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Carmakers Use Aluminum Over Steel in Boost for Rio: Commodities

February 06, 2013

Carmakers Use Aluminum Over Steel in Boost for Rio

Pre-cut rounds of aluminum are stacked at Industrial Metal Supply Co.'s store in San Diego. Photographer: Sam Hodgson/Bloomberg

Carmakers from Ford Motor Co. to Audi AG and Jaguar Land Rover Plc are using record amounts of aluminum to replace heavier steel, providing relief to producers of the metal confronting excess supplies and depressed prices.

Aluminum content in vehicles is rising about 5 percent a year and growth will accelerate in the next decade as drivers seek improved fuel economy and lower emissions, according to Gayle Berry, a London-based analyst at Barclays Plc.

“This is one of the reasons why aluminum has the most bullish long-term demand outlook of all the base metals,” Berry said, without disclosing forecasts. Morgan Stanley predicts a 29 percent gain in aluminum prices by 2018, compared with a 9.8 percent drop for copper.

Producers are hungry for new markets, even at the expense of steelmakers. At current aluminum prices, which are more than a third below 2008 highs, at least 30 percent of aluminum companies aren’t making money, according to Moscow-based United Co. Rusal, the biggest producer. Rio Tinto Group Chief Executive Officer Tom Albanese resigned Jan. 17 as the company unveiled $14 billion in writedowns, largely in aluminum.

Automakers like Ford, the second-largest in the U.S., should help pull aluminum suppliers out of a slump, said Kirill Chuyko, an analyst for BCS Financial Group in Moscow. Some 25 percent of demand is from the transport industry, with cars and light trucks using two-thirds of this, or about 10 million metric tons a year, the International Aluminum Institute estimates.

Best Seller

In the U.S., the popularity of the Ford F-150 pickup truck looms among the largest threats from automakers to the steel industry. The next generation of the pickup will be redesigned, with a higher aluminum content helping to reduce its weight by as much as 750 pounds (340 kilograms), Ford has said.

“The F-150 is the best-selling vehicle in North America, and would likely trigger all other truck makers to convert” to increased aluminum content, said Kenneth Hoffman, Princeton- based sector head for metals and mining research at Bloomberg Industries.

A switch to aluminum among U.S. carmakers could add as much as 40 percent to North American demand in coming years, said Hoffman, who entitled a January talk to steel executives in Chicago “The Death of the Steel Industry as We Know It.”

‘Strong Demand’

The metal has failed to revisit the $3,317 a ton level reached in 2008, averaging about $2,200 in the past five years, data compiled by Bloomberg show. Prices slumped about 15 percent in 2012, while producers pared global output by 3 percent from January through November, according to the London-based aluminum institute, a trade group for producers.

Aluminum for three-month delivery fell 0.8 percent to $2,096 a ton in London Metal Exchange trading by 1:56 p.m.

Barclays sees the price declining to $1,988 a ton in 2013 from last year’s average price of $2,052. LME aluminum forward contracts show that traders forecast the price to reach $2,530 by the middle of 2015 and $2,700 by 2022.

“Strong demand growth from the automotive sector would be very positive for the industry,” said Steve Hodgson, Rusal’s director for international sales.

The aluminum used in each car built in Europe almost tripled between 1990 and 2012 to 140 kilograms from 50 kilograms as manufacturers pursue higher fuel efficiency, data from the Brussels-based European Aluminum Association show. Among U.S. automakers, the figure climbed to 155.6 kilograms in 2012 from 148.3 kilograms in 2009, according to Ducker Worldwide Automotive, a global market research company in Troy, Michigan.

Fuel Savings

“Tightening fuel economy regulations continue to drive the growth of the aluminum usage,” said Charlie Durant, senior consultant at London-based metals analysis company CRU. “The transportation sector will be the fastest-growing end-use segment for aluminum demand due to higher automotive build rates in developing nations and increasing intensities of use in the developed world.”

Global automobile sales exceeded 80 million for the first time in 2012 and will advance 2.4 percent to 82.7 million this year, according to LMC Automotive Ltd., a research company based in Oxford, England.

