Supply Chain Gears Up for Run on Automotive
The aluminum industry is preparing for an anticipated increase in shipments to the automotive market. Distributors hope the mills’ new focus doesn’t leave smaller aluminum markets behind.
By Dan Markham, Senior Editor
Aluminum makers have made no mystery of their plans to win market share in the automotive market at the expense of the steel industry. Ford’s introduction of the aluminum-intensive F-150 pickup was just the start of what many believe will be an accelerating trend by automakers to improve vehicles’ fuel efficiency by using even more lightweight materials—including for body panels that have traditionally been steel. While this shift holds enormous potential for new aluminum sales, it leaves the supply chain wondering about the possible effects on other markets for nonferrous metals.
Shipments of aluminum auto body sheet in North America will total 600 million pounds this year, over a billion pounds next year, then grow to 4.3 billion pounds by 2025, forecasts Northcoast Research Aluminum Analyst Lloyd O’Carroll in his most recent quarterly report. By 2025, the market for auto body sheet will match the existing can stock market, which is the largest end market for aluminum flat-roll.
“The Ford F-150 is the first of what we believe will be many, if not all, redesigns in pickup trucks. The frame is high-strength steel and the body is aluminum. We believe such a mix is the model for vehicles of the future,” says O’Carroll.
That model contains 600 pounds of aluminum in the body, plus other use in heat exchangers, wheels and cast components in the drive train. That also includes 70 pounds worth of extrusions used in the drive shafts, structures and parts for crash-management functions (see sidebar).
“We project that aluminum auto body sheet shipments in North America will likely soar over the next 10 years as other vehicle redesigns, plus closures on conventional steel vehicles, take off,” says O’Carroll, who bases his conclusions on contacts within the auto industry, plus the most recent report from Ducker Worldwide. “And some of our contacts believe that both the Ducker projections and our new forecast could prove substantially conservative with a much larger penetration of aluminum body sheet in passenger cars longer term.”
North American aluminum producers are ramping up to meet this expected spike in demand, though not necessarily fast enough. The shift toward greater adoption of aluminum products in some automotive applications is being held up by a lack of rolling capacity. “The mills are the bottleneck in the process of conversion,” O’Carroll says.
This despite previous investments by major aluminum mills to expand automotive sheet capacity in the United States. In January, Alcoa completed a $300 million investment at its Davenport, Iowa, facility to serve the growing demand. In late 2015, Novelis will complete a series of investments at its Oswego, N.Y., facility that will boost automotive sheet capacity to more than 400,000 tons. The facility will devote 80 percent of its capacity to serve the auto market. Kaiser is exploring investments to grow its automotive extrusions operations.
The most recent announcement was delivered last month by Aleris, which is investing $350 million to upgrade its Lewisport, Ky., facility. The Cleveland-based aluminum rolled products company is adding heat treatment and finishing capabilities, including a new wide cold mill, two continuous annealing lines and an automotive innovation center. Once fully operational, Aleris will be able to produce 480 million pounds of aluminum auto body sheet annually. Aleris will tap into its experience serving the European auto industry. The shift to more aluminum-intensive vehicles has proceeded more rapidly on the other side of the Atlantic.
“The key to our success in Europe has been our strong partnership with customers on research and development,” says Steve Demetriou, chairman and CEO of Aleris. “We will take a similar approach with our customers in North America.”
Aluminum’s gains will offer plenty of opportunities for distributors who service the automotive supply chain. “For service centers, in terms of overall growth, they’ll carve their share out of that market. There’s a natural place for them to fit,” says Sean Stack, executive vice president and CEO of Rolled Products North America for Aleris.
At the same time, service center executives who don’t serve the auto sector are left wondering how smaller aluminum markets may be affected by this new focus on automotive sheet.
“It has yet to play itself out, but I do have some concern about it,” says Mike Petersen, president of Elk Grove Village, Ill.-based Petersen Aluminum, which specializes in products for the building and construction segment. “Building product sheet is probably one of the least profitable items for a mill, though we tend to buy painted packages from our mill suppliers, and those products are more profitable than some alternatives.”
If shipments to automakers cause supply constraints in other areas, they are not likely to be long-lasting, says Nathan Kahn, president of Empire Resources, Fort Lee, N.J. “Some units have been sucked out of the market, particularly in the heat-treat sector, but I expect it to even out a bit in 2015.”
Some distributors may have to source more material from foreign suppliers in the future. “There is going to be a need for supply from offshore, and it’s going to be in the standard products,” Stack says. “Part of our need as an industry is to continue to provide distributors and OEMs on the automotive side with a higher-value-added mix and let capacity available offshore fill the void. Nobody is considering a hot-mill investment, so there will be a repurposing of how the assets get deployed to what end markets.”
The lack of new capacity, not just in the U.S. but around the globe, is starting to have an effect. O’Carroll says years of surpluses have already given way to a short supply situation. Combined with above-trend demand growth, the supply deficit will only worsen over the next few years. Consequently, he anticipates significant hikes in both the LME price and the transaction price. Northcoast forecasts the LME price will increase from an estimated $1,914 per metric ton in 2014 to $2,550 in 2017, and for the U.S. Midwest transaction price to climb from $2,311 per metric ton to $2,818 in just three years.
