Oil prices are at their lowest level in more than five years. That is poised to save the American consumer hundreds of dollars at the pump this year. However, those low prices could change on a dime, which is why the country continues to push for more fuel-efficient vehicles.
Ford Motor Company (NYSE:F) is at the leading edge of this shift, using aluminum to reduce the weight of its uber-popular F-150 pickup. Now the Blue Oval and other companies could get a boost from the Department of Energy, which this week announced a conditional commitment for $259 million in funding to enable Ford's aluminum supplier, Alcoa (NYSE:AA), to expand its manufacturing capacity. This loan would keep Alcoa's costs down so it can provide affordable aluminum to automakers.
The funding would come from a DOE loan program established in 2011 to support the development of advanced technology vehicles. The Advanced Technology Vehicles Manufacturing, or ATVM, initiative is part of an often-maligned $25 billion DOE loan program that funded flops such as Fisker Automotive and Solyndra, as well as successes including Tesla Motors and Ford itself. However, due to past criticisms the program has been retooled, with the ATVM program announcing a number of improvements last year, including clarifying the eligibility of component suppliers such as those that make lightweight materials, like Alcoa and aluminum.
The $259 million conditional loan commitment (which is an important step toward receiving a loan from the DOE) to Alcoa is the first since those improvements were announced. If finalized, it would provide the company with capital needed to expand its plant in Tennessee, where it makes high-strength aluminum for vehicle manufacturers that are using the material to reduce the weight (and thus improve fuel efficiency) of their vehicles. The expansion is expected to create 400 construction jobs and 200 permanent full-time jobs at the facility.
Aluminum is built Ford tough
For Ford and other automakers, using aluminum is a game changer for fuel efficiency. By using an all-aluminum alloy instead of steel for the body, Ford shed more than 700 pounds from its latest F-150, about 15% of the vehicle's body weight. That switch has the potential to boost fuel economy by 5% to 20% depending on the model. Not only does that save consumers a bundle on gas, but it's also better on the environment, as improved fuel economy cuts down on greenhouse gas emissions. In fact, according to a study by the Automotive Science Group, the new F-150 has the lowest life-cycle carbon footprint among pickups.
The aluminum Alcoa is providing Ford and other automakers isn't the same stuff used to make soda cans, but instead is a high-strength, military-grade aluminum. Pound for pound, this material can actually absorb twice the crash energy as steel, making it safer in an accident. Aluminum also performs differently than steel during a crash, dissipating energy and directing it away from the vehicle's occupants. Finally, bringing a vehicle's weight down shortens the stopping distance and provides drivers with better handling and performance. Put another way, this material is clearly Ford tough.
While the Department of Energy's loan programs haven't always paid off, the changes made to the ATVM program to allow it to fund initiatives such as Alcoa's expansion could work out very well for all stakeholders. It will provide the company with secure funding to increase the capacity of a plant that is expected to see surging demand in the years ahead as Ford and others vehicle manufacturers put more aluminum in cars and trucks. This is a real win-win, as aluminum is proving to be a real game-changing material for the auto industry.
Matt DiLallo has the following options: long January 2016 $10 calls on Ford and short May 2015 $15 puts on Ford. The Motley Fool recommends and owns shares of Ford and Tesla Motors. 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.