Emerging Markets Won't Hold Back the Aluminum Revolution

Some industry watchers are saying that aluminum won't replace steel in cars. They're right, but that doesn't mean that there won't be years of auto growth ahead for companies like Alcoa.

May 23, 2014 at 10:00AM

Aluminum is a lightweight but strong metal. That's why Ford (NYSE:F) is putting more aluminum into its cars. However, some industry watchers point out that auto growth is coming from developing nations where margins are very tight. Tight margins means sticking to cheaper steel—for now. That doesn't mean aluminum won't continue to make inroads in more developed countries, however.

It all started with a truck
The new Ford F-150 has more aluminum in it than ever before. The use of the metal has allowed Ford to shave some 700 pounds off the vehicle, which in turn allows for better performance and better gas mileage (nearly 30 miles per gallon on the highway.) For a truck buyer, those are compelling reasons to pay a little more for a vehicle. In fact, few are likely to care what the Ford F-150 is made of as long as it lives up to expectations.

Ford

(Source: Lord of the Wings, via Wikimedia Commons)

If it does, Ford CEO Alan Mulally is very clear about what to expect. Earlier in the year, he explained to Bloomberg that, "Over time, you'll see more and more aluminum across our product line." That's obviously going to be good news for aluminum giant Alcoa (NYSE:AA), which has also been saying positive things about the Ford F-150.

In fact, when it comes to the auto sector, Alcoa CEO Klaus Kleinfeld's expectations are just short of ebullient. "Last year we stood at $229 million revenues for auto sheet. For this year, we are expecting $330 million, for next year, $580 million. But you really get the picture when the volume ramps up to $1.3 billion in 2018." He's got good reason to expect big growth, particularly since the developed nations around the world are pushing higher efficiency standards.

Ah, but there's a fly in the ointment
That's great news for Alcoa, but it only extends just so far. Industry analysts at Bernstein Research point out that auto industry growth is going to come from emerging markets, not mature ones. Since emerging market consumers probably won't be able to afford all the bells and whistles (or light metals), steel is going to remain the key player in the auto sector.

They're right. Ford's first quarter results show the dichotomy. The company's U.S. operations saw sales volume decline by 2%. The auto giant's Asian segment, meanwhile, witnessed a volume increase of 32%. China drove that with an increase of 45%. This isn't a new trend; in 2013 U.S. volumes were up a robust 11%, but Asia was up even more at 30%. Backing up Bernstein's logic, operating margins last year on the domestic side were 9.9% versus just 3.5% in Asia.

The long, long-term trend
Since aluminum is really only just starting to catch on in the auto space, there's likely to be solid auto growth ahead for Alcoa even if the big push remains in mature markets. Thus, Alcoa CEO Kleinfeld's big growth expectations aren't outlandish, they're just coming from a small base. Government regulations and customer demands for greener vehicles pretty much guarantee that aluminum's share of the auto market will increase.

Ford

(Source: Literary Digest, via Wikimedia Commons)

Auto makers like Ford are going to learn a lot from this process. For example, you can't just swap aluminum for steel; you need entirely different machines and manufacturing processes. That's not something you roll out across your entire company at once. It's something you ease into -- sort of like introducing more aluminum in mature markets while developing markets continue to move higher up the economic scale.

Once the fast-growing markets start to have both the money to afford more and the desire to drive lighter, more fuel-efficient cars, Ford and the other automakers will introduce aluminum. This will provide for a second round of growth for companies like Alcoa. In fact, China is already facing environmental issues with big pollution generators like utilities. It won't be long before autos get their day in the regulatory spotlight.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. 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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