A Struggling Automotive Market Harm Many Other Companies in 2014

Could slowing emerging market growth for autos impact the commodity markets?

Jan 19, 2014 at 2:04PM

Commodities

Which commodities are more at risk to slowing growth in emerging markets? Photo credit: www.LendingMemo.com

A few weeks ago Toyota Motor Corp's (NYSE:TM) Chief Executive Akio Toyoda said something that causes concern. Not just for automakers, but for a wide range of suppliers. Toyoda noted that, "a deceleration is seen in emerging markets that have been growing rapidly until now," He went on to say that, "this year, the situation is unpredictable." The impact of that unpredictability, especially relating to the auto sector, could be felt all the way down to the struggling mining and material's industry. Here's why.

Lots of heavy metal
The average car contains 2,124 pounds of iron and steel. That's in addition to containing 240 pounds of aluminum, 42 pounds of copper and a variety of other metals and minerals. Needless to say, if demand in emerging markets slows down, so will demand for these metals. That could have a big impact on production from iron ore producers like Vale SA (NYSE:VALE), aluminum makers like Alcoa Inc (NYSE:AA) and copper miners like Freeport-McMoRan Copper & Gold (NYSE:FCX). However, not all would feel the impact in the same way. 

According to Vale, the iron ore market is expect to see rising supply in 2014. That said, the company fully expects that the international market will be able to absorb this increase. At least that's what its iron ore chief Jose Carlos Martins told investors at a conference in December. Because of this the company sees iron ore pricing remaining around its current level. However, this forecast is based on housing construction in China sustaining the demand for steel. Something that Toyoda suggests isn't as predictable this year.

Aluminum, on the other hand, does have a brighter future as more American automakers bet big on the metal. That bodes well for Alcoa's future. In fact, the company recently completed a $300 million expansion at one of its facilities to specifically take advantage of increased automotive demand. Alcoa sees automakers doubling the amount of aluminum used in vehicles by 2025. The biggest increase will be in body sheet content, which Alcoa sees quadrupling by next year. That projection actually doesn't bode too well for steel or iron ore demand as aluminum is being used to replace steel in these vehicles. At least in the U.S., demand for aluminum in vehicles, especially from companies like Alcoa, should be on the rise.

Finally, while copper is just a minor component of vehicles, like aluminum it's becoming more important to automakers. In fact, while an average of 42 pounds of copper is typically used in a car, that jumps to 75 pounds for a hybrid. With fuel efficiency becoming a key future driver for most automakers using lighter metals like copper and aluminum, it will fuel growth for those two metals in the future. That bodes well for the world's number two copper producer Freeport-McMoRan.

Investor takeaway
If emerging markets slow down this year that decline it could really take the metals market down with it. Iron ore appears to be especially vulnerable. Meanwhile, aluminum and copper do have some positive trends, at least as each grows more important to the auto industry.That should help to fuel demand for the commodities produced by Alcoa and Freeport-McMoRan. Unfortunately, that alone doesn't make either a top stock to own in 2014.

One must-buy stock for 2014

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Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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