As Original Equipment Manufacturers (OEMs) turn to aluminum from steel to further improve fuel efficiency and meet standards, automotive aluminum sheet industry is expected to register one of the fastest growth in the metals sector over the next several years. Industry experts and consultant agencies on environmental regulations expect aluminum auto sheet to grow at a 14 percent CAGR from 2012 through 2025. Furthermore, one of the biggest players in the aluminum industry, Alcoa (NYSE:AA), expects the market to grow at a greater than 50 percent CAGR from 2012 through 2016.
AA and Novelis, a unit of India’s Hindalco Industries, are the top two U.S. aluminum sheet producers. Both these companies invested more than $1 billion last year in U.S. factories producing aluminum for autos. AA is spending $575 million to expand its plants in Iowa and Tennessee, while Novelis is spending $550 million to upgrade its plants in Germany, China as well as in Oswego.
Transition to Higher Aluminum Usage
Aluminum has been used in high end car bodies for some time and it is lighter than steel, but it’s also three times more expensive. The expense not only for the higher cost material, but to retool manufacturing facilities and other related expenses has not been justifiable for mass production vehicles. However, with Corporate Average Fuel Economy (CAFE) standards requiring a significant improvement in fuel efficiency over the next several years, and consumers becoming increasingly more sensitive about fuel costs, automotive OEMs are beginning to make the transition to higher aluminum usage. Ford (NYSE:F), at the Detroit Auto Show last month, unveiled its new F-150 pickup, the first high-volume vehicle to be built with a full aluminum body. The truck is 700 pounds lighter than its predecessor and is expected to improve fuel efficiency 30 percent.
Still a Long Way to Go
U.S. autos still has a long way to go to meet the new efficiency standards. Since the end of 2007, fuel economy on average new car sales has improved over 20 percent to 24.8 miles per gallon; however, standards require a further 43 percent improvement from current levels over the next five years. Along with advanced high strength steels and ultra-high strength steels, most of the fuel efficiency improvements are expected to come from weight reduction through the use of aluminum.
To increase average fuel economy through 2016, President Obama proposed a new national fuel economy program in May 2009. The program accepted by 10 auto makers and United Auto Workers will take average fuel economy standards to 35.5 miles per gallon from current figures of just under 25 miles per gallon.
Aluminum Body-in-White Can Achieve Significant Weight Reduction
Majority of the growth in the aluminum sector over the next 10-15 years is expected to come from the automotive aluminum sheet. As opposed to steel, automotive OEMs can achieve significant weight reduction by producing Body-in-White (BiW) from aluminum sheet, driving fuel efficiency improvements. As mentioned earlier aluminum auto sheet is expected to grow at a 14 percent CAGR from 2012 through 2025.
The aluminum content per vehicle in North America increased from 200 pounds in 1995 to 350 pounds in 2012. The increase was driven by castings: parts for engines, transmissions, chasses, and suspension systems. Now, manufacturers are seeking additional areas to reduce vehicle weight to meet fuel efficiency standards and are focusing on the rolled and extruded parts where aluminum currently has low penetration.
We believe that aluminum usage in hang-on parts, including the exterior body of the car and bumper systems, will improve significantly over the next several years. Analysts, consultant agencies, and downstream aluminum producers including AA and Novelis expect average aluminum content per vehicle in North America to increase by 200 pounds to 550 pounds by 2025.
We believe that this gradual conversion of automotive exposed body to aluminum (BiW) will be a significant positive for downstream aluminum use, with a growth rate higher than any other end market for specialty metals for the rest of this decade. The CAFE rules in the United States require a 50 percent reduction in auto car emissions by 2025 and leading OEM’s are bound to look at alternative materials to reduce vehicle weight.
We are of the opinion that Ford’s new F-150 is the tip of the iceberg, and expect several other automotive platforms from all major OEM’s to move toward partial or full aluminum Body-in-White in coming years. Constellium (NYSE:CSTM) is best positioned to benefit from this fast growing automotive aluminum sheet market. The company already has a leading position in the global aerospace aluminum-lithium markets and this fast growing exposure to BiW will provide a significant boast to earnings. Alcoa also stands to benefit from this rapidly growing market and should see its multiple expand as investors gain confidence in its high growth midstream and downstream businesses.