suppliers. Ultimately, more electric steel must be produced to close the gap between supply and demand. We expect this will happen, albeit slowly. While the steel industry works to resolve this, we expect that motor suppliers which are more vertically integrated within their supply chains (particularly their steel supply) will begin winning share based on lower lead times and lower prices, while the rest of the market struggles to secure the materials necessary for production.
Motor suppliers have been discussing this as a coming trend for years. It is now safe to say that the trend has officially arrived.