Growing demand for aluminum in other markets besides automotive will also contribute to the supply shortfall. In the U.S., all major end markets for aluminum shipments are expected to show increases this year except packaging, which will see a modest decline. More important, increases in shipments to construction, heavy truck, consumer durables, electrical components and machinery are expected again in 2015. Service center executives already see this kind of across-the-board strength in their markets.
Greg Weekes, CEO of Eastern Metal Supply, Lake Worth, Fla., says the Southeast is showing good activity on all fronts. “All of the indicators for different markets are up,” says Weekes, whose company is expecting double-digit sales growth this year.
The story is the same in the West, says David Pace of Industrial Metal Supply, Sun Valley, Calif. While the West Coast’s exit from the recession was “slower than I’d like, it’s starting to pick up steam. You look at the demand drivers and you can see it’s all fairly positive.”
Particularly positive are shipments to the construction market, which is enjoying 6.6 percent growth this year, and will increase by an additional 8.5 percent in 2015 and 12 percent in 2016, according to O’Carroll’s forcasts. Such projections are consistent with the trend in business activity.
“We’ve seen a steady increase in demand, and I expect that to continue well into next year,” says Petersen. “For the last several years we’ve been in the wrong niche. The building market is still down 30 percent from its peak, but I’m optimistic we’ll get back to a level near where we were.”
Leading indicators point to such strength. The Architecture Billings Index from the American Institute of Architects has been trending up, save for one month, for the past year. “We’ve found that to be a good nine-month look forward,” Petersen says. Perhaps just as important, the ABI’s current strength is broad-based, with all types of nonresidential construction and all geographies trending positively in the most recent report.
On the residential side, there’s also steady improvement. New housing starts are forecast to climb from 925,000 in 2013 to more than one million in 2014 and 1.2 million in 2015.
“The glut of homes is behind us, and we’re into more normal supply and demand on the housing front,” says Stack. “Single-family home development should trend positively over the next few years because of supply and the house-formation fundamentals in North America.”
The building and construction market has become a larger part of Aleris’ business in the past six months since the acquisition of Nichols Aluminum. “It has been a good business this year, particularly as we went into the normal season, April to October,” he says.
Residential construction, both new homes and remodels, also pulls along other related markets. “We’re not big in construction, but the ancillary markets that support construction are all trending positive,” says Pace.
One of those markets is HVAC, which is poised for substantial increases in 2015 as a result of a change to the government’s Seasonal Energy Efficiency Ratio requirements in two regions of the country, the Southeast and Southwest. “We’re expecting a stronger second half and fourth quarter because of the SEER changes,” says John Parker, vice president for communications and investor relations at Noranda Aluminum, Franklin, Tenn.
One other aluminum-intensive market anticipating great gains in 2015 is the heavy truck and trailer segment. While down globally, the market in North America is expected to rise 10-14 percent in 2014, reports Alcoa. The company’s orders in the segment increased 28 percent for the first six months of 2014.
“That’s been a strong market, particularly the trailers. We’ve seen the trailer makers struggle to keep up with demand,” says Stack.
All told, O’Carroll says, it adds up to a 22.7 million pound aluminum market in the U.S. this year with shipments increasing at a 5-6 percent pace next year. Growth in the years to follow? That’s up to aluminum’s new pacesetter—the auto industry.
|Extruded Products to Enjoy Robust Demand
Sheet is not the only aluminum product poised to increase market share with the trend toward lightweighting in automobiles. The aluminum extrusion industry is also preparing to handle a demand spike from the carmakers.
According to Ducker Worldwide, use of extrusions in vehicle designs will more than double between 2012 and 2025. Extruded products represented 19.1 pounds per vehicle two years ago. That number will jump to 24.6 pounds next year and climb to 42 pounds per vehicle in a decade, Ducker estimates.
“The automotive sector is obviously contributing to the industry gains. The future holds the largest increases as automakers are designing more and more extruded products into their vehicles,” says Thomas Landry, senior marketing manager for Sapa Extrusions North America, Rosemont, Ill. “When these vehicles launch into production, the demand for extruded aluminum will escalate significantly.”
Landry says the industry is poised to handle those increases. “Capacity is being added to the North American market for anticipated growth, driven by the thought of automotive lightweighting. As more automakers incorporate aluminum extrusions into their vehicles, the industry will be prepared to supply that demand.”
The gains from automotive production add to a market that’s already showing signs of significant expansion. Jeff Henderson, director of operations for the Wauconda, Ill.-based Aluminum Extruders Council, says industry shipments are up 6-7 percent over 2013.
Sapa has enjoyed similar gains. The company reports demand is up 7 percent for its products this year, with forecasts for further growth in 2015. The heavy truck market, a major consumer of extruded products, is up double-digits from 2013. Building and construction sales also have been on the rise, if not at the same level of improvement.
Landry also cited healthy demand from distribution and consumer durables in 2014. The only market showing softening conditions was solar energy.
Henderson says one of the key issues facing the extrusion market is foreign suppliers trying to work around the countervailing duties that are in place. Some overseas producers are trying to circumvent the tariffs on 6000 series with 5000 series alloys, for example.
In August, four individuals and one corporation in Puerto Rico pleaded guilty to smuggling aluminum extrusions into the United States to avoid paying antidumping and countervailing duties.
According to the indictment, the defendants conspired to smuggle and introduce aluminum imported from China by passing false and fraudulent invoices through the San Juan Customs and Border Protection customhouse.
“It was good to see there was a conviction of some circumvention. They face the potential for jail time and multimillion dollar fines,” Henderson says.