ArcelorMittal ( MT ) is the largest producer of steel in the world, and not by any small margin.  Still, the growing focus on lighter metals in the automobile manufacturing process could be a possible source of concern for the company. ArcelorMittal, formed in 2006 by the merger of two steel giants (Arcelor and Mittal), competes with other international steel companies like BaoSteel, Posco ( PKX ), Nippon Steel and ThyssenKrupp.

Our price estimate for Arcelor Mittal stands at $40.67 , implying a 10-15% premium to market price.

Steel and the Automobile Industry

The transport sector accounts for almost 16% of the global consumption of steel in a given year. This includes steel used in automobiles as well as in aviation, shipbuilding, and railways. With 2010 global steel production at around 1.4 billion metric tons, this represents a market of more than 220 million metric tons of steel.

Of this, the global automobile industry uses more than 87 million tons of steel annually. Steel sheets are used in making the vehicle’s frame as well as other parts including hoods, doors  and fuel tanks. Specialty hardened steel also goes into the manufacturing of the engine and transmission.

But Steel is a ‘Burden’…

Iron and steel makes up more than 70% of a typical sedan’s weight, with body skeleton and power train individually accounting for 25% of the weight and chassis and suspension contributing about 21%.

… and Fuel-Efficiency Norms are Driving the Search for Alternatives

The Transportation Department and the Environmental Protection Agency have mandated a 7% to 20% reduction in fuel usage by new automobiles, and many countries in the European Union are also stressing higher fuel efficiency. Automobile manufacturers have, hence, had to turn towards aluminum, which is 10% to 40% lighter than steel and has comparable strength.

The relatively higher price of aluminum, and the costs that companies would need to incur to use aluminum in their automated assembly lines have been deterrents against the metal’s wide-spread adoption. But increasing pressure to reduce automobile weight could outweigh these disadvantages in the near future.

ArcelorMittal Has Stepped up to the Challenge…

ArcelorMittal has been focusing on ways to reduce the weight of its steel products. It has made significant investments to establish automotive-design centers in Japan and China. Engineers at these centers have successfully designed high-strength steel parts for automobiles that are 14% lighter at the same cost.

… But What if Aluminum Gets its Break?

ArcelorMittal ships more than 50 million tons of flat-rolled steel to customers in Europe and the Americas. An increasing adoption of aluminum in automobiles could reduce this number by as much as 20%.

This implies a reduction in our base case estimates for shipments to Europe from about 38 million tons to just over 30 million tons by the end of our forecast period.

Similarly, the shipment numbers for customers in the Americas could drop below 24 million tons by the end of our forecast period.

The combined effect of these two scenarios would still only reduce our $40.67 price estimate for ArcelorMittal by less than 2%. No wonder Mr. Lakshmi Mittal, CEO of ArcelorMittal dismissed the substitution of steel by aluminium saying, “This has been the prophecy of the aluminum industry for a long time.”