The Changing Demand for Aluminum in North America

 

It’s Aluminum’s time to shine – with a big coup in the auto industry.  Though die-hard steel enthusiasts would disagree, the unveiling of the aluminum body of the newly designed 2015 Ford F-150 truck this past January may turn out to be a major milestone.  The impact on aluminum demand may be significant given that the Ford F-150 being the best-selling vehicle in the U.S. for the last 37 years. More importantly, it is suggestive of a change in perceptions in the auto industry as aluminum moves from supplying specific parts for generally high-end auto brands to more mainstream, mass-market popular trucks and heavy duty vehicles.

The history of aluminum use in cars depicts a stable and steadily increasing trend.  Newly expanded regulations within the U.S. surrounding increased fuel efficiency have also acted as a motivating factor. Aluminum use in transportation is touted for providing weight reduction to vehicles, and hence better fuel economy as well as crash protection.  Indeed, average aluminum use per light vehicle rose from approximately 250 lbs. in 2000 to 360 lbs. in 2013 according to Ducker Worldwide, a consulting firm. Forecasts for use in 2015 are expected to weigh-in at 425 lbs. per vehicle.

 

Aluminum demanded by the transportation sector is only expected to continue increasing, in conjunction with aluminum increasingly substituting for copper in other industrial uses where feasible, it is expected that aluminum consumption growth will continue to increase – possibly outpacing growth of the other base metals over the next five years.

While metals are generally imperfect substitutes for each other in industrial uses, there are exceptions and less efficient routes (which consider other factors) to be taken- especially when large price ratios between metals are suggestive of cost savings. Observing the ratio of copper price to aluminum price, the ratio has increased from 1:1 in the year 2000 to over 4:1 as of March 2014, with copper becoming relatively more expensive. Interestingly, on average the substitution end-users make tends to be lagged with a timeframe of approximately two years.

 

 

This suggests that while copper is indeed a more efficient metal versus aluminum in certain uses, for example, in wiring due to its increased electrical and thermal conductivity, the cost incentive might be strong enough to push substitution towards aluminum. Furthermore, it might be that aluminum drives copper replacement, as copper’s relatively more limited supply plays against abundant aluminum supply which has been going on for the past six years. A pivotal factor to consider however is the proportion of “easy to convert” projects that have already been completed, leaving the marginally more difficult conversions to be made – and whether those are feasible or cost effective.

Meanwhile, the aluminum markets show primary production in North America is rising, up by 16 percent in 2012 from 2009, even though coming off a low base from a significant drop in 2008. At the same time, North American imports for consumption have also been increasing, rising by 22 percent in that same time period.

And from the context of a macroeconomic perspective, in the scenario where global growth picks up, led by increasing growth in the U.S., the aversion of a hard-landing in China, and stabilization with incremental improvements in Europe – base metals across the board may see some heightened demand – with aluminum favored by some to take the lead.

 

 

Samantha Azzarello is an economist at CME Group.

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