For each 10 percent of reduction in vehicle weight, car manufacturers achieve a 5 percent to 7 percent fuel saving, Alcoa Inc. (AA:US) says on its website. A car with components made of aluminum can be 24 percent lighter than one with components made of steel, shaving 2 liters (0.5 gallon) off fuel consumption for each 100 kilometers (62 miles), according to Rusal.

Light Metal

Only 54 percent of potential car buyers were willing to pay for more fuel efficiency in 2008, while in 2012 the number had climbed to 83 percent, Alcoa said on a conference call in October, citing a consumer study.

Global automakers may increase use of the light metal to 249.5 kilograms per car in 2025 from 148.3 kilograms in 2009, the Arlington, Virginia-based Aluminum Association said last month. The association gave its forecast as Honda Motor Co. presented an Accord with increased aluminum content and General Motors Co. unveiled the Cadillac ATS and the 2014 Chevrolet Silverado at the Detroit auto show.

North American applications of aluminum in cars may jump 66 percent by 2025 to at least 3.7 million tons, according to Hoffman, citing the Aluminum Association study.

Demand Projections

In Europe, the aluminum content in cars may rise to as much as 180 kilograms per unit by 2020, the Brussels-based association says. That would mean an increase in demand of 170,000 tons as nations impose stricter standards on fuel consumption, Jochen Hitzfeld, a UniCredit Group analyst, said by e-mail on Jan. 22. For 2013, Hitzfeld forecasts an average increase in demand of 7 percent, compared with an average of 5.8 percent from 2000 to 2009.

Stepped-up use of aluminum in cars will “fuel strong growth in demand for the light metal and we forecast that total consumption of primary aluminum will expand by a compound annual growth rate of 5.9 percent over the coming 5 years,” said CRU’s Durant.

“We expect new applications for castings to develop, but rolled aluminum products for hoods, doors, fenders, deck lids, lift and tail gate and body structures are expected to drive the majority of the growth from 2013 to 2025,” Rusal’s Hodgson said in an e-mailed response to questions.

Sports Car

The lightweight metal’s application has so far mostly been in the so-called premier segment. Aside from the A8, Audi has applied the technology in its R8 and TT compact sports cars, using its so-called Audi Space Frame aluminum body.

“Aluminum is an excellent material for vehicle bodies,” said Christoph Lungwitz, Audi’s spokesman for products and technology. Audi’s 1994 A8 model was the world’s first large- volume production car with a self-supporting aluminum body. The material “is roughly two-thirds lighter than conventional grades of steel, and since it is a relatively soft metal, it is easy to machine,” he said.

Land Rover is to offer a new generation of Range Rover as a part of a 1 billion-pound ($1.6 billion) investment program, which will be the first sports utility vehicle with a lightweight all-aluminum monocoque body structure. It will be manufactured at a new plant in Solihull, in England, and weigh 39 percent, or 350 kilograms, lighter than the steel body in the outgoing model, according to the company.

Mercedes-Benz

The Mercedes-Benz SL roadster’s body-shell is made completely of aluminum, and is around 110 kilograms lighter than a comparable steel body, Benjamin Oberkersch, a spokesman for Daimler AG, which makes the car, said by phone Jan 22.

Even so, aluminum producers may need to curb output to tackle an excess in supplies that may be the biggest in four years in 2013, according to Barclays’s Berry. Demand from automakers “alone will not be enough to offset the surplus the industry is facing over the next couple of years,” she said. “To address that, producers need to show some production discipline.”

The global surplus of aluminum may reach 1.8 million tons in 2013, as output rises to 51.4 million tons from 47.9 million in 2012, Barclays estimates. The market faces the prospect of the largest surplus since 2009, with 8.96 million tons of reported stocks, according to the bank.

The chief argument against aluminum is the cost, about three times that of steel, a point that is holding back producers in the world’s largest auto market. The material costs carmakers roughly 3 euros a kilogram, while steel costs 1 euro, said Christian Ludwig, a Dusseldorf, Germany-based analyst at Bankhaus Lampe.

“At the moment, this technology is mostly used for premium cars because it’s expensive, and Chinese are not in the premium segment yet,” said Ludwig.

The potential for increased use of aluminum in China carmaking is clear: the transportation sector accounts for 24 percent of the country’s demand for the material, compared with 40 percent in the U.S., according to UniCredit’s data.

To contact the reporters on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net; Marina Sysoyeva in Moscow at msysoyeva@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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